Decoding Mutual Fund Brochures

I spotted this a week or so ago in the Globe & Mail. I thought of ripping it off and posting it here but wondered about the consequences of ripping off the mighty newspaper. Fortunately, the Globe & Mail had given the appropriate credit to the author, Joshua Brown of The Reformed Broker.  I went to the site, followed the Contact link and requested permission to add this post to The Passive Canadian Investor. Joshua came back immediately with his permission and best wishes. Thanks Josh!

Visit Josh at (The Reformed Broker).  His light hearted, entertaining, insightful comments are worth the read. I suggest subscribing to the RSS feed to add a link to your homepage.

October, a pretty boring month

Not much happened in October. The Dow was flatter than the proverbial pancake. It ended the month at 9,712.73 compared to 9,712.28 at the end of September. On the down side, the TSX had its first down month since the small drop in June. This time it was significant, from 11,394 to 10,910. A full 4%.

When I last posted on October 2, we had had a down day on the 1st and the 2nd wasn’t looking any better. By market close on the 2nd, indeed we were seeing a very poor start for the month. As the month progressed, we enjoyed a bit of a rally. My portfolio value reached a new high for year on October 20. Wow! Alas, the gains were totally erased by month end as six of the remaining eight trading days were downers…and big downers at that!

With a month like this I tend to sit tight. In fact, the only change in my portfolio was the transfer of a small position in a Canadian Equity Fund to the Canadian Endeavor Fund which I mentioned in my last post. This change was actually requested in September but wasn’t finalized until October 23. Fund companies don’t make things easy. A transfer from one fund to another within the same company can take place the day you request it, but to actually change from one company to another is something else.

I made no changes in my trading account in October. I still like all the good ones, six out of nine, and I’m so far under water with the losers, two out of nine, that there is no point is selling. The final stock is down a bit but I wouldn’t call it a loser. It’s just not performing right now. It’s the (Claymore) Canadian Agricultural ETF, that I’ve mentioned before. I still have hopes for (COW).

As of today, we are nearing the end of US earning’s season and getting into the thick of the Canadian earning’s season. US companies did very well with some 80% turning in better than expected numbers. Things aren’t quite as rosy North of the 49th, but still, better than half of the early numbers are matching or exceeding expectations. Our best hope for a nice bounce this month rests with our big banks which will begin reporting in the next couple of weeks. Of course, as always, we need the price of oil and gold to hold as well.

They, whoever they are, say that November and December are historically the best months of the year. We’ve all heard of the Santa Claus rally, right? Let’s hope they’re right and we end the year with a nice bounce. Maybe, just maybe we’ll get back to where we were on January 1, 2007 by year end. On one hand, it’s pretty sad when you think about it. Our most optimistic wish is to get back to where we were a FULL THREE FULL YEARS AGO. On the other hand, if we make it back, it’ll have been an amazing recovery, after what we’ve been through.

A September to Remember

At the beginning of the month, the talking heads continually warned that September is historically one of the worst months of the year for the markets. My own research indicates that the TSX dropped, in September, 6 times out of 10 since 2000. 60/40, not really definitive. They’re obviously talking about longer term trends.

As mentioned in my post, A Brief History of Volatility, the low point in both 2007 and 2008 occurred in November which is diametrically opposed to the old adage Sell in May and Go Away (come back in the fall). The point is, long term trends and averages are just that. They consist of highs, lows and everything in between. In order to invest, you must do your own research and pay attention to what’s going on, both here at home and around the world.

I tend to pay less attention to global goings on, because, as previously mentioned, my portfolio is all Canadian all the time. Not to say I completely ignore global factors. One can’t invest in the TSX without paying attention to global commodity prices. As goes the price of oil, so goes the TSX which is heavily weighted with Canadian energy companies.

Now, back to September, 2009. On September 22 the TSX hit a new high for the year, 11,585. Yippee! No surprise that my portfolio value reached a new high for 2009 on this same day.

I’m often guilty of spending too much time with my trading account and being far too passive with my mutual funds. I took the time for a brief review of my funds last month and discovered that I should have been paying more attention.

To the end of August, a Canadian Premier Fund that I’ve been holding for a couple of years was up 11.5% for the year, well behind the TSX, while the Canadian Endeavor Fund, offered by the same fund company, was up 41.5%, beating the TSX by a bunch. The (Globefund) 5 Star rating for the Premier Fund was 2, for the Endeavor Fund 5. Needless to say, I made a change. On the surface, the two funds appear very similar, just one of those things I guess.

(Globefund) and (Morningstar) are wonderful resources for mutual fund research…and they’re both free! See links to both in LINKS OF INTEREST down the right hand column

So, after a September to Remember, we’re into a rough start for October. The TSX tanked by 323 points yesterday and it’s not looking great for today…but it’s still early. We’ll soon be into earnings season. Let’s hope that our Canadian companies report some decent numbers.

The BIG BOUNCE!

Things have been going very well since July 8, the date of my last post. The TSX has bounced from 9,653 to 11,495 as of September 15. An amazing 19% jump in about 70 days.

At the same time, the value of my portfolio has risen by a bit over 17%. Haven't quite matched the TSX. During this period, my mutual funds are up 18% but my stocks are up only 15%.

Right now I'm holding more stocks than usual. A total of nine, and a very mixed bag. At the moment I'm holding one energy company, one pipeline, one alternative energy company (wind generation), two Canadian banks, one miner, two speculative small caps and the Claymore Canadian Agricultural ETF (COW).  The American Agricultural ETF is (MOO:NY).  Go figure.

With a mixture like this, it's pretty much guaranteed that they'll all never move in the same direction at the same time. Some go up, some go down. While I've enjoyed some gains since July 8 my stocks have not managed to keep up to the TSX or my mutual funds.

But, this is not the BIG BOUNCE referenced in the title of this post. No, it's not the 17% increase in my portfolio value since July 8 I'm excited about. Remember that I mentioned November 20, 2008 as the low for the year? This was also the day that my entire portfolio hit an all time low. The BIG BOUNCE I'm referring to is the fact that my portfolio value has risen a full 50% since that day! Yes, a very BIG BOUNCE of 50% in just under ten months!

I am very thankful that I did not give into the urge to sell off during last year's doldrums. On the other hand, I am even more thankful, that for the past few years, I managed to resist the urge to cash GICs in favor of adding to my stock or fund portfolios during good times. The balancing act between fear and greed is always a challenge.

A Brief History of Volatility

For some time I’ve been planning a post about market volatility. Each time I think I’m ready, the current volatility makes a retrospective look appear redundant. Since ending 2008 at 8,987 the TSX has dropped to a low of 7,566 on March 9 and risen to a high of 10,714 on June 11. An amazing 41.6% bounce from the low to the high.

Rather than put it off any longer, I figure I’ll post the story of my portfolio for the period beginning January 1, 2007. Who knows what’s going to happen going forward? Not me for sure. The numbers here relate to my portfolio which is not necessarily a typical portfolio as it’s pretty much all Canadian all the time. I made the decision some years ago to dump the Investing 101 plan in favor of a Canadian portfolio, which I pretend, at least, to understand.

Some time in early 2008 I became intrigued by the near daily fluctuations in the value of my investments. I wondered what the results would be if there were only gains or only losses on the scale of the daily ups and downs. Because I track my portfolio with a personal accounting program I was able to turn the clock back one day at a time and review the daily values. Next, I developed a spreadsheet for the purpose of doing some calculations. I decided to look at the daily value of my investments back to January 1, 2007 as 2007 was the last normal year. I found some interesting figures. Interesting to me at least.

In 2007 the low point on November 21 saw my portfolio value down 6.22% from the opening on January 1.At the highest on July 19 it had risen by 10.18% from the opening value. Daily fluctuations? The total of all the down days represented 77.94% of the opening value while the total of all the up days was 76.14%. Yes, at the end of the year the total of my investments had fallen 1.8%. There were 133 days of gains and 118 days of losses. We all wish this was a bad as it would ever get. Right?

Now we get to 2008. the roller coaster ride to end all roller coaster rides. We hope! The low in 2008, on November 20 was down 40.38% from January 1. Yikes! The high for the year was on June 5, up to a modest 5.06% year-to-date. Now for some crazy numbers. The total of all the down days for 2008 was 165.71% of the opening number and the good days totaled 136.57%. Wild fluctuations! At the end of 2008, my life savings were down 29.14% for the year. Believe it or not, there were 126 up days and 126 down days for the year.

Interesting that the worst days in 2007 and 2008 were November 21 and 20 respectively while the best days fell on July 18 and June 5. Makes one wonder about the Sell in May and go away advice. Fall Out and Spring In might have been better advice for the past two years.

Things have been better in the first half of 2009. My value has been up as much as 16.79% while the at the low point it was down 11.08%. At the end of June it was up 14.72% but it’s given up over 5% in four trading days this month. As I’ve said before, this investing stuff is not for the faint of heart!

A Little More About Exchange Traded Funds (ETFs)

Some friends don’t believe that I qualify as a Passive Canadian Investor. They say this simply because I maintain a small trading account rather turn everything over to finance guy to plough into his favorite mutual funds. My trading account, a self directed RSP, represents just 6% of my holdings. The remaining 94% is made up of mutual funds and GICs with more GICs than funds. The portfolio I speak of on this blog is just the trading account and funds.  I’d say that’s pretty passive. In fact, active traders would consider such a portfolio to be ultra conservative. Very Canadian eh!

I tend to pay the most attention and have the most fun, with my small trading account. It’s a hobby. Among all the available choices, I believe that ETFs are the easiest to understand and present a best opportunity for a novice investor like myself.

When I first posted about ETFs I failed to mention that most of my trading success, since then, has involved ETFs. Not to say that I’ve never made a decent stock pick but I tend to buy and hold stocks rather than trade them. That’s the difference between trading and investing. Traders buy and sell, investors pick good companies and hold them for the long haul. My trading activities are an attempt to recoup the HudBay Mineral loss as described in my last post.

ETFs seem ideally suited for trading, especially if you stay with commodities. When oil or gold are way up, they inevitably cycle down. At some point on the way down, you pick an entry point and jump in. Hopefully, you catch the bottom, or very nearly, and soon enjoy the ride up.

I’d be fibbing if I didn’t admit to being tricked on occasion. I bought the gold ETF (XDG) once while gold was at $900US having just fallen from $1,000US. I wrongly believed that it would jump back up to and possibly over $1,000US. I misunderstood something about that cycle as gold dropped all the way to $750US. Needless to say, the shares of the gold producing companies held within the ETF dropped off accordingly. I held those XDG units for several months before selling at a very small profit.

I recently bought XDG once again at 19.01. Figuring that a quick 6% gain would be nice, I put in a sell order the following day for 20.20. The following month the transaction was executed at 20.20. A nice return in 40 days. Had I exercised a bit more patience I cold have held them for another two weeks and received 21.00. On the other hand, they are down to 19.13 today.

HudBay Minerals - My BIG Mistake

For most of 2007 I held large cap financials in my small trading account.  I felt good about my decision to hold Manulife (MFC) and Power Financial (PWF), two of Canada’s premier financial services companies.

During 2007 I watched, from the sidelines, a few corporate takeovers. I learned that the initial offer per share often involved a premium of 20-30% above the previous day’s close. Additionally, I noted that there was often a run up in the share price after the initial offer as the market inevitably anticipated increased offers to come. The Board of the target company would declare the offered takeover price totally inadequate. The aggressor would respond with a revised full and final offer, usually somewhat higher than the initial offer but not even close to the ultimate full and final offer. Just as often, a third company would enter the fray and initiate a bidding war.

An example of the takeover process in 2007 involved Alcan (AL), eventually won by Rio Tinto (RTP:NY), who beat out Alcoa (AA:NY).  Closer to home, right here in the west, was the takeover of Agricore United (AU) by Sask Pool (SWP) after out bidding Richardson.  In both cases there was a considerable run up in the share price of the target company before the deal was done.  My sense was that takeovers are good...if you happen to hold shares of the target company.

In the summer of 2007 I obviously had too much time on my hands, evidenced by the fact that I was watching a lot of BNN, Canada’s business news television channel.

It seemed that every week or so a guest analyst would heap praise upon HudBay Minerals (HBM). The reasons were as varied as the number of analysts. HudBay, I came to understand, had a wonderful balance sheet with nearly half a billion dollars of unencumbered capital and was spinning off nearly a million dollars of free cash flow each day! The price of zinc, HudBay’s principal product, had reached an all time high a few months earlier and was expected to rise again. Could it get any better than that? Almost to a man, the analysts picked HudBay Minerals as one of their top three picks and more often than not, HudBay was number one.

Finally, one day the analyst du jour declared HudBay to be the number one takeover target in North America if not the world! Well, didn’t that push me over the edge! With my newly acquired insight into the world of corporate takeovers I couldn’t wait to get my feet wet and my hands on some HudBay shares. I dove right in.

As a result, I pretty much liquidated my trading account. I sold off Manulife and Power Financial. On July 11, 2007 I bought HudBay at $27.35. Now, all there was left was to wait for the inevitable takeover offer and subsequent run up. NOT!

At that time, the price of zinc had popped to very near its all time high. Shortly thereafter the whole commodity sell off began. It has yet to come back. At about the same time HudBay was in the news because its Flin Flon smelter was revealed to be contaminating the entire town and surrounding area. Not good for share prices.

These two factors, the drop in the price of zinc and news stories about contamination, combined to kill the HudBay share price. In 2007, I knew nothing of stop losses. I wish that I had taken the time to learn.

I road my $27.35 shares down to $15.69 before bailing on January 18, 2008. For me, a huge loss! The HudBay share price eventually bottomed at $2.90 last December. They have since recovered to about $8.00 as of today.

The worst thing about my HudBay experience was that I was so excited the day of my purchase, I dashed off an email to family and friends recommending that they get on board. As far as I know, no one took my advice as they are, as a group, more passive than I. I believe that most of them hold only mutual funds and do not even have a trading account. For this I am thankful. Never again will I recommend a stock to family or friends.

My Home Run! (Part 2 of 2)

At the end of 2002 the value of the three remaining funds was about 66% of the original investment.  By the end of 2003 they'd recovered to the 76% level.  These three funds would test my resolve to never sell at a loss.

In mid 2004 my patience ran out and I undertook a serious review of these holdings.  I made the decision to transfer the investment in the Canadian Fund to a very attractive Income & Growth Fund that was performing much better than anything I was holding.  By year end, the revised holdings were worth 87% of the original amount.

In mid 2005 I rolled the weaker of the two Global Funds, which never went above 66% of the original value, into the Income & Growth Fund.  Two months later the other Global Fund recovered to the a level whereby I was able to sell the units and put a full measure back into my GIC ladder.

Half way to recovering the investment in the Fab Four and they were all gone.  Two back into GICs and two rolled into the new Income & Growth Fund.  For the remainder of 2005 and most of 2006 the value of the Income & Growth Fund units fluctuated between 84 & 87% of the original investment.

In the fall of 2006 I wondered why a small holding in my RSP account seemed to be outperforming everything else.  I learned that this was an Index Fund, simply mirroring the TSX. As the TSX was doing well, so was the fund.  At the same time, I was becoming disenchanted with the inability to sell mutual funds when the price is up.  The value of fund units are set once daily, at the end of each day.  If you decide to get out of a fund you have to make the decision by about 1:00 pm Eastern time.  If the market and the value of a fund’s holdings fall off the cliff later in the day you take the hit, having made the decision to sell some hours ago.

I began looking for something that would provide some control over valuation and timing.  I’d been paying attention to the rise and fall of energy and gold for a number of months and had come to believe that there was an opportunity if one could move quickly and time things correctly.  In addition to my various funds I have a small trading account with a discount broker.  I sent a note off to them asking if there was anything like an index fund that could be traded more like stocks than mutual funds.  Welcome to the world of Exchange Traded Funds!

After studying and learning a bit about ETFs, (iShares) Energy Sector (XEG) and iShares Gold Sector (XDG), I took the giant leap (for me) in late September.  I cashed out all the units of the Income & Growth Fund, then valued at 86% of the original investment, and put the proceeds into XEG and XDG on a 60/40 split.  I bought the Energy ETF (XEG) on September 25 and the Gold ETF (XDG) the following day.

On November 30 I sold XDG for a 26% gain in 65 days!  On December 14 I sold XEG for a gain of 15% in 80 days!  As a result of these two trades, I was able to rebuild my GIC ladder, returning it to its original state.  A ten year roller coaster ride.  I had learned that this investing stuff is not for the faint of heart!

My Home Run! (Part 1 of 2)

Time for something positive. I thought I'd post about my biggest investment success. Chronologically it was before my biggest loser so it seems appropriate.

Sometime in the late '90s I was lamenting about the fall off in interest rates. The perfect GIC ladder that I'd built a few years before looked like it was going to produce only half the income as interest rates had dropped from 9 or 10% to around 5%. Needless to say, finance guy had a plan. It was kind of a modified Investing 101 plan as described in my earlier post.

The Plan was to include four funds; A Canadian Large Cap (mostly financials), a US Large Cap, and two Global Equity Funds. Let's call them the Fab Four. Accepting the advice of finance guy, I dutifully cashed my GICs every three months over the next two years and wound up with 40% of my perfect GIC ladder invested in the Fab Four. The Plan was simple, put the money in and then make systematic withdraws each month to replace the GIC interest. The best part of The Plan was that I could set my own monthly withdrawal. Given that the Fab Four had been steadily churning out 8 to 10% annual gains, I had no compunction with setting my withdrawals at 7.5%. This represented a 50% premium over the banks' offering of 5% for a 60 month GIC.

The Fab Four performed as expected for about two and a half years. The first six months got us to year end and low and behold the value of the Fab Four units was greater than the original investment. I toyed with upping the monthly withdrawal figuring that I may as well take all of the investment income, leaving the nest egg in place. I decided to leave well enough alone and carried on for another two years, at the end of which, I could barely contain my excitement. After monthly withdrawals at an annual rate of 7.5% the remaining Fab Four units were worth 114% of the original investment! That was at the end of 2000.

2001 will forever be in our collective memories because of the attacks of September 11. What many will not remember is that we were in a down market for pretty much the entire year preceding September 11. On September 10, the TSX was 6,890 down from 8,690 on January 2. A drop of more than 20%. The DOW fared somewhat better. On September 10 it was 9,605 down about 10% from 10,662. After 9/11 the TSX reached a low of 6,513 while the DOW dipped to 8,235.

Sometime earlier in the year the Fab Four had reached the top of the stairs and immediately piled into the elevator for a quick ride down. The value my units had dropped well below the original investment. Suddenly those GICs that I'd cashed were looking pretty good! I suspended all monthly withdrawals having made the decision to allow (hopefully) the value of the remaining units to recover to the point whereby I could extract the original investment and put the funds back into my safe, secure GIC ladder.

As if to prove the resiliency of the US market the US Large Cap Fund recovered in a few months. I was able to sell all of the units and put the full amount of my original investment in this fund back into GICs by the end of January 2002. The recovery period for the remaining three funds was going to prove to be a test of both will power and patience.

In my next post I'll tell you how I eventually recovered the balance of the original investment in the Fab Four.

Orphan Fund(s)

Several years ago finance guy came by to pick up my annual RSP contribution.  After extolling the benefits of the various funds in my account for a number of years he suddenly put the new money into two totally different funds with a new fund company.  Let's call it the Dynamo company. I doubt that I was aware of this when I signed the forms. You know how it is. It’s near the end of February. There’s only a few days left to make a tax deductible contribution. Don’t ask any questions. To quote Larry the cable guy, “just get 'er done”.

For the next several years I received the usual statements indicating the value of my holdings and the progress since making the original investments. By and large, things were going in the right direction, but the Dynamo funds never moved. Well, maybe a fluctuation of one-half of one percent, sometimes up, sometimes down. Interest rates were high and I was sure wondering why I was sitting with two funds that appeared dead in the water while a GIC investment would pay 8 or 9% and my principal would be guaranteed.

Every now and then I would ask finance guy about the Dynamo funds. The answer had something to do with a huge involvement in the Australian Dollar just about the time of my original investment. Just wait for the turn of the Australian Dollar and these puppies will take off!

Well, I held the Dynamo funds for something like ten years before finally rolling them into one of my stronger funds. Ten years. Zero return!

Why would a highly trained, supposedly knowledgeable finance guy be diverted from an established plan to add a couple of unknown, untested funds to a client's portfolio? How many times have I asked that question?

In retrospect, I've come to believe that my RSP investment in that particular year was placed with Dynamo because Dynamo was offering a bonus commission for that particular RSP season. Can't prove it. Will never know for certain but do believe that there had to be a reason.

Have a look at your portfolio. Do you have an orphan fund or two that just don't seem to fit into the overall plan? Maybe it's time to say goodbye.

Investing 101

How many of us relied on our financial advisers for years as they practiced Investing 101 with our life savings? What is Investing 101 you ask. Well, it varies from day to day or finance guy to finance guy but basically it goes something like this;

They develop a personalized plan, especially for you...interesting thing is, that it's the same plan they've been using for everyone in the past ten years. With slight variations they highly recommend an asset allocation involving 20% Canadian equities, 20% US equities and 20% Global equities. For the final 40% they strongly suggest that half be invested in something very secure...not a guaranteed instrument, that wouldn't pay nearly enough commission, but something like a balanced fund or Blue Chip dividend fund. They then get really creative with the final 20%...emerging markets, small cap, resource fund etc.

The advice is that with this type of allocation you can never be hurt as all these markets will not go down at the same time...until 2008 that is. The trouble is, you never actually make real money with this portfolio as there is seldom more than half your money moving in the right direction...but, we Canadians thought we were doing great since the bounce after 9/11. Surely our portfolio was outperforming money markets or guarantees. Yup, it was...for a few years.

I do not intend to offer advice in this blog. I established it solely to share some insight and anecdotal research with fellow Canadians many of who have had retirement plans shattered in the past two years.