In 2004, Allison Godden* had had enough. Preparing to retire from her second career as a real estate agent in a small southern Ontario city, she had watched in dismay as the value of the mutual funds in her RRSP continued to dwindle even while the stock market appeared to be edging upwards.
“I really couldn’t take the stress of watching twenty years of building my RRSP melt away just as I was finally planning on using it as income,” she recalls. So, after consultation with her partner, Allison visited the bank brokerage where her account was registered and took drastic action. “I told them to sell all the funds and put the money in GICs,” she says. “Every penny of it.”
The bank was aghast. Drop out of the market entirely? Not have any investment at all in equities? Did she really know what she was doing?
She certainly did. “I knew I risked watching stock values rise and hearing other people brag about how much money they were making,” she says. “But that wouldn’t stress me out nearly as much as worrying if I’d still have enough to live on in a couple of years.”
For about two years, Godden’s decision remained questionable. Her GICs were earning reasonable rates but not nearly as much as the stock market. Her actively managed equity-based mutual funds had failed to keep pace with the TSX in the past, so this was hardly worrisome. When the market began its slide in early 2008 followed by the major collapse of 2008–2009, however, she felt vindicated.
“No matter what happens to the stock market from now on”— she smiles—“I’ve got peace of mind and a good night’s sleep. And those have their own value to me.”
Allison Godden’s experience, and the long-term impact it made on her investing philosophy, tap into our latent reaction to the question of risk. Do we abhor it? Welcome it? Exploit it? Avoid it?
Dealing with risk often leads to irrational behaviour by investors— and yes, I mean you (and me, from time to time, but let’s not turn this into a mass confessional). The most common example of this is a tendency to buy high and sell low. Basic logic, and every investment book with more words in it than a Rolling Stones song, tells you to do the opposite. Yet every day of the year, investors surveying mutual funds or stock market winners spot a company whose price has soared by a factor of two or three in a short period of time, and they sprint to board the bandwagon. Unfortunately, the bandwagon is usually at the crest of a hill at that point and they ride it down into a valley of losses, screaming all the way.
In explaining the folly of chasing winners only to catch losers, I use the analogy of grocery shopping in a supermarket and passing a display of canned tuna. If a shopper notices her favourite brand of canned tuna has doubled in price over the past week or so, will she slide a few tins into her shopping cart? Not bloody likely. She’ll probably switch to salmon or some other substitute until the price drops back to a realistic level. That’s rational behaviour.
Reverse the situation: The shopper’s favourite canned tuna is now half the price it was last week. Yippee! She loads up with her favourite fish before the price goes back to its normal level. More rational behaviour.
Many investors turn the tale backward, buying into the market at or near peak price before selling with dismay when the price drops through the floor. The behaviour appears even more irrational because recent research indicates investors are so risk-averse that they hate losing more than they enjoy winning.
Think about that for a minute.
We will risk $2 in a national lottery that offers the prospect of winning $10 million. It’s easy to toss $2 or $10 away in the face of such tremendous odds in return for the prospect of such a massive return because, among other reasons, no one—including ourselves— will be aware of the loss. As the amount at risk increases, so does our aversion to risk. You may bet $1 with me on a simple coin toss, choosing either heads or tails, for the prospect of walking away with $2 at even odds. Would you bet $100,000 with me on the same gamble, paying the same odds? Probably not, if you’re a rational person and not susceptible to a gambling addiction.
Now let’s put that $100,000 in your RRSP and assume that you’re as risk-averse about it as you were about flipping a coin for the same amount. Someone—your financial advisor, your brotherin-law, a voice in a TV commercial—suggests you put that hundred large into an actively managed mutual fund. The fund manager, your source tells you, makes astute decisions based on extensive research backed by brilliant analysis conducted continuously across the globe, and as a result has generated exceptional returns in the last year, yada yada yada.
Having someone watch over your money minute by minute, making decisions based on data you’ll never acquire and probably do not understand, sounds irresistible. And the fund has made enormous gains in the past year? Hey! Where do you send your money?
Now stand back from the slot machine and shake hands with Reality.
You Want Odds? We’ve Got Odds, and You Won’t Like ‘Em
A respected study published in the Journal of Portfolio Management revealed that over a 10-year period (1989–1998) only 9 percent of actively managed mutual funds in the United States delivered a bigger return than the relative benchmark or index. In other words, the odds were better than 11 to 1 against an investor in a managed mutual fund earning more than someone who bought unmanaged shares in companies listed on an index similar to the fund’s.
It gets worse: While the average measure of overperformance by a winning managed mutual fund over the relevant index was 1.8 percent higher, the average underperformance by a losing managed fund was 4.8 percent. You were less than 2 percent ahead of the gang if you won and almost 5 percent behind it if you lost—and the odds were 11 to 1 that you would lose. Dividing the underperformance by the overperformance and multiplying by those 11 to 1 odds, researchers measured risk-adjusted odds against beating the index performance at 28 to 1.*
That’s fine for U.S. experiences, you may say. But things are different in Canada.
Yes, they are. Our mutual fund costs, measured by average MERs and other fees, are substantially higher than those of U.S. mutual funds or, for that matter, mutual funds marketed anywhere else in the world. A highly regarded 2006 study* found total fees for actively managed funds averaged 1.71 percent in the United States and 2.87 percent in Canada. Expensive fees make it difficult for actively managed funds to beat the index, so the odds against success are almost certain to be significantly higher in Canada than in the United States.
An even more devastating study conducted by Morningstar, Inc. and released in May 2009 examined mutual fund operations and regulatory issues in 16 countries around the world, grading them from A to F on various qualities. Canada earned an F on fees and expenses, and the report noted, “Canada’s failing grade in fees is the lowest grade received in any of the surveyed areas.” It also pointed out:
Canadian MERs contain “trailer fees,”† which are [annually deducted] fees fairly specific to the Canadian market.… The typical [Canadian] investor pays a front-end load between 4% and 5%, primarily because investors are unaware that this fee is negotiable [with brokers/advisors].… Canadian investors do not pay much attention to fees. Canadian investors are comfortable with the fees because they don’t know how low these fees should actually be. Assets tend to flow into average- or higher-fee funds because Canadian investors use financial advisors to help them make decisions. Advisors direct client assets to funds that pay better trailers. And since the trailer is included in the MER, the result is that assets flow into higher-fee funds.‡
Higher MERs are just the beginning of the costs associated with an actively managed mutual fund. Added into the mix are front-end or back-end loads paid to the commission-based advisor who sold the fund, brokerage commissions paid by the fund to do all the trading determined by the fund manager, and those annual trailer fees paid each and every year. With some funds turning over their assets four or more times annually, these commissions can be significant. And whose pockets do you think the commissions are extracted from—the fund manager’s or the investors’?
This emphasis on earnings may seem out of place in a book about defensive investing, but it’s not. In fact, it’s totally relevant, especially to RRSP investors, because the more you put away in the good times, the less you’ll lose in the bad times. Rising stock markets tend to reflect sectors and individual companies with varying degrees of reward for the winners; bear markets are like a blanket that descends upon all and sundry equally. If the $100,000 equity investment in your RRSP manages to gain 50 percent in a bull market, leaving you with $150,000 (see how easy the math can be?) and I earn merely 40 percent over the same period on my $100,000, what happens in a bear market that chews up 30 percent of our capital? When the dust settles, I’m left with $98,000 ($140,000 minus 30 percent) and you’re chuckling with $105,000 ($150,000 minus 30 percent), proving that maximizing your returns in the good times without altering the risk factor is a strong defence against losses in the bad times.
Before you dismiss the value of earning only 1 percent more per year from your equity investment as not being worth the effort, check the accompanying chart comparing the growth of $100,000 over 10-, 15-, and 20-year periods at annual returns of 6, 7, and 8 percent.
| ANNUAL RETURN | 10 YEARS | 15 YEARS | 20 YEARS |
| 6% | $179,085 | $239,656 | $320,713 |
| 7% | $196,715 | $275,903 | $386,968 |
| 8% | $215,892 | $317,217 | $466,096 |
It’s easy to shrug off earning 1 percent less than your RRSP might have made in a single year due to high fees on an actively managed mutual fund. It’s not so easy when you discover how much it costs you over 10, 15, or 20 years. If I had been shrewd enough to generate 7 percent annually over 20 years and you were content with 6 percent over the same period, my original $100,000 would now be worth almost $67,000 more than yours.
Time to Go Home: The Traditional Mutual Fund
Party May Be Over
If I were the manager of a large and successful mutual fund these days, I would have a lot of wealth and a lot of worries, although enough of the former tends to alleviate much of the latter.
It’s taken a good deal of time, but Canadians are beginning to understand that the best way to become wealthy is not by purchasing units in a mutual fund, but by owning and managing the fund itself. That’s because Canadian mutual fund expenses charged to those who entrust the fund with their money are outrageously and indefensibly high. The mutual fund industry may sputter and groan about higher administrative costs in Canada, claiming such culprits as the need for bilingual documentation, but when was the last time you heard about a tag day to raise money for destitute mutual fund operators? Canadian mutual funds charge excessive MERs and other fees because they can, not because they need to.
As a means of providing novice investors with a small asset base (less than $20,000) and a long-term horizon (at least 10 years), a carefully selected mutual fund may be a good choice if costs are low and the management’s ethics are high. This is a difficult combination to track down. High MERs and sales commissions paid by mutual funds (and we know where the money to cover theses costs originates, don’t we?) create a drag on performance that can negate even a brilliant manager’s investment acumen. Commissions paid to brokers, advisors, and mutual fund salespeople are not a drain on the MER but a separate expense deducted from the fund before the fund’s unit holders are paid.
Since mutual funds are spending their investors’ money in these trades, you might expect them to make the information available to interested unit holders. You might also expect to see winged hogs in the sky too.
Dan Hallet, a highly regarded consultant to the Canadian mutual fund industry, asked several companies whether he could examine their statement of portfolio transactions, or STPs, to gain an understanding of their procedures. Every mutual fund company turned him down flat, even when he offered to sign a confidentiality agreement to prevent disclosure. Such data, the funds responded through their legal counsel, was non-public (does that mean “private”?) information and could not be revealed.
Hallett correctly labelled this reply nonsense. “There’s no compelling reason to keep this data secret,” he wrote in an industry trade publication. “Mutual funds trade at net asset value, and old trading data cannot possibly influence any mutual fund’s market price or NAV.”* He also wondered how much of a mutual fund manager’s own investment assets were entrusted to the funds they managed. The nearuniversal response: a significant amount, indicating the managers believe their own counsel. No one, however, volunteered percentages. If a fund manager held 90 percent of his or her RRSP assets in the fund he or she managed, wouldn’t you feel better about having your money in their care? How would you feel if it was just 40 percent? Or 10 percent?
You may give as much thought to your mutual fund’s STPs or the manager’s own trust in the fund’s performance as you do to the colour of the prime minister’s socks. That’s fine. But you should be aware that the companies that badger you with their low opinion of your ability to handle your RRSP investments prefer, in almost every aspect of their operations, that you avoid asking embarrassing questions such as “How do you spend the money I pass along to you?” and “What do you do to earn the management fee you charge?”
Publicly traded mutual fund companies also face a rarely discussed serious conflict of interest in their decision-making: They have a primary fiduciary obligation to their stockholders, not to their investors. When this occurs, as David Swenson reports in his book
Unconventional Success: A Fundamental Approach to Personal Investment,*this relationship “inevitably resolves in favour of the bottom line.” If it’s a matter of making money either for the mutual fund’s stockholders or for the people whose money the fund manages, the stockholders win every time. See why it can be more profitable to invest in the mutual fund company than in the mutual fund itself ?
Thanks to the enormous marketing power of mutual funds, most Canadians are drawn to the largest funds managed by the largest fund companies. This creates a sense of safety—but let’s remember that the Titanic was a pretty big boat.
Here’s a revelation: The bigger a mutual fund grows, the more it resembles an index fund—and why pay somebody 2 or 3 percent of your investment every year for something that you can manage yourself ?
The bigger the fund gets (and the more companies that comprise the fund), the less the manager can pay attention to details. Eventually, management of the fund is handed to a committee and all committees do one thing very well: They cover their collective asses by making middle-of-the-road decisions. Few committees boast rebels who will break from traditional thinking, and soon the fund will begin losing the distinctive characteristics that made it successful. Eventually, the fund becomes a closet index fund, proclaiming its “unique and dynamic approach to seeking out investment opportunities overlooked by other funds,” which is balderdash when committee-think drives the fund to making the same investment decisions as everyone else.
The smartest person I met in the investment industry was a man named Robert Krembil. In 1981, he and Arthur Labatt, from the brewery family of the same name, launched Trimark Investment Management Inc., which proved to be one of the major success stories in the Canadian mutual fund industry. One of Trimark’s operating philosophies, Krembil told me in 1988, was to limit the number of companies it would include in its portfolio to 40. “That’s as many as we can track accurately and with confidence,” he said. “If we find a company to invest in that’s better than any of the 40 already in our existing portfolio, we take out the weakest and insert the new one.”
Through the latter part of the 1980s and into the 1990s, few mutual funds in Canada outshone Trimark in performance or prestige. The more it succeeded, the more it attracted new investments. Money poured in, ballooning the fund’s assets until it became impossible not only to restrict the portfolio to 40 companies but for Krembil to exert his investment magic. New Trimark funds were launched in an effort to spread the incoming money around, managed by new managers and decisions by committee.
By the late 1990s, Krembil’s winning formula was no longer applicable. In 2000, Krembil and Labatt sold Trimark to British-based Amvescap PLC, operator of AIM funds. AIM became a division of Invesco, a gigantic U.S. company managing $350 billion in total assets. A few years later, Invesco dumped the AIM identification and inserted Invesco ahead of Trimark, which bolstered the egos of Invesco executives in Houston and confused the hell out of loyal Trimark investors in Canada.*
So where’s the Krembil philosophy that thousands of Canadians (including me) responded to in the glory days of Trimark? Check the wastebaskets and paper shredders at Invesco’s head office in Houston, Texas. Nothing about the investment philosophy of Trimark today resembles the proven genius of Krembil’s approach.
When Everybody Thinks the Same Way …
In May 2009, I surveyed six of the largest mutual funds investing primarily in Canadian equities—the kinds of funds that many financial advisors suggest to their RRSP clients. Here they are with the total assets each fund managed at the time:
| ||||||||||||||||||||||||
|
SOURCE: www.globeinvestor.com. Used With permission.
Notice that these six funds—not the fund companies, but the individual funds themselves—represent almost $14 billion in cash, most of it entrusted to the fund managers by RRSP owners seeking to build assets for their retirement years.
When I noted the 10 largest holdings of each fund, representing the core of its investment philosophy, the same company stocks, and even the proportion of each company in the top 10 listings kept showing up. Here they are with the number of funds that held them in the top 10 percent of each fund’s assets:
| Manulife Financial | 6 |
| Royal Bank | 6 |
| TD | 6 |
| Encana | 5 |
| Goldcorp | 5 |
| Nexen | 5 |
| Potash Co. of Canada | 5 |
| Research In Motion | 5 |
| Suncor | 4 |
| Shoppers Drug Mart | 2 |
All the above firms are excellent choices for long-term Canadian investments, but do you or I have to pay MERs of 2 or 3 percent for the privilege of investing in them? And how much real difference can there be between large funds if their holdings are similar?
Here’s another problem faced by large mutual funds: Manage a mutual fund with $100 million in assets, and most trades you make on behalf of investors will have all the impact on the market of a hungry mosquito on a sleeping hippo. Selling 2 percent of the fund’s holdings, even if just one stock is represented, and buying an equivalent amount of another stock to replace it represents a mere $2 million each way. Should the fund grow to $1 billion in assets, however, a 2 percent trade represents $20 million each way, enough to stir a response on the TSX.
The larger mutual fund could not likely purchase $20 million of stock in one buy, so the money would sit looking for sellers until the purchase was completed. Word would spread about the large buy being made, and prices would rise to meet the existing demand. In effect, the fund would soon be bidding against itself, paying more for the stock than it should. Even if it tried to fill the position with ten buys of $2 million each, the effect on the price would be the same, heightened by bandwagon jumpers bidding the price up.
A similar effect works going the other way. When the fund decides to get out of the same 2 percent of another stock, how does it do so without depressing the price and lowering its return for investors? The word would soon spread—“XYZ Fund is dropping Acme Widgets!”— and many would panic, selling their shares and depressing the price. These are two very good reasons why large mutual funds have difficulty beating the returns of broadly based index funds.
The Good News: You’re in Charge of Your Financial
Future. The Bad News: You’re in Charge of Your
Financial Future
You don’t have to count on traditional mutual funds to represent the equity portion of your RRSP or other investment portfolio. You can do it yourself. Honest.
A few years ago, I equated successfully managing their own investment portfolio, for most Canadians, with removing their own appendix—it probably can be done, but do you really want to try it?
Things have changed, as they always do. I suspect Canadians are marginally better informed on investment basics than they were a few years ago, thanks to broader and more accessible media coverage. What’s more, the economic carnage of 2008–2009 demonstrated that no one has a truly foolproof means of avoiding losses, just as no one has a similar method of guaranteeing betterthan-average returns year after year. The recent growth of indexed exchange traded funds (ETFs), offering broadly based investment with minimal expenses and maximum liquidity, reflects this growing attitude. Why pay somebody to do the things you can do yourself for (almost) free?
The time may have come for you to seriously consider managing your own portfolio. It’s cheaper, easier, and, with a few cautious steps, safer than a few years ago, thanks to ETFs.
A decade ago, ETFs were as rare as socialists at the TSX; by mid-2009, more than 100 ETFs were vying for Canadian investor attention. Originally aimed at broader indices such as the S&P/TSX Composite, reflecting every company listed on the Toronto Stock Exchange, ETFs now deliver a dozen or more sector choices, including gold, energy, dividends and income, oil sands, natural gas, and maybe even pistachio. Their performance varies according to that of the sector they emulate. No manager is at the helm trying to exceed the index in good times and cushion the fall in bad times, so wherever the sector leads the ETF will follow. In good or bad times, however, the low cost of the ride represents a benefit.
Barclays iShares CDN LargeCap 60 Index ETF boasted total assets of $8.357 billion in mid-2009, invested in many of the same companies as the six actively managed funds shown earlier, including Royal Bank, Encana, TD Bank, Barrick Gold, Goldcorp, Potash Company, Research In Motion, and others. The iShares MER is just 0.17 percent, less than one-tenth the MER of the AGF Canadian Large Cap Dividend Fund Classic, the cheapest fund in the actively managed group.
If you believe in buying and holding over the long term, the most effective method is via ETFs reflecting major sectors of the Canadian stock market. These include the TSX Composite Index; the TSX Large Cap Index (investing in the 60 largest companies on the TSX); the S&P 500 Index (for the largest U.S. companies); and the Canadian Financial Sector Index (banks, investment firms, and insurance companies).
Actively Managed ETFs: An Oxymoron
After years of claiming, with little hard-nosed proof, that an active manager charging an annual MER of 2 percent or more will outperform an ETF with an MER of 0.35 percent for the same period, some actively managed mutual funds are joining the enemy. Well, almost.
In May 2009, Manulife Mutual Funds announced with great fanfare that it was launching three funds based on Canadian, U.S., and international equity indexes, essentially three different ETFs. Very nice. Except that you could not purchase them as stand-alone funds. You could invest in them only with one of Manulife’s Simplicity wrap accounts. As much as 20 percent of a Simplicity wrap account’s assets could be in the firm’s in-house indexed account.
Here’s the rub: The Simplicity wrap accounts charge an annual MER ranging from 2.25 to 2.85 percent. Remember what MER stands for: management expense ratio, the fee paid to fund managers in return for their energy and expertise at actively managing the fund’s assets, which, of course, consists of your money. Perhaps 20 percent of the investment assets in these Simplicity wraps is now spent passively, tucked into a corner out of the manager’s sight while he or she focuses on other things. ETFs such as those marketed by Barclays and others, mirroring the same indices as those employed by Manulife, carry MERs as low as 0.20 percent annually.
So the Manulife Simplicity fund managers are doing 20 percent less work. Is Manulife charging a 20 percent lower MER? Only the naive expect them to do so.
In mid-2009, the Bank of Montreal launched four ETFs with great fanfare, bringing the number of ETFs available in this country to more than 100. BMO was not the first Canadian bank to give ETFs its blessing. TD pioneered the idea in 2001, dropping the funds five years later because they failed to achieve critical mass, which means there were insufficient numbers of units in circulation.
Remember that one of the key appeals to ETFs, besides their very low MERs, is their liquidity—the ability to trade fund units as quickly and easily as shares in public companies. A million or so units in circulation are required to generate buy-and-sell action at competitive market prices, and liquidity becomes difficult if insufficient numbers of units are available. It took TD five years to realize their ETFs would not achieve critical mass. It may take as long for BMO and investors to determine whether the new ETFs promise a longer and more profitable life.
Should You Assemble a Portfolio of Individual Stocks?
Well, Yes and No …
Some Canadian investors are so jaded by mutual fund performance that they are seriously considering what was once unthinkable: bypassing mutual funds entirely and building a basket of stocks on their own. Is this a good idea?
The problem is diversification, which, along with quality fixed income elements such as guaranteed bonds and laddered GICs, represents a bulwark against overwhelming loss. But how many stocks does it take to minimize portfolio loss? Some people claim 15 or 20. Many believe it takes 40. Others, such as investment guru and author William Bernstein, snort at the very idea of fewer than 500.
In a published study titled The 15-Stock Diversification Myth, Bernstein claims that over 28 years, from 1980 to 2008, all of the gains reported on the NYSE and NASDAQ were recorded by the top 25 stocks; the remaining 75 percent recorded losses. On that basis, the odds are 3 to 1 against success should you choose a portfolio by throwing darts at the complete stock listing.
You wouldn’t do that, of course. You would carefully ponder the future of specific industries, examine past performance of selected companies, weigh this against future prospects, and make your decisions in a methodical manner.
Very nice. But how would you identify companies that Bernstein calls “Super Stocks,” names such as RIM or Potash or Dell or Walmart, companies that achieve massive gains, propelling their indices to extraordinary heights well beyond any expectation? You likely wouldn’t.
Bernstein focused his attention on the U.S. stock market, about 30 times bigger than the Canadian stock market in total assets, so the universe is considerably smaller in this country. While his theory applies to a similar degree to Canada, it should be subject to modification.
Consider technology, for example. Bernstein mentions Dell as a Super Stock, and it clearly qualifies. He could also have mentioned, in their earlier incarnations at least, Microsoft, Cisco, Sun, Oracle, HP, and at least a dozen other large-cap technology-based companies that qualify. In Canada we have one: RIM.
Here’s another difference: No one of consequence is promoting the idea of investing in U.S. financial organizations in 2010, except on a speculative basis. Canadian banks, however, represent a buttress of stability with reasonable prospects of growth and an impressive record of dividend payments. But no Canadian bank can deliver Super Stock performance to the degree that Citibank may or may not. Royal, TD, Scotiabank, and the rest are attractive at least as much for their dividend records and stability as for their growth prospects. Let’s face it— assembling a portfolio of stocks in this country means opting for the dull and steady over the wild and risky. Hey, isn’t that the Canadian Way?
So consider this strategy: Choose broadly based ETFs as a foundation of your equities spiced with selected individual stocks. Annually, or whenever you achieve a targeted gain in the sector stocks—say 50 percent—plan to rebalance the sector. Reaching a targeted gain of 50 percent might trigger selling one-third of the sector, reducing the level to your original investment, and moving the gain into the fixed-income portion of your portfolio. In the terminology of the market this is known as crystallizing your gains.
Subject to the unpredictable vagaries of the stock market and the world in general, here are some guidelines in building a stock portfolio for an RRSP. These are suggested content only; the balance between them is up to you.
1 If you can’t beat the banks, buy ‘em. Through 2009, Canadian politicians and their banking buddies delighted in quoting U.S. President Barack Obama and others on the stability of our banking system. Various international sources called it the best banking system in the world, which considering the state of global banks at the time was like being named the best hockey player in Hawaii.
Still, Canada’s banks are solid and profitable, two qualifications for any investment choice. We can complain about their fees, their size, their clout, and their encroachment into other activities besides banking, but bank shareholders in recent years can’t complain about their performance. In fact, given their comparable strength TD, Scotiabank, and Royal Bank may be poised for substantial foreign expansion via acquisitions, providing a wider base for potentially larger profits. “Investing in bank stocks,” says a market-savvy friend, “is like owning a casino.” Not quite, but close.
2 What’s so bad about boring? Energy stocks are exciting things. If oil hits $200 a barrel, the cheers in Calgary will be heard all the way to Newfoundland. Of course, if it sinks below $40 a barrel, the Alberta oil sands project risks becoming the world’s largest junkyard. To avoid the rough ride, bypass the risky and invest in the boring, namely pipeline companies that carry the stuff at any price to consumers. These include Enbridge and TransCanada Corp. Utilities such as Canadian Utilities (CU) are just as boring (even the company’s name is dull). CU, part of the Alberta-based ATCO Group, transports electricity and water, generates electric power, and provides global technological services on power generation and related activities. None of these companies is likely to produce major capital gains, but they have low downside risks and long histories of paying fat dividends.
3 The more cash, the better. Invest in companies that already have a lot of cash and appear to attract it in truckloads. Loblaws, the country’s largest grocery chain; Jean Coutu, a chain of drugstores in Quebec and the Atlantic Provinces; and Alimentation Couche-Tard, with more than 5000 convenience stores across North America, all deal in cash and consumer goods. The latter quality is especially attractive in tough economic times, when people forsake Rolexes and 20-year-old Scotch but still need corn flakes and Aspirin.
4 All that glitters just might … Imagine a product that has been priced artificially low for years, faces a growing worldwide demand for its dwindling supply, and is almost as liquidable as cash. Would you invest in it? You probably can’t wait. But perhaps you should.
It’s gold. For years, a highly vocal minority of investors and advocates across North America has been predicting that gold is certain to reach $2000 per ounce based on a category of reasons (in mid-2009, the price floated around $1000).
Gold bugs claim governments constantly manipulate the metal’s price because a rise in gold prices translates into a decline in the value of national currencies, underpricing gold and overpricing the dollar, pound, euro, and other loose change. Meanwhile, future demand for gold will grow with the expansion of the middle classes in India and China, cultures with good historical reasons for valuing the unquestioned security of gold over promises-backed paper money. The price of gold tends to track the price of petroleum; if oil resumes its position above the $100-per-barrel price, gold is certain to rise alongside it.
Inflation is another booster of gold prices. With governments printing money as though it’s cheap wallpaper, inflationary pressures may become inevitable within the next few years, driving the price of gold up to and beyond that $2000 level. Or not.
So, is gold a risk or a refuge? It may be both—a hedge against inflation if held as bullion (or the equivalent), and an astute investment as shares in established gold producers such as Barrick and Goldcorp. Or not.
5 Go on the defensive. In downtimes, consumers stop buying plasma TVs and new clothing, but they still need to eat and, in their later years, take medication. Companies providing these goods and the services that accompany them are neglected in boom times and beloved in bad times, providing some protection against downtime disaster. These include George Weston and Loblaws in the food area, and Shoppers Drug Mart in the pharmacy trade. The latter may be a growth stock in the coming few years as boomers find Viagra and Celebrex more tempting than Hugo Boss and Chanel.
6 Telecommunications could be a new staple. Older boomers scoffed at the younger generation’s passion for cell phones and the gizmos they propagated. Who needed MP3 music files, cameras, video games, text messaging, internet access, and other paraphernalia? It’s only a telephone, right?
Wrong. Wireless communication changes more than the way we keep in touch; it is changing the way we live, especially for those under 40. Landline telephones are doomed. Mobile connectivity is becoming a 24/7 service necessity. And if you think RIM has exhausted the market for BlackBerrys, think again: About 2 billion people around the world will become prospective BlackBerry consumers in the next decade, all of them purchasing wireless communication services to use the little devils. It’s difficult, on a global basis, to find any industry matching this one for both growth and stability.
*A pseudonym.
*In reality, the odds are even higher because they do not include mutual funds that, because of poor performance, were discontinued or merged with more successful funds during the same period. This reflects the mutual fund industry’s practice of concealing evidence of losses by eating their dead.
*Ajay Khoraba, Georgia I.T.; Henri Servaes, London Business School; and Peter Tufano; Harvard Business School, Mutual Fund Fees Around the World.
†For more on trailer fees, see page 124.
‡John Rekenthaler, CFA; Michelle Swartzentruber; Cindy Sin-Yi Tsai, CFA, CAIA,Morningstar® Global Fund Investor Experience, May 2009.
*Dan Hallett, “A Regulatory Wish: Fixing These Problems Would Make Life Better for Investors,” Investment Executive, May 5, 2009.
*New York: Simon & Schuster, 2005, p. 92.
*For more on the sad demise of Trimark, see Chapter 7: Fees, Commissions, and Other Holes in Your Bucket.