June 2013 update – Mutual Funds

How did the markets perform in June?

 

Not well.

How’s your stomach?

Are you still an investor in the bad times as well as the good?

The Canadian market continues to underperform. This is a trend that began in April 2011 and has not let up.

Again, I have no objective reason to blame the Canadian government, but the coincidence of a majority conservative government at the same time as an economic slowdown and market decline, is hard to ignore.  I will be looking at that issue in more depth in upcoming months.

New government policies on the telecommunications industry has resulted in Verizon announcing an aggressive entry to the Canadian market.

As a result, all three big Telecoms in Canada (BCE, TELUS and Rogers) took a huge hit, affecting the market in total.

All told the markets ended higher than their low points at the start of the last week in June.

 

TSX =  (4.12%)

DJIA = (1.36%

S&P = (1.50%)

 

I have suggested that you can expect a rocky summer.  This is not because of any special knowledge or power, it’s just that the past few years that seems to be the trend, especially with the big run-up we have had the past while – you can expect a downturn.  Corrections can be as much as 10% down.

 

If you are like me, a dividend investor, you can take comfort in the fact that the dividends keep rolling in and increasing.

As a long term buy-and-hold (mostly) investor, you had no plans of selling anyway, so the downturn doesn’t really affect your plans.

 

****

Investment Advisors and Mutual Funds

If you haven’t already, you will likely get a call from an “investment advisor” promising huge guaranteed returns. These investment advisors are usually sales people who are on commission for a company selling a variety of mutual funds. They are often very well trained in sales techniques, but know absolutely nothing about investing. They will be able to toss around all the jargon and buzz words which is usually enough to intimidate most potential investors into thinking that this person is smart and you should listen for fear you will miss the boat. The glossy brochures with graphs showing historical returns and projections are impressive to the uninformed – which is most of us.

These people have been remarkably successful at getting people – often expat teachers with excess cash – to hand over their money for these guaranteed gains. Now try to find me any investor who has actually gone this route – and there are many – who are happy with their decision in the long run. And after ten years in this trap they will have missed out on the long term gains that the market provides, while the mutual fund company and their sale people, do quite well.

I have occasionally sat down with some of these people to get a first hand view of what they are hawking. I have been appalled at the audacity of their claims, and the lack of knowledge they have of the funds they are selling.

Here are some of the pitfalls that are almost always ignored, or glossed over in the pitch.

1) Commissions – most funds have some kind of commission charged up front. This is especially true of the European funds that are often pushed to expats in the Middle East. Some companies don’t charge this, especially if you deal with the company directly, rather than through an agent. For example Vanguard Funds, Investor’s Group (Canada) and funds offered by the Canadian banks. Commissions can range from 2% to as much as 7%. This is money that is taken right off your initial investment and goes into the company’s pocket and the sales person’s pocket, never to reach your fund. That means that if you invest $1,000 you will only buy fund units totalling $970 (using 3% commission).

2) MER (Management Expense Ratio) – This is a fee that is hidden within the fund itself. You don’t pay it directly, it is removed from the fund at the end of each year as a fee the mutual company collects for managing your money. The sales person will seldom talk about this as they likely aren’t even aware of it. I had to get one salesman to bring me the actual fund prospectus and point out to him where it was on the statements. He was actually pretty surprised himself. These fees can range from as low as 1% (rare) to as much as 5% (also rare), but 2.5 to 3% is very common. In their detailed prospectus they may disguise this as several separate charges so they look rather small. But in total they add up. Again, using Canada’s Investor’s Group (actually one of the better mutual fund companies) these small fees do in fact add up to 3%. What this means to you as the investor is that if the market goes up by 8%, your fund will only go up by 5% affecting your returns. During the 1990s when everyone made money in the markets, this 3% can get lost in the sales pitch because the fund made such big returns (but smaller than the market returns). In today’s sales pitch you will likely see a “base” year of 2009 or whatever time the market was at it’s low point and lead up to today’s record highs. The MER can seem quite insignificant, but it’s not.

3) Fund Fees – This is quite rare in Canadian, or even US funds, but quite common in European funds. It is usually an amount of abut 1% that you pay directly to the fund manager. You can pay it in cash, or they can redeem some of your units, thus reducing your total investment. The sales person will dismiss this as a small price to pay for a well managed fund.

4) Exit fees – These are really brushed off in the sales pitch because “your are in it for the long run – yes?” This is a set of golden handcuffs that requires you to pay a fee to get your money out. It is usually a sliding scale with a high rate in the early years, declinign to zero at some distant future date. The rates can start as high as 7% and can take up to 10 years to decline to zero. Five to seven years is the most common term. This means that if you decide to redeem your funds after one year, you will have to give the fund manager up to 7% of the amount you want to take out – thus $1,000 becomes $930. This is especially painful if you decide you want to consolidate a bunch of funds that you had purchased from several different companies over a period of time. Not an uncommon occurence.

 

4) Example

For a numerical example, let’s assume you invest $1,000 in a fund that has 3% commission, 3% MER, 3% exit fee, 0% fund fee and the market grew by 8% and you redeem your money after one year.

You would think that your $1,000 would now be worth $1,080 – an 8% growth because that is what the market did and that is how the sales person explained it to you. But you walk away with only $988, a loss of 1.2% or amlost 10% below what you might have though you had.

 

****

My Current stock list: (34 stocks)

 

 

  

 

                                                                                                                                                                                                     

   

ADP

   

   

INTC

   

   

MO

   

   

RY.TO

   

   

BCE.TO

   

   

ITW

   

   

MRK

   

   

T

   

   

BMO.TO

   

   

JNJ

   

   

NA.TO

   

   

T.TO

   

   

CM.TO

   

   

KMB

   

   

NVS

   

   

TD

   

   

COP

   

   

KO

   

   

PEP

   

   

TOT

   

   

DD

   

   

LMT

   

   

PG

   

   

TRI.TO

   

   

ENB

   

   

MCD

   

   

PM

   

   

TRP.TO

   

   

FTS.TO

   

   

MMM

   

   

PWF.TO

   

   

UL

   

   

GWO.TO

   

     

RDS-A

   

 

 

 My portfolio performance for the month was a marginal decrease of about 1/2% when expressed in Canadian dollars.  My heavy holdings in US stocks combined with a weak Canadian dollar helped mitigate my losses.  However when expressed in US dollars I was down a full 2% which is still slightly better than the weighted average losses of the US and Canadian markets.  My one account that holds BCE and Telus dropped just under 3% with the hit on the Canadian market and those two stocks specifically.

 

 Suggested stock picks:

 

Criteria – A++ (ValueLine), >3% dividend yield, 10 record of increasing dividends.

Note – there are still good stocks with yields below 3% and there are good A+ or A stocks with high yields. 

If anyone wants a list of more stocks with different criteria, let me know. 

 

Company   Name

Ticker

Financial Strength

Dividend Yield

Dividend Growth 10-Year

McDonald’s   Corp.

MCD

A++

3.18

27

Intel   Corp.

INTC

A++

3.72

26

Lockheed   Martin

LMT

A++

4.57

22.5

Texas   Instruments

TXN

A++

3.23

21.5

Novartis   AG ADR

NVS

A++

3.63

16

Total   ADR

TOT

A++

6.35

15.5

Occidental   Petroleum

OXY

A++

3.08

14.5

ConocoPhillips

COP

A++

4.38

13.5

Johnson   & Johnson

JNJ

A++

3.2

12.5

Procter   & Gamble

PG

A++

3.2

11

Kimberly-Clark

KMB

A++

3.42

9.5

Unilever   PLC ADR

UL

A++

3.54

9.5

Chevron   Corp.

CVX

A++

3.39

9

Royal   Dutch Shell ‘A’

RDS/A

A++

5.6

8.5

Raytheon   Co.

RTN

A++

3.33

8

Emerson   Electric

EMR

A++

3.02

6.5

Pfizer,   Inc.

PFE

A++

3.35

6

AT&T   Inc.

T

A++

5.3

5

Bristol-Myers   Squibb

BMY

A++

3.14

2

Verizon   Communic.

VZ

A++

4.21

2

Du Pont

DD

A++

3.42

1.5

Merck   & Co.

MRK

A++

3.71

1.5

 

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About borgford

Feel free to contact me with questions: brianborgford@hotmail.com
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