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Cameron Passmore CIM, FMA, FCSI

Portfolio Manager

Benjamin Felix MBA, CFA

Associate Portfolio Manager
Contact
  • T613.237.5544 x 313
  • 1.800.230.5544
  • F613.237.5949
  • 265 Carling Avenue,
    8th Floor,
  • Ottawa, Ontario K1S 2E1
January-21-15

Surprise rate cut by the Bank of Canada

On January 21, the Bank of Canada cut its key interest rate by 0.25%. Here are our observations about this bold monetary policy move.

Seven Observations About the Bank of Canada Rate Cut

  1.  In a move causing major surprise, the Bank of Canada has cut its overnight target interest rate by 0.25%, from 1% to 0.75%. The bond market delivered a dramatic response within minutes; the Canadian yield curve has steepened, as short term rates have decreased much more than long term rates:

     
  2. This is the latest from a series of signals that federal government officials believe that the negative effects of the recent months’ drop in oil prices will outweigh its positive effects, at least in the short run. The anticipated benefits to the sharply lower oil prices include a stronger U.S. economy and a lower Canadian dollar (which makes our exports more competitive in global markets), but it will take at least a few months for these effects to be fully realized. However, the negative effects have been immediate, as capital expenses are slashed in the Canadian oil patch. The Canadian market could go up or down from here – a period of economic uncertainty should not derail an investment strategy.
     
  3. The Canadian stock market has responded well to this announcement, as the S&P/TSX Composite Index has returned +1.8% today, compared to only +0.5% for the S&P500 Index.
     
  4. Bond returns have been very positive so far in January. For example, the Vanguard Short-Term Bond ETF has returned 1.0%, and the Vanguard Aggregate Bond ETF has returned 2.7% to date.
     
  5. This rate cut provides very little information about future stock and bond returns. The market’s initial reaction to this news has been positive, but nobody can accurately forecast its direction in the coming weeks or months. Market fluctuations remain unpredictable, as always, and long term investors should not change their strategy based on this news.
     
  6. Unexpected events like this highlight why savvy investors diversify their portfolios beyond Canada with U.S. and international stocks and bonds. Canadian stocks and bonds will outperform sometimes, and underperform others, but a globally-diversified portfolio brings stability due to the imperfect correlations of global markets. A wise investor will not put all of their eggs in one (asset class) basket.
     
  7. The financial media gets excited about bad news. Stories sensationalizing how the economy is nose diving sell a lot more quickly than an objective point of view on maintaining a long-term investment portfolio through changing market conditions. It may not be easy, but the more that investors can ignore the media, the better off they will be.
By: Ben Felix & Raymond Kérzerho | 2 comments
January-08-15

An Open Letter to Active Fund Managers

Dear Active Fund Managers: Please do not give up!

We know that 2014 was an especially difficult year for you, and though it was not the first difficult year that you have endured, it was surely the most public. Do not allow yourselves to feel discouraged from headlines like “The Decline and Fall of Fund Managers” and “The Triumph of Index Funds”; maybe your bets and predictions will be more accurate in 2015.

It cannot be easy watching institutions and retail investors aggressively shift their assets from active to passive funds – Morningstar data for a trailing one year period through November 30th showed that active U.S. equity funds lost $91.9 billion, while passive U.S. equity funds received $156.1 billion. At least there were positive flows of $67.6 billion across all active U.S. domiciled fund categories, though passive funds did see inflows of $385.7 billion despite consisting of a significantly smaller fund universe.

Try not to worry too much about Warren Buffett and CalPERS advocating for index funds. Just because they are two of the most well respected and influential figures in the investment world does not mean that they are always right.

Right now it may feel impossible to pick the right stocks or guess the market direction, but do not let your confidence wane! You see, for everyone else to enjoy an efficient market, at least a handful of you need to continue your vigorous research and due diligence on securities. Each one of you may only get it right sometimes, but the aggregation of your predictions plays a role in getting accurate information into prices.

There will always be some investors eager to pay your high fees in hopes of beating the market, regardless of what the data says – you will never be obsolete. So please, ignore the media, the data, and the thought leaders, and keep up the great work!

Sincerely,
Investors

By: Ben Felix | 0 comments
January-05-15

Is 2015 the year to fire your financial advisor?

2014 was a strong year for financial markets, capping off a six-year-long bull market that could make anyone look like a star investment manager. As an investor, there are important areas to evaluate beyond positive investment performance to determine the worth of a relationship with a professional financial advisor.

Who are they working for?

A large amount of the financial advisors in Canada operate on a commission basis; they are getting paid by the products or transactions that they are recommending to their clients. This compensation model creates obvious conflicts of interest as these advisors are working for the financial companies, not their clients! The advisor in this model is inclined to make recommendations that will result in them receiving compensation and bonuses. A much more viable relationship exists when the client agrees to pay the advisor directly for their unbiased advice. If your advisor is being paid by the products that they are recommending to you, it might be time to say goodbye.

Are they acting in your best interest?

Financial advisors in Canada are held to a suitability standard. This means that they can legally make recommendations that will benefit them more than you, as long as the investment is suitable. Some firms may choose to hold themselves to a code of ethics, such as the CFA Institute Code of Ethics and Standards of Professional Conduct. If your advisor has not already, and is not willing to, agree in writing to abide by a written code of ethics, they should not be kept around much longer.

Have they built your Investment Policy Statement?

An Investment Policy Statement is a signed document that governs how your money will be invested. One of the most important roles that an advisor plays is determining your short and long-term goals, your required rate of return, and your risk tolerance in order to make an asset mix recommendation. An appropriate asset mix, reflected in the rules written in an Investment Policy Statement, is the foundation of every long-term investment plan. If your advisor is investing your money without having built your investment policy statement, their investment recommendations may not be aligned with your long-term goals.

Are they conscious of your tax situation?

After-tax returns can be significantly different from pre-tax returns, especially if your advisor is not integrating their investment recommendations with your overall tax situation. An involved advisor will be conscious of asset location (which accounts should hold which investments), tax-loss harvesting opportunities, and other unique tax circumstances that may affect your optimal investment portfolio. If you advisor is ignoring taxes to focus on investment returns and picking the next hot stock, they could be doing significant harm to your after-tax returns.

Are they giving you financial advice?

Not all people that are paid to give financial advice actually give financial advice. There are plenty of stock pickers and salespeople parading as financial advisors that do not give advice beyond the hottest new product for your portfolio. Financial advice encompasses the construction of an Investment Policy Statement, integration with your tax situation, and coaching on how to achieve your financial goals. Financial advice can go much further, depending on the expertise of the advisor. It should go without saying, but if your financial advisor is not giving you financial advice, it is probably time to fire them.

Firing a financial advisor can be difficult. Often times advisors work hard to build a personal relationship with their clients, or a personal relationship preceded the professional engagement. As awkward as the conversation and following situation may be, it must be remembered that the cost of poor financial advice can be immeasurably large over a long period of time.

By: Ben Felix | 0 comments