Download Toronto District School Board Continuing Education Investment

Toronto District School Board
Continuing Education
Investment Planning
Fall 2015, Week 3
Instructor Gail Bebee
[email protected]
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
What was the most
important thing you
learned from last
week’s lecture?
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Week 2 Take Aways Bonds
1. Fixed income, rate ∝ risk
2. No guarantees -check credit quality
3. When interest rates rise, existing
bond prices fall
4. No maturity date - bond funds BUT
5. Low bond fund fees are critical
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Week 2 Take Aways Stocks
1. No guarantees.
2. Higher risk, higher reward than
fixed income, + real return
3. Research before you buy:
financials, management, etc.
4. Dividends are good.
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Stocks are risky
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Today’s Topics

Preferred shares

ADRs

Real estate

Currency hedging

Funds
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Initial Public Offering

IPO

First time stock offered

Best IPOs sold to institutional
investors/ preferred clients

Retail investors must buy
once trading starts
E.g. Tim Horton’s
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Should you buy IPO?

Many perform poorly first 3 to 5
years

Some companies fail

Best to wait a few years before
buying stock
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Preferred Shares

Dividends paid before common
shares

Fixed income-like return

Issuers mostly well-established
e.g. banks, utilities, insurance
 Less
tax due to Can. dividend
tax credit
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Ontario Marginal Tax Rate
2015 Taxable Income
Capital
Income
Gains
Eligible
Dividends
First $40,922
20.05% 10.03%
-6.86%
Over $40,922 to
$44,700
24.15% 12.08%
-1.20%
Over $44,700 to
$72,064
31.15% 15.58%
8.46%
Over $72,064 to
$81,847
32.98% 16.49%
10.99
Data from taxtips.ca
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Preferred Shares

Company symbol.PR.letter
e.g. Bank of Nova Scotia - BNS.PR.S

Issue price $25

Many variations

Features as required to attract
buyers
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Perpetual

No retraction date

Price fluctuates with interest rates
Retractable

Right to sell shares to issuer on
call date at specified price

Call date = bond maturity date
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Straight Rate

Fixed interest rate
Floating Rate

Rate linked to established rate
e.g. bank prime

better when rates
rising
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Rate Reset

Interest rate reset on specific date(s)
based on prevailing rate
Convertible

Convertible to common shares

Specified formula

Price moves with common share price
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Cumulative

Unpaid dividends accrue

To be paid in future
Non-cumulative

Missed dividends disappear
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Choosing Preferred Shares

Features

Issuer reputation, financial status

Credit Rating - Investment grade

Pf-1 or Pf-2 (DBRS)

P-1 or P-2 (Standard & Poors)
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Choosing Preferred Shares

Real yield?
Yield to Call
– Yield if redeemed on next call date
Yield to Worst Call
– If several call dates/redemption
values, the worst yield

Diversify – pref share ladder
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Choosing
preferreds
is work
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Prefs can be Risky
e.g. 2015 price meltdown
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Funds are Less Work
– Horizons Active Floating Rate
Preferred Share ETF
– iShares S&P/TSX N. Amer. Preferred
Stock Index Fund C$-hedged
– PowerShares Canadian Preferred
Share Index ETF
– BMO S&P/TSX Laddered Preferred
Share Index ETF
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
More on Preferred Shares

Scotia Macleod Guide to Preferred
Shares

Raymond James Canadian
Preferred Share Report

Chapter 13 of No Hype - The
Straight Goods on Investing Your
Money
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Income Trusts

Investment trust holds incomeproducing assets


Trading symbol XXX.UN
e.g. REI.UN, Riocan Real Estate
Investment Trust
Unit holders pay tax on distributions

Due to tax changes, mainly REITS
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
American
Depositary Receipt

ADRs

Certificate representing
ownership of share(s) nonU.S. company

Trade like stocks on US stock
exchanges e.g. NYSE
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
ADRs The Back Story

Foreign company hires U.S.
depository bank to set up ADR

Underlying shares:

Buy on company’s home stock
exchange

Kept in home country custodian
bank
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Why Companies
have ADRs?

Access US capital

Build visibility in U.S. & globally

Expand shareholder base

Improve overall liquidity

Facilitate merger & acquisitions
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Why Buy ADRs?

Companies tend to be wellestablished, low bankruptcy risk

Transactions U.S. $$, minimizes
currency management

Easy to trade

US disclosure, accounting standards

Annual reports etc. in English
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Examples of ADRS

Major depository banks issuers
BNY Mellon, Citibank , Deutsche
Bank

List of ADRs

DEMO
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Real Estate

Property, buildings

Higher risk

Real estate values rise & FALL

Illiquid

Being a landlord is work
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Why Invest in Real Estate?

Diversification

Consider your home
– First: place to live
– Second: investment
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Options for Investing
in Real Estate
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Buy Land & Bricks
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Real Estate Direct
Ownership

Major $$, long term commitment

Minimal diversification

Upfront costs: taxes, legal, etc.

Ongoing costs: mortgage,
insurance, taxes, maintenance etc.

Landlord duties
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Real Estate Stocks & REITS

Malls, offices, industrial parks,
apartments –diverse or specialize

Diversification –one/few purchases

Liquid, known costs, low effort

Trading costs

Tax treatment
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Real Estate Stocks

Can. dividend tax credit

Trading on TSX
Melcor Developments, MRD-T
First Capital Realty, FCR-T
Brookfield Properties, BPO-T
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Real Estate Investment
Trusts (REIT)

Units trade like stocks

Unit owners pay taxes on income

Best for tax-deferred accounts
Riocan REIT
Canadian Apartment Properties REIT
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Real Estate Funds

Own pool of stocks, REITs

Instant diversification

Low maintenance

Can invest small amounts
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Mutual Funds

Dynamic Global Real Estate Fund

Sentry REIT Fund
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Exchange-traded Funds

iShares Global Real Estate Index Fund
(CGR-T)

Vanguard FTSE Canadian Capped REIT
Index ETF (VRE-T)

iShares S&P/TSX Capped REIT Index
Fund (XRE-T)

BMO Equal Weight REITs Index ETF
(ZRE-T)
DEMO
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Currency Hedging
Strategy to protect
investments from
currency price
fluctuations
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Currency Hedging



2 steps to foreign investment:
1) buy foreign currency
2) buy foreign stock
Profit 2 ways:
– exchange rate
– investment itself
Hedging removes exchange rate
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Un-hedged US
Investment
Investment return,
Exchange Can$ falls
Can$
rate stable to $0.80 rises to
US
$1.10 US
100
100
100
0
+20
-10
100
120
90
US$
Change in Xchnge
rate US$/Can$
Total Return,
Can$
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
US Investment
Hedged to Can$
Investment return,
Exchange Can$ falls
Can$
rate
to $0.80 rises to
stable
US
$1.10 US
100
100
100
0
0
0
100
100
100
US$
Change in Xchnge
rate
Total Return,
Can$
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Impact of Hedging
Average Annual Return
Oct. 31, 2015, %
iShares US Fundamental
Index ETF (CLU) C$ hedged
1 yr
0.27
iShares US Fundamental
16.98
Index ETF, (CLU.C) unhedged
3 yr
5 yr
14.84 12.76
25.35 18.64
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
When Canadian dollar falls vs.
US$, return on US investment in
Can$ rises if no hedging

Some funds (mutual and ETF)
hedge to Can$, some don’t
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Financial Products
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Financial Products

Created by financial company

Marketed to investors

Sold as easy, profitable investing
solution
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
1. Mutual
Funds
2. Exchange-Traded
Funds
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Mutual Funds

Pools money from many investors

Specific investing objectives

Hold one or more asset classes

Pay distributions

16,000+ funds
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
5 Main Types
1. Cash-Money market, T-bill
2. Fixed Income –bonds, mortgages
3. Equity – country, sector, region
4. Balanced funds – all of above
5. Other
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Mutual Fund Choices

Investing style & type e.g. value,
Canadian equities

Most actively managed

Some passive – track benchmark
index

Different classes A,D,F etc. by fee
structure
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Mutual Funds Pricing

Unit price is NAV at end of day
NAV= current market value assets - liabilities
#units

Price changes with value of assets

Most open-ended: no limit on # units
issued
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Mutual Funds are popular
because...
1. Instant diversification
2. Low knowledge
3. Low maintenance
4. Widely available
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Mutual Funds are popular
because...
5. Small purchases, regular
contributions
6. Professional management
7. Access non-typical investmentsemerging markets
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
The downside of
mutual funds
cost – among most
expensive in world
 High
 No
guarantees - return of
principal or performance
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Mutual Fund Ownership Costs
1. Management Expense Ratio, MER
–% av. daily value fund assets
–management fees
–trailer fees to advisor as long as
client owns fund
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Mutual Fund Ownership Costs
2. Administrative Expenses
trading, HST,
accounting, legal,
borrowing costs
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Mutual Fund Ownership Costs
3. Commissions

Front end load, low load, back end
load funds - % transaction charge

No load

No commission “load” funds most
discount brokers
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Impact of Fund Fees on Returns
$50,000 initial investment 1.00% MER 2.50% MER
5 years, 5% return rate
Fund Value without Fees
Total fees paid
Fund Value after Fees
Reduction in future value
due to fees
$63,814.08
$63,814.08
$3,127.52
$7,587.77
$60,686.55
$56,226.31
4.9%
Gail Bebee, Canada’s Independent Voice on Personal Finance
11.89%
www.gailbebee.com
Impact of MERs on Returns
from Financial Consumer Agency of Canada
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Can a mutual fund manager
add enough value to
overcome the drag of fund
fees on returns?
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Lower Fee Fund Companies

Mawer

Beutel Goodman

Leith Wheeler

Phillips, Hager & North

Steadyhand

D class – discount brokers
Gail Bebe, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
How Much are You Paying
in Fund Fees?

Buyupside Investment Fee
Calculator

Investor Education Fund Mutual
fund fee calculator
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Canadian Mutual Fund
Databases
Lots of info & fund screeners

Morningstar Canada

The Globe and Mail

www.fundlibrary.com
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Segregated Mutual Funds

Fund & insurance contract
– guaranteed return of % principle at
contract end (10 years)
– creditor protection
– avoid probate taxes
– guaranteed value if die during contract

0.5%+ to fund MER
Most people should avoid
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Selecting a Mutual Fund
1.
Which fund class(es) meet
investment objectives
2.
Fund screener - short list funds
3.
Research
– Fund Facts
– Fund Facts Document Explained
– Company & financial web sites
Gail Bebee, Canada’s Independent Voice on Personal Finance
,
www.gailbebee.com
Selecting a Mutual Fund II
4.
Fund objectives suitable?
5.
Track record: >3-years returns,
consistently top quartile in class
6.
Fund manager? Invests own
money?
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Selecting a Mutual Fund III
7.
Fund costs: low MER, no load.
8.
Fund size vs. mandate
9.
Special policies e.g. early redemption
fees, min. purchase
10.
Decide price to pay
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Case Study: Mawer
Canadian Equity Fund

Mawer website

Fund Facts

Morningstar Canada Fund Profile

Globe and Mail Fund Profile

Fund Library
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
More Info on Mutual Funds

Chapter 14 of No Hype - The
Straight Goods on Investing Your
Money

GetSmarterAboutMoney.ca
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
Suggested Homework

Research a mutual fund you own.
– What are 5-year return rate & MER?
– Where does return rank vs. similar funds?
– Is MER competitive vs. similar funds?
– Does it own investments you intended?
– Are there better funds you could buy?
– Total cost to own over past 5 years?
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com