Anthony Layton MBA, CIM

Chairman & CEO, Portfolio Manager

Peter Guay MBA, CFA

Portfolio Manager
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The High Risk of High Stocks – Cannabis in the Market


Legalization and the Stock Market

Legalization is happening in Canada and pot stocks are on the rise. At times last year, some of the discount brokerage platforms were so bogged down with customer orders for these stocks that they had to shut down temporarily.

If you’re reading this, then you obviously don’t have a moral problem investing in pot stocks. In fact, I think it’ll be interesting to see how the Socially Responsible Investing community treats these stocks. Will they be lumped in with big tobacco and alcohol as vices, or will their medicinal benefits carry the day as a benefit to society? I think I have an idea where that will land but we’ll have to wait and see.

Before we dive in, let’s be honest for a second. The only reason most people are even considering buying these stocks is because of how much they’ve already gone up. That’s true for most bubbles actually. When prices rise, more people notice, which makes them rise even more in a virtuous cycle. That phenomenon alone warrants caution.

To give you an idea of how “high” these stocks have flown, let me give you some of the numbers. Aurora Cannabis and Canopy Growth are the largest two pot stocks in the Canadian market. In the last year for which they reported earnings, they made $18 million and $40 million in revenue respectively. Now, that’s not nothing. However, the value of their outstanding stock is $4.6 billion and $5.6 billion. That’s 95 and 65 times the value of their revenues. Normal pharmaceutical stocks trade around 3.5 to 5 times their revenues!
But wait. Isn’t there going to be an enormous consumer market for marijuana once it becomes legal? I don’t doubt that there will be, but you do need to step back and ask yourself how big for a minute. I would argue that these companies are trading at prices that suggest that the marijuana market will rival the cigarette market, that the current handful of companies are going to capture the entire market, and that it’s already being sold today! 

The Regulations You Need to Jump Through for Pot Stocks

Now I haven’t even talked about some of the risks that these companies face. First of all, the path to legalization is far from straight. There will be plenty of regulatory hurdles to jump through before any of these companies start selling in any real volume. Second, there will be massive competition from large and established tobacco companies and big pharma companies. Who knows which of today’s pot stocks will still be around in five or ten years?

Listen, I’m not saying you shouldn’t have any fun here. Like all good things you shouldn’t consume, a little bit in moderation won’t hurt you. The same goes for marijuana stocks. If you want to play with them, do it in a side account with just a few bucks. Just don’t bet your retirement on what might become no more than a Purple Haze!

By: Peter Guay | 0 comments

Tony’s Take: No free lunch


Fund companies receive a slap on the wrist, but what about the little guy?

They say there’s no free lunch in life. But for some Canadian investment advisors, there’s not only been free lunches, but free golf trips, free tickets to sports events and concerts by the likes of Madonna, Paul McCartney and Justin Bieber, and other pricey gifts.

Mutual fund companies laid those goodies on advisors to encourage them to recommend (read: sell) their mutual funds to their clients. 

As I mentioned in my last column, that kind of lavish promotional spending has led to a belated crackdown by the Ontario Securities Commission. The OSC has handed out a total of $3.2 million in fines to three fund companies as part of settlements over the spending.

They are Mackenzie Financial, fined $900,0000, Scotiabank’s 1832 Asset Management, fined $800,000, and Sentry Investments, fined $1.5 million. The trio were also required to each pay $150,000 to cover the OSC’s investigation costs.

Clients left in the dark

While the focus in the settlements was on fund companies and advisors, let’s save a thought for the clients. When they purchased mutual funds from the companies in question, did their financial advisors disclose they’d been wined and dined and given assorted swag? We don’t know, but it seems unlikely.

What’s more plausible is the clients were told about the fund’s holdings, its successful track record and the managers’ promising investment strategy.

Unfortunately, according to an astonishing study I discussed in another recent column, most advisors just don’t make good investment recommendations to their clients, even before you throw in freebies from mutual fund companies. 

We know this because the advisor’s personal portfolios reflect the same bad investing choices as those of the clients they advise, according to the study.

Many advisors have misguided beliefs

 “They under-diversify, trade frequently and favour expensive, actively managed mutual funds with high past returns, despite evidence that these strategies often underperform,” says the paper, which looked at data from two large Canadian financial institutions, comprised of the trading and account records of more than 4,000 advisors and 500,000 clients.

In other words, many advisors are incompetent, dangerously so, when you consider this is their own and their clients’ retirement savings we’re talking about.

So yes, let’s have more enforcement to get conflicts of interest out of the industry. But let’s take it further.

How to protect investors better

We need tougher penalties for misconduct, as well as improved training and certification standards for investment advisors.

But most importantly, we must make it a legal obligation for investment firms to act in their clients’ best interests. That’s called a fiduciary standard, and I’ll talk more about it in the next Tony’s Take.

By: Anthony Layton | 0 comments

How Does Socially Responsible Investing Work?


Socially Responsible Investing or SRI has been growing in popularity in recent years and it’s easy to see why. You get to invest your money, build wealth, and do good by aligning your investments with your personal values. But what exactly is Socially Responsible Investing and how can you be sure that you’re investing in an ethical way? 

Socially Responsible Investing is any investment strategy that considers both financial return and social good to bring about a social change. We all know about financial return but you’re probably thinking, ‘what is a social good?’ That varies depending on each person’s own values, but is most commonly categorized in the investment industry by Environmental, Social and Governance or ESG. 

Environmental factors consider companies’ impact on air quality, land, water and human health. Social factors consider companies’ human rights records and support for the communities in which they operate, and finally Governance factors consider executive compensation practices, board diversity and corporate risk management. 

So let’s look at the numbers. As I said, SRI is growing in popularity and a lot of growth is being driven by Millennial investors, who are more likely than Baby Boomers to consider ESG factors when investing. They look for companies dedicated to solving environmental and social challenges. 

According to the Responsible Investment Association’s 2016 trend report, there is approximately $1.5 trillion dollars in assets that are part of a responsible investing strategy in Canada. The report also says that responsible investing represents 38 per cent of the Canadian investment industry and I expect that to increase, particularly since the Ontario Pension Benefits Act now requires pension plans to have a statement on Socially Responsible Investing as part of their Investment Policies. So how can you implement a socially responsible portfolio for your investments? Well, there are a few ways to approach this.  

The first is what’s known as negative screening. That’s where you exclude companies and industries involved in practices and behaviours that go against your values. Some may avoid investing in tobacco, alcohol or cannabis products while others may avoid investing in companies that are considered environmentally and socially unfriendly. For instance, the recent movement in the US around gun control, or the lack thereof, has many investors asking about the exposure to gun manufacturers in their portfolio, and how to eliminate that exposure.  

Another approach takes ESG ratings into consideration. Several indexes screen and rank companies on their ESG practices. This determines the weight of each company in the index as a function of the company’s ranking.  

Now there isn’t one overall ESG report that scores all public companies, but there are multiple indexes provided by third-party providers. As you would expect, the methodologies can differ so the best way to find investments that work for you is to work with an advisor you trust. I like to use ETFs based on the MSCI ESG rating system, for which I’ll provide a link below.  

The growing popularity of indexes like these sends a message to public companies that if they want to raise funds in public markets, good ESG behaviour will make it easier for them to attract more investor dollars. 

The last way to express your views that I’ll discuss, is by Impact Investing, where returns aren’t the main goal. Instead you invest in projects that might earn below market financial return, but that complement your Environmental or Social objectives. Financing clean water projects, or lending funds to micro-financing small businesses in poor African countries are good examples.  

It’s important to understand that socially responsible or ESG investing won’t necessarily mean higher returns on your portfolio. I’m not aware of any conclusive academic research that says as much. If you know of any, please let me know! That said, if it’s important to you to express your views and values through your investments, you may be willing to give up a little on the financial return in exchange for a clear conscience and the knowledge that you’re doing good for the planet and for others. 

As always, I’ll put some links below if you want to read more about SRI, ESG and Impact Investing. Leave a comment below if you have any questions about this episode or want to get in touch with me. 

By: Peter Guay | 4 comments

Tony’s Take: Overcharged

It’s time Canadians got the investment industry they deserve 

How would you feel if you were charged thousands of dollars for advice you never received? 

Well, that is exactly what’s been happening to clients of discount brokers who bought mutual funds carrying commissions normally paid to financial advisors. The clients paid, but they didn’t get any advice—discount brokers aren’t allowed to provide investment advice.

Commissions for ongoing advice, known as trailing commissions, are typically 1% on an equity mutual fund, or about $1,000 a year for every $100,000 invested. Investor advocate Ken Kivenko estimates discount brokerage clients have been overcharged about $190 million a year.

Last month, the investment industry self-regulator, IIROC, finally did something to stop the practice, after years of complaints from industry observers. IIROC issued a notice stating that advice fees in mutual funds raise a conflict of interest for discount brokers. 

It said brokers are expected to address this conflict by offering Series D funds that do not pay a commission for ongoing advice. If an investor buys a fund that isn’t available in a Series D version, the broker is supposed to rebate the advice commissions.

Around the same time in April, a pair of law firms in Ontario filed a proposed class-action lawsuit against TD Asset Management over trailing commissions paid to discount brokers on TD Mutual Funds.

No shortage of problems

There’s been no shortage of other news over the last year about overcharging and questionable sales practices in the investment industry. 

There was a rash of settlements between Ontario Securities Commission and big financial institutions over excess fees charged to clients and unpaid interest on mutual funds and other investments, stretching back years. The settlements resulted in over $350 million in compensation being paid to clients.

Most recently, two mutual fund managers agreed in settlements with the OSC to pay fines over lavish promotional activities and gifts to financial advisors, including tickets to professional sporting events and concerts by big stars.

Mackenzie Financial Corp. agreed to pay a $900,000 administrative penalty plus $150,000 in investigation costs, while Scotiabank’s asset management division, 1832 Asset Management, agreed to pay a $800,000 administrative penalty and $150,000 in investigation costs. A year earlier, Sentry Investments was ordered to pay a $1.5 million administrative penalty and $150,000 in investigative costs over similar practices.

How to improve the industry

Canadian investors deserve an investment industry that is free from conflicts of interest and hidden or excessive fees and commissions.

Aggressive enforcement has to be coupled with stricter investor protection, starting with a ban on trailing commissions. We also need to hold advisors to a fiduciary standard that requires them to act in their clients’ best interest.

The industry’s troubles of the last year prove these reforms are long past due.

By: Anthony Layton | 0 comments

2018 Rules for Split Income


I’ve talked about income splitting through a corporation before in this series, but things have changed! Last December, the Federal Minister of Finance, Bill Morneau, revealed some new rules and in this video, I want to discuss if and how the new changes could affect you, your family, your business and of course, your taxes.

If you recall from my previous videos, income sprinkling is used by small business owners or incorporated professionals to redirect their business income to family members who are in lower tax brackets, usually by issuing dividends. 

These dividends are often discretionary, so the owner can direct any amount in a particular tax year to a given family member, so long as they are shareholders of the company. This only worked for lower-taxed family members who were 18 years old and older because of what is known as the Tax on Split Income (TOSI) or more commonly known as the ‘kiddie tax.’ Family members who were under 18 have the highest marginal tax rate applied to such dividends, so that was never an option.

The government has changed these rules specifically to target incorporated professionals (Doctors, lawyers and others) who are benefiting from lower tax rates on what would otherwise have been fully taxable income at the highest marginal rates, if not for the corporation. In other words, the government is essentially making the argument that these incorporated professionals aren’t adding any economic value to society by their decision to incorporate, and should therefore not benefit from many of the tax advantages of doing so. 

Now, I’m not going to wade into the debate over whether this reasoning is right or wrong. What I will say is that all kinds of small businesses are getting caught up in these changes, which is causing an uproar among entrepreneurs and their accountants! 

So what are the changes? The TOSI rules have been extended to cover adult shareholders of private corporations, as well as the minor children that it already applied to.  

The question then becomes: If you are a private corporation owner and would like to pay dividends to relatives who are shareholders, when can you do so without being caught by the new rules? Essentially, to escape the new rules, you have to be able to show a significant involvement in the business. The Federal government is putting what they’re calling ‘clear, bright-line tests’ or ‘off-ramps’ to exclude some family members from the TOSI. 

Let’s look at these exclusions. One for is the business owner’s spouse, providing they are over 65 years old. Another is for adults over 18 years old who have made a significant labour contribution, which the CRA is measuring at an average of 20 hours a week, to the business during the year or during any of the five previous years. 

Here’s another: if you’re age 25 or over, you can be exempt from the TOSI rules if you hold over 10% of the share value and the company earns less than 90% of its income from the provision of services. This exemption doesn’t apply to professional corporations though.

And finally, if you receive capital gains from qualified small business corporation shares and they are not subject to the highest marginal tax rate on the gains under existing rules, the new exception rules will apply.

So what happens if you don’t fall into one of these categories? Well, anyone who is 25 or older, who does not meet any of the exclusions described above would be subject to a reasonableness test to determine how much of any dividend received, if any, should be taxed at the highest marginal tax rate. In certain cases, adults aged 18 to 24 who have contributed to a family business with their own capital will be able to use the reasonableness test on that related income.

One of my pet peeves is that this has only made the tax code more complex, which adds more potential for unintended consequences. There’s no doubt that these rules are messy and will have accountants working lots of overtime to figure out to whom and how they should apply.

As always, I’ll put some links below if you want to read more about the new changes. In my next video, we’re going to look at Socially Responsible Investing so don’t forget to subscribe to get the notification when that video goes up.

By: Peter Guay | 0 comments