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 Best stock returns for next decade: Would you believe American blue chips? Over the last ten years, U.S. stocks came dead last compared to stocks in the rest of the world, and against bonds, U.S. REITs and other asset classes. Yet at the turn of the century, Canadian investors were anxious to add American technology stocks and other large U.S. stocks to their portfolios -- even though firms like Coca Cola, Wal-Mart and Johnson & Johnson were trading at 40 or 50 times earnings, or twice what would have been considered fair value. Unfortunately, today many Canadians have a bad taste in their mouth over this experience, since they bought expensive stocks with what was then an undervalued currency.If you'd listened to GMO's Jeremy Grantham a decade ago, you would have benefited from his 10-year forecast about the dismal performance of U.S. stocks. Today, Grantham has a new 7-year forecast and it's almost the opposite of what he said in 2000. Now he's predicting U.S. high quality stocks will top the asset charts in the next seven years, with real [nominal minus inflation] returns approaching 7%.  These forecasts are the centerpiece of a recent set of presentations made in British Columbia by Odlum Brown Ltd.'s director of research, Murray Leith [pictured, left]. The above slide shows Leith pointing to the kind of U.S. (and a few foreign and Canadian) quality stocks he's loading into his model portfolios these days at Odlum Brown. Leith admits he was a little early on this theme. In an interview today, he says the U.S. large-cap theme was on his mind as long ago as 2006 when it came to the health-care sector. "Before that, the model portfolio was never more than 10% outside the country. As the dollar got to 85 cents and some of these big companies came down to very attractive levels, we picked away at them and have now built the foreign content to 45% of the equity component."Most U.S. megacaps are global plays While many of these household names are ostensibly U.S. companies most are foreign multinationals that do as much or more of their business outside the U.S., including the Emerging Markets. Some Canadian investors may fear these names because of currency risk, assuming a domestic stock like TD Bank has less currency risk than a Coca Cola. In fact, Coke is more than 80% outside the U.S. and TD has a lot more exposure to the U.S. market than investors may think. Many of the picks above -- like 3M, J&J and Wal-mart -- are components of the elite 30-stock Dow Jones Industrial Average. Some, like Colgate Palmolive or UPS, are not Dow Stocks per se but are certainly well-known megacap stocks in the S&P500. All are, in Leith's opinion, trading at a discount to intrinsic value. "My error in my earliness is that they were overvalued a decade ago, then came back to fair value and continued to overshoot on the downside, which often happens. This has gone on longer than I thought but I think it sets the stage for a long period of relatively good performance. The starting value is good, which is what really matters."Throw darts at the Dow and you'll do fine in ten yearsIn the interview, Leith says only half in jest that "frankly, you can throw darts at these big stocks and you'll be absolutely okay in five or ten years. Pick any of them."Or, I suggest, you could buy all 30 Dow Stocks with a single trade: the Diamonds (DIA/NYSE) or if you want them hedged back to the loonie, through the new BMO ETF, the BMO Dow Jones Industrial Hedged to the CAD Index ETF (ZDJ/TSX).However, there is a reason to cherry-pick certain names, which is of course what Leith does for his clients at Odlum Brown. Refer to the slide at the bottom of this blog, which shows why Canadians can benefit from exposure to these American multinationals. The domestic market is heavy in financials and resources but has only minimal exposure to consumer stocks, health care and technology. Keep that in mind if you choose to pick some of these large-cap U.S. stocks: you might want to downplay U.S. financials if you have heavy exposure to Canadian banks; and underweight U.S. oil stocks if you already have plenty of exposure to Canadian energy and materials stocks. Canada a play on China but don't bet it all on that one story Not that Leith is down on Canada. He says a "textbook economic recovery is underway" and the "stars are aligned for Canada ... the Canadian economy, our stock market and our currency will continue to behave favorably." Even so, he cautions, "It would be a mistake to bet too heavily on Canada, as we do have some vulnerabilities." One is high levels of consumer debt and an inflated housing market. Another is an overly strong loonie, which doesn't help exporters. The Canadian stock market hangs on China's fortunes, which makes it both an opportunity and a risk. China is a "great story," but so was Japan in the 1980s -- it turned out to be a horror story. In short, China does have "some risk and I think you should be careful not to have too many eggs in the China basket," Leith says in the presentation, "That means not having too much exposure to Canadian stocks."You can view the entire presentation here, including Hank Cunningham's on the bond markets.  -- 62--
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 Income Trusts -- they're not dead yetSince the Halloween Massacre of 2006, income trusts have been a forgotten investment by many. After all, on January 1st of 2011 -- some nine months from now -- most income trusts will be subject to Ottawa's new SIFT Tax, which stands for Specified Investment Flow-Through.  But Leslie Lundquist, the long-time manager of Bissett Income Fund [pictured] is convinced the general investor lack of interest is an opportunity. In a presentation on a swing through Toronto this week, the Calgary-based fund manager says "income trusts are evolving, NOT dying."While some believe 2010 will be remembered as the year income trusts faded away because of federal tax policy, "WE believe 2010 will be remembered as the year that income trusts provided competitive total returns for contrarian investors who ignored corporate structure and found strong businesses trading at attractive prices as a result of one easily identifiable risk that would soon be resolved."True, Bissett Income Fund has less money invested in it than when trusts were flying high before the tax was announced. In its heyday there was more than $1 billion in the fund, versus $440 million today. Income Trusts have beaten the TSX ever since the 2006 Halloween MassacreBut investors who hung in have been amply rewarded with a 36.3% return in calendar 2009, compared to 35.1% for the S&P/TSX composite total return index and 43.8% for the Scotia Capital Income Trust index. So far in 2010, trust investors have also beaten the TSX: in the first quarter Lundquist's fund returned 6.7% and the trust index 7.2% versus just 3.1% for the TSX. Compare to the 5.4% the DEX Universe Bond Index returned in 2009 and 1.3% in the first quarter. In fact, Bissett Income Fund has beat the TSX every year since trust taxation was announced in 2006. That's Finance Minister Jim Flaherty pictured on the right, the politician income trust fans love to hate.
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 BMO Guardian follows Invesco Trimark into ETF Mutual Fund hybrids BMO Guardian Funds is launching six new ETF mutual fund classes today, the second major Canadian mutual fund company to embrace a hybrid ETF structure. Invesco Powershares Funds were the first, as we reported here in November 2009In a press release, BMO said the new fund classes "combine many of the benefits of ETFs with a mutual fund in a simple, easy to use investment option." The funds are available for sale today (Monday). They include two tactically managed funds and four strategically managed risk-differentiated portfolios. Each BMO Guardian ETF Mutual Fund is a series of BMO Global Tax Advantage Funds Inc, which allows for switching among other Class Advisor Series Funds without incurring a taxable event.Survey finds 56% of Canadians have never heard of ETFs A recent survey conducted by Leger for BMO found 92% of
consumers are familiar with mutual funds but only 44% have "some level of familiarity" with ETFs and only 7% are "quite familiar" with them. In fact, the majority of Canadians -- 56% -- have never even heard of ETFs. That's a sad commentary on the current state of financial literacy in this country, given the long-term wealth creation potential of ETFs -- not to mention their cost advantages and tax efficiency merits relative to regular mutual funds. Indeed, the Leger survey found 62% would be more likely to add ETFs to their portfolios once they understand these benefits. [While on the topic of ETFs and low levels of financial literacy, I might add that ETFs are explained in my financial novel, Findependence Day, as are the new Tax Fee Savings Accounts]. No surprise then that BMO believes the more Canadians learn about the benefits of ETFs, "the
more likely they are to consider including them in their portfolios." Serge Pepin, Director of Investments at BMO Investments Inc. [pictured above] says ETFs have received much attention from the media as
investors look for additional investment options. BMO is already the first and so far the only Canadian bank to offer ETFs through its BMO ETFs unit, even though it already sells its own no-load mutual funds and actively managed BMO Guardian Funds. TD Bank briefly offered a small family of ETFs but subsequently withdrew from the market.An early experiment in mutual fund use of ETFs was the Spectrum Tactonics Fund, which held several ETFs but which slapped on a Management Expense Ratio that effectively eclipsed the cost advantage of the underlying ETFs. The next major move was Invesco Trimark's PowerShares, which introduced the usual advisor compensation device of the trailer fee. The result was again a product that was more expensive than regular ETFs, although somewhat lower cost than Invesco Trimark's regular actively managed mutual funds. As I wrote at the time, regardless of what you think about higher-cost ETF/mutual fund hybrids, the PowerShares Funds were a watershed development if only because it showed how the mutual fund industry had at long last "blinked" when it came to the ETF threat. You could argue that the rationale for Invesco Trimark and now BMO Guardian is that if you can't beat them, join them. When PowerShares was alone in the market, the product seemed a strange anomaly but now that BMO Guardian Funds has joined them, the trend is clear. Normal trailer fees paid to advisors The press release makes no mention of advisor compensation but focuses on the need for investors and advisors to access "the growing ETF market." However, in an interview on Friday, Pepin confirmed that -- as with Invesco Trimark PowerShares Funds and Claymore Investment's Advisor Class ETFs -- the new BMO hybrids pay normal trailer fees to advisors: 1% for front-load and low-load; 50 basis points for Deferred Sales Charge funds. The underlying ETFs are BMO's own family of 22 BMO ETFs. Each hybrid is in effect a fund [or "portfolio"] of ETFs, with the number ranging from five to eight depending on the portfolio. The MERs on the A series range from 1.58% to 1.73%, Pepin said an on the F series (fee-only) 0.74% to 0.89%. Those fees are "competitive" (i.e. slightly lower than) Invesco Trimark's PowerShares Funds, Pepin said. Asset allocation
decisions will be actively managed
by Jones Heward Investment Counsel Inc. for BMO Guardian Canadian
Tactical ETF Class and by Pyrford International Ltd for BMO Guardian
Global Tactical ETF Class. The four risk-differentiated ETF portfolios
will be strategically managed with ongoing portfolio monitoring and
rebalancing. The full names of the new funds are:BMO Guardian Tactical ETF Classes
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 The virtuous circle of tax refunds and RRSP contributions On Wednesday's column in the paper -- Turn tax refund into virtuous circle -- I looked at what to do with this year's tax refund, assuming you qualify for one. If you're unsure what a virtuous circle is (or indeed its cousin, the vicious circle) check this entry from Wikipedia. The above graphic is courtesy of Wikipedia.Coincidentally, the very next day after the column appeared, the refund cheque arrived, as it may well have for any reader who NetFiled early in April. Instead of the industrial example in the graphic, imagine one circle as a tax refund, the next as the RRSP contribution generated by that tax refund, then a year later the tax refund arising from that RRSP contribution etc. The key is to pump the refund directly back into the next RRSP contribution: immediately, before the temptation to spend it on something else occurs.How to make $8,000 from a one-time $10,000 RRSP contribution In the original column , space precluded elaborating on an example but blogs have no such limitation. Here's an example that I bounced off tax guru Evelyn Jacks, author of Essential Tax Facts, 2010 edition. Say you contributed $10,000 to an RRSP in 2009, and that it's going to create a $4,600 tax refund for you in the next week or two, assuming you're an Ontario resident in the top tax bracket. Even if you never put any new money into your RRSP from this day forward, here's what should happen: the $4,600 tax refund is pumped into your 2010 RRSP contribution. This time next year, that $4,600 RRSP contribution generates a new tax refund of $2,116. That becomes your 2011 RRSP contribution, which generates a $973 tax refund in April of 2012. Pump that into your 2012 RRSP contribution and you have a $448 tax refund in 2013. And so it goes. True, the amount gets smaller and smaller each year because of the nature of the arithmetic but remember this is what happens just to that one-time contribution of $10,000. All the while, the original $10,000 is still there in your RRSP, growing in value if it's invested properly, and the subsequent contributions generated by the refund-pumpingroutine will take your RRSP value even higher. "A total of over $8,000 from a single $10,000 investment," Jacks commented, "That's before earnings on the investment. Not a bad return of your own hard-earned dollars." Think how much better it gets if you put in a new $10,000 each and every year or whatever the maximum amount you're permitted (possibly $22,000!). Each additional contribution sets up a new virtuous circle that proceeds in parallel with and on top of the earlier contributions.Yes, to do this you have to resist the temptation to spend the refund on something else -- on "stuff" -- but as you can see from the example, the virtuous circle results ultimately in financial freedom. That's why I use the slogan "Freedom, Not Stuff." --62--
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 Pension Reform for Dummies: 5 simple "no-brainer" proposals This morning BMO Financial Group's BMO Retirement Institute released a paper by director of retirement strategies Tina Di Vito [pictured above] outlining five such simple changes. Those who read Tina's paper in the March issue of Policy Options may already be familiar with them. While I've borrowed the ideas from the paper, the exact wording here below is mine. You can find Di Vito's original here. 1.) Remove age restrictions for RRSPsCurrently, RRSPs have to be converted to annuities or RRIFs at age 71, or cashed out with a big tax penalty. This makes little sense in a world where mandatory retirement is a thing of the past. If Ottawa wants us to live longer and save more, it's sending us the wrong message in legislating unnecessary and unwanted RRIF payments that are fully taxable and may trigger OAS clawbacks. I agree with BMO that Canadians should decide when they need to withdraw the money from their RRIFs to live on -- it's inevitable that they will one day need to do so and when they do, the government will get its coveted tax bonanza. 2.) Reduce taxes on RRIF withdrawalsRRIF withdrawals are taxed as if they were interest/salary income even if the growth was derived from some combination of dividends and capital gains. We looked at this topic and Andrew Dunn's suggestion for fixing it in this blog last week. Di Vito is singing from the same song sheet and notes that had such growth been achieved outside registered plans, the income would have received preferred tax treatment and resulted in a lower tax rate. The current tax treatment "skews" investment behaviour in favor of sheltering the highest-taxed but lowest-yielding fixed income investments. At today's low interest rates, such retirees may not even keep up with inflation. The fix is to consider only the original RRSP contributions as "deferred employment income" while the growth in the plan should be taxed at a rate that mimics non-registered investments.3.) Broaden opportunities for tax-free RRSP/RRIF rollover on deathOttawa gets a big tax bonanza when a RRIF holder who is the second spouse to die passes away: the plan balance is included as taxable income in the year of the death. BMO suggests a tax-free rollover to the next generation's RRSP or RRIF. This would have huge implications for the much ballyhooed "trillion-dollar " intergenerational transfer of wealth. Of the five proposals this is the one Ottawa may balk at most and I'd think the industry would be content if 1,2, 4 and 5 were adopted at the expense of conceding number 3.4.) Lower the rate of mandatory RRIF withdrawalsSeniors get understandably upset by the requirement to withdraw -- and be taxed on -- at least 7.38% of a RRIF's balance every year, a percentage that rises to 20% in one's 90s. These requirements were designed during an era of high interest rates but at current rates means retirees are in danger of outliving their money in old age. As medical science advances and longevity rises further, current policy puts those in their 90s at peril. As BMO says, "it is highly unlikely in today's investment world that investment returns will keep pace with the withdrawals" -- especially if invested in fixed income. To point number 2, seniors would have a better shot at it if invested in stocks but current policy motivates them to stay in low-yielding interest-bearing vehicles. BMO suggests Ottawa can extend the lives of RRIFs by lowering the withdrawal rate but doesn't specify what the new lower rate might be. I'd suggest it should be no higher than what 3- or 5-year GICs currently pay. 5.) Increase maximum contribution amounts for RRSPs This recommendation parallels a similar one by the CD Howe Institute, as mentioned in this blog entry. BMO thinks RRSP contribution limits need to be hiked from the current 18% of earned income and $22,000 maximum to higher (but unspecified) levels. It suggests there be parity with current Defined Benefit pensions, which are able to make plan members whole in the event of investment losses. BMO notes an interesting fact I'd not seen before: that current RRSP rules favor households: a couple each earning $75,000 get combined RRSP room of $27,000 while a single taxpayer earning $150,000 can only contribute $22,000. This particular paper focuses on just RRSPs and RRIFs but of course further tweaking is possible with the new TFSAs, of which Di Vito is a fervent advocate. We've looked before at Malcolm Hamilton's proposal to make TFSA contribution room retroactive to age 18, or to introduce a lifetime TFSA contribution room that might be some hundreds of thousands of dollars. There are also suggestions that it be made easier to make lump-sum contributions to RRSPs or TFSAs from special lifetime events like inheritance, severance and the sale of certain assets. In short, the tools to fix a pretty-good system and make it into a world-beating system are all there now: all we need to do is get Ottawa to bring them into the 21st century. BMO's suggestions are a good place to start.  --62--
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 Strange bedfellows: mortgages in retirement Apparently most Canadians don't agree with me that a "paid-for home is the foundation of financial independence." That line is a recurring one issued by my fictional certified financial planner -- Theo Konstantin -- in Findependence Day. However, a poll released by Investors Group yesterday found a whopping 56% of mortgage-holders do not consider paying off their mortgage in full as an important factor in deciding when to retire.Almost two in three (62%) plan to carry debt into retirement or are already doing so. Of these, half say this debt will be the mortgage. Among those not yet retired, 23% expect the outstanding balance to be minimal when they retire: $25,000 or less.Rose-colored glassesHowever, they may be wearing rose-colored glasses on that point. Such expectations "may not be realistic," says Investors Group vice president banking and mortgage operations Peter Veselinovich. For retired mortgage-holders, the median mortgage balance is more than three times higher at $82,000. "The road to being mortgage-free is paved with good intentions, but twists and turns along the way can make the trip longer than you'd planned," says Veselinovich [pictured right].  In its press release, the financial planning giant uses the phrase "strange bedfellows" to describe mortgages in retirement. Over the two decades I've been writing about money, most of my financial planner sources suggest their clients enter retirement free of all debts: certainly high-interest credit cards but also lower-interest mortgage debt. My view is that if your finances are so shaky that you haven't yet even paid for the roof over your head, what makes you think you're able to retire? A paid-for home is the best financial security you can have, even if you're still working. After all, what can be more comforting than the knowledge the "rent" is pre-paid in the event one or both spouses loses their jobs? Now it's true that even if a mortgage has been fully paid off, there is still plenty of property tax to be paid out, and that's with after-income-tax dollars. Property tax doesn't cease to be a liability in retirement, nor do normal maintenance costs, heating, utilities and other expenses. Given all that, why would you want to still be making mortgage payments in old age, perhaps living on a fixed income? 50% Replacement Ratio argument assumes a paid-for home The more marginal the "Replacement Ratio" you have in retirement, the less you'll want to carry debt of any kind. The Replacement Ratio has long been debated by financial planners and the investment industry. The latter, who admittedly have an interest in this, traditionally suggest retirement income should be at least 70% of what was earned in one's working years. Some, like fund company Fidelity Investments Canada, argue the ratio should be 80% or even 100% or more -- especially in the early years of retirement that feature frequent travel and pent-up demand for various costly hobbies like golf or mountain climbing.At the other extreme is the much-cited opinion of actuary Malcolm Hamilton that Canadians can get by with just a 50% replacement ratio. His view is that once you've raised the kids and educated them, paid off the mortgage, and finished saving for retirement, you don't need so much income, nor do you need to pay as much income tax to generate that income. But note that one of his three reasons for citing the 50% ratio is that the principal residence is fully paid for.  Clearly, the Investors Group poll reflects a mentality born of ultra-low interest rates. The thrust of the rest of the poll revolved around the confidence debtors have that they will indeed be able to cope with higher interest rates, now that mortgage rates have started to rise. The poll also found a third of the 4.8 million Canadians holding a mortgage are "not concerned" about their ability to make their payments when rates rise; 41% said rates would have to spike 3% or more before they'd lose sleep over it.Well, retirement can last 30 or 40 years, so it's hardly a stretch to imagine interest rates rising much more than 3% over the coming decades. I still recall paying 11.75% on a mortgage in the late 1980s and I know others who were paying close to 20% earlier that decade. If you're retired, you don't want even the possibility of losing sleep over rising interest rates. So I'm sticking with Theo's mantra that a paid-for home is the foundation of financial independence. If your home is not yet fully paid for, you don't have financial independence. It's as simple as that. P.S. Added, Thur., April 22: A version of this blog ran as a column in various Canwest papers today under the headline, Retiring with a Mortgage may be Rude Awakening. (Photos by Getty Images and Fotolia) -30-
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 Developing a national strategy on financial literacy As I noted yesterday, the fact a poll found three quarters of investors don't consider the tax consequences of their investment actions suggests we have a long way to go in promoting financial literacy in this country. Yesterday morning, I sat in on the first Toronto session of the federal Task Force on Financial Literacy, contributing my own two cents worth along with other journalists, credit counsellors, financial educators and a fascinating cross section of fellow Canadians. Toronto is just one of 17 locales for full-day meetings that began on April 6 and will conclude on May 13th. There's also an online forum for gathering further comments on financial literacy here. The Task Force is accepting written submissions from Canadians until April 30, with the goal of delivering its findings to Minister of Finance Jim Flaherty in December, after which a public report will be released. The Task Force is chaired by Don Stewart [pictured above], who I had the pleasure of meeting and interviewing yesterday while the Task Force was in Toronto. Stewart is the CEO of Sun life Financial Inc., a unit of which he joined in 1969. A native of Scotland, he emigrated to Montreal in 1972. He's already chaired input sessions in western Canada and Yellowknife and is off to eastern Canada the rest of this week, starting with Halifax today.  Even as some of the Task Force convened yesterday in Toronto, a parallel session was running in Montreal. The Toronto contingent featured a high-powered team that included tax guru and Knowledge Bureau president Evelyn Jacks [pictured right], Credit Canada executive director Laurie Campell [pictured below left], Advocis president and CEO Greg Pollock and educational consultant Mitch Murphy. Between 8:30 am and 3 pm, the Task Force listened to 15 10-minute presentations, each followed with a Q&A that suggested a keen interest in the topic on the part of Task Force members.  The presentations I heard in the morning included Warren MacKenzie of Weight House Investor Services Inc., the ABC Guys, Healthy Money, SIFE St. Lawrence College, the Catholic Family Services of Hamilton and fellow financial columnist Ellen Roseman. Goal is to identify and leverage what's already out thereIn a subsequent interview, Stewart emphasized the goal is certainly not, as I cheekily phrased it, to "reinvent the wheel" but to consolidate, identify and leverage what's already out there. After four decades in financial services, Stewart says he's been struck in the last decade by the "huge amount" of work going into developing financial literacy both in Canada and the rest of the world. It's in the private sector and multiple government web sites but all cover "remarkably common ground." That's why they titled the February 2010 consultation document "Leveraging Excellence." "We feel there's lots of good work being done but it needs to coordinated and consolidated." The Task Force's central mission is to take what already exists -- whether by individuals, governments or companies -- and get it implemented and executed, keeping in mind there will be some gaps. "It's not at all a matter of starting over. Many people have done good things. The question is whether we can leverage it. The report will have the important focus of building on the shoulders" of those who have begun the work. One of the tricky aspects is keeping in mind what's going on at the provincial level. Ontario has in progress a program to include financial literacy in the curriculum for grades four to 12 [see this blog item] and there's a similar initiative in Manitoba. The British Columbia Securities Commission is also moving forward on this front. "We all feel this is a tremendously worthy cause but it's a huge tapestry," Stewart concluded, "The question is can you deliver actionable executable recommendations to move it forward." You can also follow the progress of the Task Force on Facebook and here on Twitter.  --62--
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 Three quarters of us don't consider tax implications of investment decisions, survey finds He suggests that when considering an investment, tax implications should have equal mindshare as risk tolerance and expected return. BMO Nesbitt Burns is also recommending that Canadians keep in mind personal tax implications when planning their investment strategy. Waters says the 2010 federal budget introduced several measures to improve tax fairness. These ranged from tax treatment of stock options to enhancements to the Registered Disability Savings Plans (RDSPs).In my own experience, one of the most important topics is one addressed in last week's blog suggesting tax changes to how different types of investments are taxed. Interest income is taxed at the top marginal rate (46% in Ontario) if not held in shelters like RRSPs or Tax Free Savings Accounts. More favorably taxed capital gains and Canadian dividend income are better candidates for holding in taxable plans than interest income. Because foreign dividends are taxed like Canadian interest, they are arguably better held inside RRSPs and TFSAs. Ironically, the Financial Literacy Task Force swept through Toronto today gathering input on how Canadians can become more financially literate. This survey is Exhibit A on why their work is needed. --62--
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 The Wealthy Boomer has movedHello readers! Jonathan Chevreau's Wealthy Boomer blog has a new home over here: http://opinion.financialpost.com/category/wealthy-boomer/There will be no more updates at this address, so please change your bookmarks to the address above.Thanks, and we look forward to seeing you soon!
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 Zvi Bodie in Toronto to rebut financial myths of "popular literature" Controversial University of Boston finance and economics professor Zvi Bodie is in Toronto today to give a talk to a conference held by the CFA Institute. We've featured Bodie [pictured] several times in columns and this blog and this morning he'll continue to question the financial industry's most-cited contention that stocks become safe in the long run because of time diversification, or that the only way to reduce risk is diversification.In his presentation at 10:30 am, Bodie says the simplest way to reduce risk is to hedge, insure or hold safe assets. He continues to stand by the recommendations he made in his book, Worry-Free Investing. In particular, he continues to make the case for inflation-indexed bonds: Real Return Bonds in Canada; Treasury Inflation Protected Securities (TIPs) in the United States. In order to eliminate currency risk, he has said Canadians should stick with RRBs and Americans with TIPS."Stocks do not become safe even in the long run," Bodie maintains, "If they did, they would not have a risk premium."The presentation, entitled The Future of Life-Cycle Investing: The Retirement Phase, looks at such life-cycle investment products as target-date retirement and target-date college tuition accounts and health savings accounts. These share some characteristics: they have a special purpose (i.e. retirement or college), specific maturity dates and are tax-advantaged."The trouble with mutual funds" However, most of the money in these accounts is invested in mutual funds. And the "trouble with mutual funds" is that they are not matched to the purpose or the target date of the account. "For a matching strategy, the basic building blocks must be denominated in units that match the purpose and have known maturities." In a portion of the talk entitled Safe Investing in Risky Times, Bodie says conventional investment advice is based on the "mistaken principle" of time diversification. This leads to portfolios that are "riskier than consumers realize." Therefore, he argues, the starting point should be "100% inflation-proof, guaranteed annuities." Investors can hope for the best, he says, but must "prepare for the worst."A basic economic principle is there is no free lunch, Bodie says. "The present value of achieving a future target cannot be lowered by taking risk." However, it can be lowered through contingent contracts that only pay off when needed. He cites as an example life annuities, which pay off only if the annuitant is alive.High risk requires high-cost guarantees  Bodie also has some interesting views on risk and guarantees. A guarantee transfers risk from a client to the investment firm. On the one hand, if risk is truly small, then the cost of the guarantee will be low. On the other, if the cost of the guarantee is high, then the risk is obviously NOT small, he warns. Risk is most efficiently managed by investment firms, not clients. Bodie questions whether clients can trust firms that do not guarantee its products. You can download Worry-Free Investing for just $5. P.S. Added Thur., May 6th. My column based on the actual talk and a subsequent interview with Zvi appeared today in the FP under the headline Our faith in stocks misplaced and in various Canwest dailies as Don't put your faith in stocks for the long run, guru says. --62--
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 1.7 trillion reasons IFIC thinks major pension reform not needed and mutual fund MERs should stay sky high While the ongoing retirement and pension debate has focused on the existing three pillars -- OAS/GIS; CPP/QPP and employer pensions and RRSPs -- a whopping $1.7 trillion is held in non-registered investments and the new Tax Free Savings Accounts that the mutual fund industry calls the "fourth pillar."The Investment Funds Institute of Canada posted its submission to the Department of Finance on Friday and issued a press release yesterday. [Note the change of the senior communications manager.]Its 23 page submission commenting on Ottawa's consultation paper -- Ensuring the Ongoing Strength of Canada's Retirement Income System -- can be found by clicking on IFIC's web site here. The Finance paper is here. Methinks they protest too much on fees and value of advice I wouldn't call it an interesting read but it is fascinating in some respects. It spends far too many pages justifying the high Management Expense Ratios (MERs) on its (mostly) actively managed mutual funds. It spends just as much time defending the advisor-driven distribution system that contributes to those high costs.On the other hand, I tend to agree with its top-line conclusion that the system works pretty well as it is and that all that's really necessary is to tweak the tax system to introduce a little more parity between private-sector workers and government workers. Thus, IFIC provides four reasons why there's no need to "enhance" the Canada Pension Plan (CPP) and reiterates a half dozen suggestions it made previously.Solid arguments for boosting RRSP limits and flexibility To recap, IFIC thinks RRSP contribution rates should be raised from the current 18% of prior year's earned income to 34%, something the CD Howe Institute has also called for. It also makes some sensible suggestions to provide more flexibility through a lifetime RRSP contribution limit or letting people who temporarily leave the work force for childcare or job loss to accumulate more RRSP room. It thinks the self-employed and those whose incomes vary widely year by year should have RRSP room based on average income. And it calls for some unspecified "relief" for those whose RRSPs were torpedoed by market losses in 2008 -- relief comparable to what members of DB plans enjoyed.It also makes sense to reduce RRIF minimum withdrawal requirements and to increase limits for transfers between DB plans and RRSPs. As IFIC notes, Income Tax Regulation 7308 should be rejigged to reflect an older population, longer life spans and historically low interest rates. It also wants to eliminate the double taxation of dividends in registered plans.It doesn't appear to call for similar expansion of the new TFSAs, although this blog has previously noted suggestions to increase TFSA room through retroactivity or a similar lifetime contribution limit. Even so, it's clear IFIC views the growing prominence of TFSAs as central to its future.  In the press release, IFIC president and CEO Joanne De Laurentiis (pictured right and right in the top photo) notes that the retirement debate must include discussion of all potential retirement assets and "this fourth pillar, with its significant asset base, can only serve to enhance the retirement income of Canadians."If we're at 90% replacement rate why are we debating retirement income at all? Even without the expansion of RRSP or TFSA room, IFIC thinks retired Canadians are doing pretty well. It cites data from the OECD that retired Canadians have an average income replacement of more than 90% (of the incomes they had when working). This beats the UK (73%, rounded), Australia (70%) and the US (86%). It also says that the OAS/GIS system has kept the elderly poverty rate at 6%, half the OECD average of 13% and well below the 24% of the US and 27% of Australia.At the other extreme, IFIC cites data from Ipsos Canadian Financial Monitor that shows that assets held in the fourth pillar (non-registered and TFSA) rises with income level, due to "the limiting effect of RPP/RRSP dollar limits." Thus, in 2009, households with income of $100,000 or more had average non-registered assets of $157,717. Is this the place for the eternal debate on indexing vs active and value of advice? IFIC then spends several pages explaining why Canada has "done so well," and attempts (not convincingly, in my view) to defend its cost structure. It hotly disputes other comments in the federal consultation paper that assign "a zero value to the role that advice plays" in helping Canadians prepare for retirement. As evidence, IFIC cites a recent Ipsos Reid study that found households with financial advisors have almost double the participation in RRSPs, TFSAs, RRIFs and RESPs than households without advisors. It also cites the finding that these "advised" households had less money in "conservative" fixed-income investments -- i.e. they had more in stocks and equity funds [which conveniently pay advisors more, but IFIC doesn't say that]. IFIC really falls into self-serving mode in sections 7 and 8, which cover the "value" of active management and "misplaced focus on costs rather than outcomes." Every major book I've read on the topic has decidedly made the case against high-cost active management and in favor of low-cost passive investing. See for example my column on this earlier this year: A unanimous vote for index investing. IFIC nevertheless flails away with a number of obscure fine points that do little, if anything, to advance the general debate on retirement.--62--
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 Fasten your seat belts for the Bond Roller Coaster Recent repeated hikes in Canadian mortgage rates seemingly are telegraphing a rise in interest rates some time this summer. In a piece flagged by AdvisorAnalyst.com -- The Bond Roller Coaster -- Tacita Capital's Michael Nairne warns "the good times for bonds couldn't last forever" and suggests investors recognize that "in the next year or so the bond roller coaster is about to get underway." Nairne [pictured left from a Wealthy Boomer video with me] says investors have enjoyed an unprecedented three-decade bull market in bonds since long-term government bonds peaked at 14.8% in September 1981. If you're a baby boomer, that 30-year stretch probably constitutes most of your awareness of financial markets and investing. Click on Nairne's article and you'll see some interesting charts on long-term government yields versus inflation.Unfortunately, a roller coaster implies you don't know when the rises and falls will occur. Many advisors I've talked to -- notably ValueTrend Wealth Management's Keith Richards, who I quoted in this piece in March -- have been counselling clients to reduce exposure to long bonds since they are most likely to fall in price as interest rates rise. However, Nairne cautions that "some longer-term bond exposure is needed today as a hedge against a deflationary scenario."Even if you dump long-term bonds, the problem arises of what to do with the proceeds. You can sit in cash and money market funds and earn virtually nothing while waiting for a rate rise that may or may not come. Or you can take more risk and stretch for yield in dividend-paying stocks, income trusts, preferred shares, REITs and alternative investments. Rate hike could also derail stocks in next year or so The problem is, as Kiplinger Personal Finance notes in this piece Friday -- What a rate hike means for investors -- an interest rate rise will eventually also derail the bull market in stocks. The writer, senior associate editor Andrew Tanzer [pictured, right], predicts this may not happen until early 2011:  "There's little doubt that rates are heading higher. After a three-decade decline, they have nowhere to go but up. For stock investors, what matters is how high and how fast." One of his sources thinks the trigger for a stock slump would be a 5% yield for 10-year treasury bonds. But how likely are 5% yields given a fragile housing market, stubborn unemployment and limited bank lending? The Federal Reserve Board still insists that very low interest rates are justified "for an extended period," given the shaky economy and expectations that inflation will remain benign. Why a laddered approach to bonds still makes senseI'll point readers to one more web link: the presentation from Odlum Brown Ltd.'s fixed income strategist, Hank Cunningham: Risks to Fixed Income Portfolios. I mentioned this in last week's blog about the firm's equity ace, Murray Leith, but Cunningham -- author of In Your Best Interest -- is certainly worth listening to as well, especially if you're an older investor heavily invested in bonds. In the column in the paper cited above, Cunningham cautioned against Richards' "sell long bonds" stance by advocating fixed income portfolios balanced by diversifying credit risk and investing in a "laddered" broad spectrum of maturities. Cunningham -- pictured left -- notes that as the economy started to grow, the spread between 10-year Government of Canada bonds and two-year bonds peaked in January at 231 basis points and has since narrowed to 180 basis points. The yield curve flattened because the two-year yield rose: "Simply put, the market is not waiting for the Bank of Canada to raise rates."But he adds that the U.S. yield curve remains mired at its all-time high, "indicating that their recovery is not getting underway."Little evidence inflation pressure merits overexposure to Real Return Bonds Despite "media hysteria" over inflation, Cunningham sees little evidence a sharp rise is imminent. In fact, there are pockets of deflation, notably in Japan and some of the PIG economies of Europe (Portugal, Ireland and Spain). Cunningham therefore expects positive returns from a "laddered portfolio of conventional, investment grade, corporate bonds." If inflation did start to heat up, bond investors would get some protection from Real Return Bonds (or in the U.S., TIPS or Treasury Inflation Protected Securities). But Cunningham would not put 100% of a bond portfolio in RRBs or TIPS because there is still the risk of deflation and real yields could rise, producing negative performance. "Our view is that conventional bonds will outperform RRBs for the foreseeable future." Also, because of their long durations, RRBs can be volatile.  On the currency side, Cunningham says Canadian investors should brace for "sizable swings" in the loonie. He recommends that fixed income investors remain in C$-denominated bonds if they plan to retire in this country. In his presentation, Cunnigham shows a portfolio of domestic corporate bonds laddered from January 2011 to as late as February 2017. Even if interest rates rise 1% such a portfolio would produce a positive 3.3% return. Odlum Brown also offers an all-government ladder, a Zero Coupon Ladder and an all-corporate one-to-ten year ladder. In short, Cunningham's solution to the bond roller coaster ride is to maintain a laddered approach that "minimizes downside risk while producing positive returns." --62--
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 Why ETFs are "starting to scare" one financial advisorFor our "weekend read" on this blog, I've once again handed The Wealthy Boomer over to a guest columnist. David Christianson is a fee-for-service financial planner and portfolio manager at Wellington West Total Wealth Management Inc., based in Winnipeg. He's also a personal finance columnist for the Winnipeg Free Press.On Friday in his blog, Christianson published a piece under the title Why ETFs are starting to scare me. The newspaper ran it under the headline ETFs running off in all directions. The theme is similar to what I've written before -- that ETFs are starting to replicate the sins of the mutual fund industry it seeks to displace. This week's announcement of four new foreign leveraged ETFs only reinforces this trend. On Twitter, I "tweeted" that there are now four more ways to blow up your portfolio.But I'm not a fee-only advisor. David's essay speaks for itself. To make clear his authorship, I've put his essay in Italics, beginning with the text across from and below his photo. I've added a few subheads in bold. Over to you, David:  Most 20-year olds scare me just a little bit. They are very clever, tech-savvy and often worldly, with opinions on almost everything. They can even be intimidating, in that you think they must know something you don't. Many seem to believe they know an awful lot, and we old fuddy-duddies are either scared or lazy in our unwillingness to jump off any metaphorical cliff they think looks attractive. ETFs just turned twenty. Like many human "youngsters," they were pretty well behaved till about 16, then seemed to turn a little wild, using their new knowledge and tools to run off in all sorts of untested directions. Exchange traded funds are a great tool. We use them all the time in our investment management practice, and have for a number of years. For many uses, I prefer them to conventional retail mutual funds. They became popular for a number of good reasons. An ETF allowed you convenient access to a basket of stocks (or other investments) with one purchase. That single stock or unit could be bought and sold on the stock market at any time during the trading day. The basket of underlying investments was picked on pre-set and transparent criteria (like the TSX 60 index, for example, which is published daily), so you could always know what you owned. I contrast this with an actively-managed mutual fund, where the manager has to delay release of his exact portfolio, to keep trade secrets and keep competitors from stealing ideas. Another contrast with mutual funds is the fees. Traditionally, ETFs have charged between .30% and .50% per year for access to a passive index, while the average actively-managed fund costs more like 2% to 2.5% per year, including advisor compensation (or about 1% less without advisor compensation). Some cost more; a few cost less. Index-based ETFs are also usually low turnover vehicles, and therefore quite tax-efficient.Flavour-of-the-month ETFs introduced just because they will sellSo, why does this 20-year-old now scare me so much? My main concerns centre around the explosion of ETF varieties, the use of misunderstood leverage in some ETFs, access to increasingly quirky and risky investments and the rabid introduction of flavour-of-the-month options, with no apparent raison d'
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 As tax filing deadline looms, almost half will use refund to pay off credit cards As we looked at in depth in Wednesday's column -- Filing by Friday is Number 1 priority -- if you owe Ottawa taxes for the 2009 tax year, the deadline is midnight tonight to file. That's the "Taxman" image used in the marketing materials of DioGuardi Tax, who were quoted in the article. You can be sure that today of all days, The Taxman is Watching (the title of a book by Paul Dio Guardi.) But most of us will be receiving a refund, on average $1,400. According to a poll being released today by BMO Nesbitt Burns, 48% will use that refund to pay off credit card debt and other bills -- wise behaviour in my opinion. Almost as wise -- especially if you're free of high-interest debt -- are the 4% who plan to pay down their home mortgage. If you have no debts, the best thing to do with your refund is to pump it back into the next RRSP contribution, a virtuous circle we looked at in this blog last weekend. Leger Marketing found 21% do indeed plan to do this, or just as good, the new TFSAs. But a significant number -- for shame! -- plan to indulge in various forms of conspicuous consumption: 15% for home renovations or household expenses and 12% for travel or leisure. John Waters, BMO Nesbitt Burns' manager of tax planning, offers the following five top tips for putting your 2009 tax refund to good use. Since I consider all five "good" tips not involving spending, I've taken the liberty of publishing them unaltered here. Starting with the words across from and below his photo, the words are his, not mine [ending with Tip 5]: 1.) Pay down your RRSP loan or make your 2010 RRSP contribution now If you took out a BMO RRSP Readiline loan to maximize your RRSP contribution and generate a larger refund, use your tax refund to pay down the loan. If not, consider making your 2010 RRSP contribution now instead of waiting until the deadline next year. This will allow you to benefit from almost an extra year of tax-deferred growth! 2.) Pay down credit card debtInterest on some credit cards can eat away at your savings. Reduce the cost of credit by using your tax refund to reduce or pay down your credit card balances, targeting the highest rates first. 3.) Lump sum mortgage paymentIf you have a mortgage, it is a good idea to use your tax refund to make a lump sum payment. Applied directly to your principal, a lump some payment (BMO allows you to pay up to 20 per cent of your original mortgage principal per calendar year) could save you significant dollars in interest costs over the life of the mortgage. 4.) Top-up your TFSAIf you are not carrying any extra debt then make your refund work for you. Contributing to a Tax-Free Savings Account (TFSA) can let you grow your money tax free. Even if you maxed out your TFSA contribution in 2009, you have room for an additional $5,000 this year. 5.) Save for educationAn education can be an expensive thing. Contributing to a Registered Education Savings Plan (RESP) can help alleviate some of the pressure that all parents feel when planning for their children's future. Consider opening an RESP using your income tax refund. A $2,500 dollar contribution to an RESP can earn a $500 grant from the government. Maximize your contributions every year and you could earn up to $7,200 in lifetime grants for every child. -----The cost of compliance with our cumbersome tax system There's an eye-opening piece on the FP Comment page today (FP11) entitled Our costly taxes. It's a precis of a Fraser Institute paper released yesterday, entitled The Costs of Complying with Personal Income Taxes. You can can find it here. The authors estimate the annual cost to comply with the tax rules at between $4 billion and $5.8 billion. On average, a Canadian spends $61 on payments to tax professionals and purchasing tax software. Fraser Institute vice president Niels Veldhuis [pictured, left] estimates that when it's all added up, it costs $215 per citizen to comply with the regulations when you factor in costs, time and effort to prepare tax returns. He suggests a simple flat-tax filed on a postcard-size tax return would make more sense. But perhaps then we'd have a national unemployment problem for accountants, tax lawyers and tax preparation firms? --62--
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 High-net worth investors more confident investing in Canada and Emerging Markets than the U.S.A. Talk about timing. On the heels of yesterday's blog about American mega-cap stocks -- Best returns for next decade: would you believe American blue chips? -- a high-net worth survey released today from BlackRock Asset Management Canada Ltd found 67% of wealthy investors are "very confident" about the Canadian markets and "far less confident" about investing in the U.S. Half thought emerging markets are a good investing opportunity right now while only 39% feel the same about the U.S. I don't know about you, but I'd think such data suggests the contrary view espoused by Odlum Brown's Murray Leith [pictured, left] may turn out to be right. As noted yesterday, while enthusiastic about the Emerging Markets/China story, Leith was loath to put all his eggs into that one basket. Canada is itself a play on China, he noted, but he wants to hedge his bets by investing in the many good-valued U.S. megacaps that can be found today. Appalling financial literacy from the wealthyWhether or not Leith's call turns out to be correct, I was appalled at the level of financial literacy revealed in the BlackRock survey. While almost 80% of High-Net-Worth (HNW) investors place "a great deal of importance on learning about new financial products and solutions from their advisors," almost half (47%) of the HNW investors who owned mutual funds believed their funds did not charge management fees. Another 9% were unsure. Earth to HNW investors: if you're still investing in broker-sold mutual funds charging 2.5% a year as a Management Expense Ratio, then you're paying $25,000 a year on each $1 million of assets. You'd think these financial advisors they appear to value so much would at least acquaint these well-heeled clients with the basics of how they're compensated -- and the extent to which this "embedded compensation" derives largely [completely?] from the clients' wealth. True, BlackRock -- via its iShares exchange-traded funds business in Canada -- is largely in the business of providing low-cost ETFs that make most mutual funds look like highway robbery by comparison. As iShares managing director Heather Pelant [pictured, right] says in a press release, advisors should be elevating the conversation with their clients by "carefully explaining different and/or other sound investment vehicles, such as ETF." It seems ETFs are still a foreign concept to many wealthy investors: one in four didn't know if they are a good investment or not and only 27% of wealthy investors with an advisor or broker said an ETF had been recommended. Worse, only 12% already own ETFs in their portfolio. Among investors 65 or older, 71% were unfamiliar with ETFs, compared to under a third of investors 50 or younger. New Hybrid Funds will cloud waters further But that's about to change and the timing gets stranger still. At the start of this week, this blog reported on the second new major entrant to hybrid ETFs by a major Canadian mutual fund company. Both Invesco Trimark PowerShares Funds and now BMO Guardian provide a way for compensation-hungry financial advisors to introduce the idea of ETFs in a way that will compensate them more than "pure" ETFs.Because of course these mutual fund/ETF hybrids have built-in trailer commissions [I use this phrase instead of trailer fees in deference to a request by fee-based advisor John De Goey] of 0.5 to 1%. The result of this embedded compensation is MERs that are much higher than what a discount brokerage investor would pay for ETFs directly, albeit a tad below the MERs of most actively managed mutual funds. No doubt a year from now the followup survey will reveal the wealthy flocking to these hybrids and still declaring that, like other mutual funds, they charge no management fees. So much for the popular notion that wealthy investors are "trendsetters." As Pelant notes, HNW investors "have as many questions and concerns about their financial situation and investment trends as anyone else."Certainly this group has become more cautious in the light of the 2008 crash and subsequent shaky economy: as the slide at the top of this blog illustrates, 73% said they had changed their investing style, with most "becoming more cautious."60% of young investors thought advisors provide no more value than the InternetOminously for advisors, a majority of those under age 35 agreed it's " not worth paying advisors or brokers for fees or transactions" while only a minority of older investors felt that way. About a quarter of the under-35s already use only a self-directed online discount brokerage account. The study of 500 Canadians with at least $500,000 in financial assets was conducted in the second half of March by the Gandalf Group. If you're an advisor counting on older clients not knowing mutual funds or hybrid funds charge management fees, you'd better hope this study is not "statistically significant."--62--
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 31% of those in workforce expect never to retire, RBC poll findsWhile nearly one in three (31%) workers expect never to retire, 57% feel there is no appropriate age for retirement and the decision when to retire is a personal choice, says the 20th Annual RBC RRSP Poll. The average retirement age in Canada is 62 but baby boomers are increasingly choosing to stay working or return to the workforce after retirement, says RBC head of Retirement Strategies Lee Anne Davies. The average life expectancy of Canadians has steadily increased since 1979, with current life expectancy at birth listed at 78 years for men and 83 years for women, according to Statistics Canada By age 65, men's life expectancy increases to 83 years and women's increases to 86 years. The poll found 35% feel an aging population will be a financial burden: 46% of younger Canadians aged 18 to 34 feel this way."Boomers are the first generation to be faced with caring for aging parents as they near retirement themselves," said Davies. While 91% look forward to 'me time' in retirement, needs of family members may make this a challenge. The poll of 1,457 adults was conducted by Ipsos Reid late in October 2009. --62--
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 Financial Literacy Task Force kicks into gear Canada's Task Force on Financial Literacy today released a consultation document about how Canadians make financial decisions. "Leveraging Excellence" focuses on nine major themes, including managing debt, saving and investing, retirement planning, and preventing fraud. The group defines financial literacy as "having the knowledge,
skills and confidence to make responsible financial decisions." Research from the 2009 Canadian Financial Capability Survey found almost a quarter of us were weak in three key areas of financial capability: keeping track of finances, planning ahead and stayed informed about financial matters; another 8% were weak in all three as well as in making ends meet. More than a third were either struggling or unable to keep up financially. One third couldn't answer a question about what happens to their buying power when inflation exceeds the interest paid on an investment. Only 35% knew investments in the stock market are not insured.
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 Lipper Awards 2010: Step Right Up, Everyone's a Winner! This morning, Canada's mutual fund companies have been happily issuing press releases telling the world of the great honor of having won several "Lipper" Fund Awards for 2010. These were apparently dispensed at a gala ceremony last night though I've yet to talk to someone who actually attended. If all you've seen is a press release only from Fund Company A or Fund Company B, you may have a distorted impression of the true magnitude of this "accomplishment."Lipper annoints 105 mutual funds, versus just 20 for Morningstar Canada Today's blog title I've borrowed from a similar one I ran two years ago, because nothing much has changed. You can read the original blog here but in essence, we're talking about an award that's been broken down into so many categories that there are actually more than a hundred winners: 105 by my count.Compare that to the rival Morningstar Canadian Investment Awards, which presents awards to only 20 separate mutual funds. The main difference? Lipper has awards for all of 1-year, 3 year, 5 year and 10 year performance. So if a particular fund wins all four time periods, that fund company can claim it won "four awards" based just on that one fund's performance. Sometimes there are four different winners; at other times the same fund cleans up over the whole period: for example, Phillips Hager & North Short-Term Bond & Mortgage D won all four awards for the category of Canadian Short Term Fixed Income. Mawer World Investment is the 3-,5- and 10-year winner in International Equity but -- alas! -- was displaced by the statistically insignificant 1-year performance of Hartford International Equity A. Same for Beutel Goodman Income, which won three Canadian Fixed Income awards but "lost out" to TD Corporate Bond Capital Yield A for the one-year honors.1-year performance is a dubious criterion for an "award" This begs the question whether one-year performance is even meaningful. Morningstar evidently doesn't think so since it insists on at least a three-year track record before bestowing such honors.For the complete list of 105 Lipper winners, click here. The link will lead to a PDF and a two-page printout of the awards.Let's face the cruel truth here. Investors should not be dumping shovelfuls of their hard-earned money into any one of these fund "winners" based solely on the fact the precious "Lipper" good housekeeping seal of approval has been conferred on them. True, a fund that wins all four time categories or the three longer time periods is probably a good candidate for a short list but to be jumping into the one-year winners solely on the fact it won a Lipper "Award" would be inadvisable. And there are plenty of funds that won only in the one-year term: Fidelity ClearPath 2045 Portfolio Series A wins a category called 2020+ Target Date Portfolio, with no entries for the longer periods. Several awards feature four different winners for the four time periods. This happened in the category of Canadian Fixed Income Balanced, where National Bank, United-Institutional, TD and Mackenzie Sentinel all shared the dubious spoils. This happened too with the Canadian Small-cap/Mid Cap Equity category, where Scotiabank got the 1-year award, Sentry Select the 3-year one, Dynamic the 5-year and Mawer the 10-year one. What exactly is the message here? Buy Mawer if you're a long term investor but buy Scotiabank for short-term performance? Investors should not be guided by marketing-oriented "awards"  So what's going on here really? Clearly, this is all about marketing and has little if anything to do with guidance for retail investors. Go to the Lipper web site here and you'll see the marketing imperative in all its glory: fund companies are invited to order certificates or trophies that can adorn the walls and trophy cases of their headquarters. The sales people can buy a "large" trophy for just $165, a medium one for $119 and a "small" trophy for the low low price of $95. You'd think if this were such an enormous honour that a fund company would be good for the extra 70 bucks to supersize it. Three guesses as to whether these certificates and trophies end up in the marketing department or the investment offices of the actual managers.All of which is not to disparage some of these winners. Clearly in the above example, Mawer is doing something right. So is Dynamic when its American Value Fund wins both the 5-year and 10-year version of the U.S. Equity Award.I'm not making this up: index funds win 1- and 3-year U.S. Equity AwardBut somehow I doubt Dynamic's press release will brag about the fact the 1-year and 3-year winners in that category were index funds: TD Nasdaq Index Investor in the case of the 1-year award; CIBC Nasdaq Index for the 3-year. That's pretty amusing, actually, since the last thing promoters of actively managed mutual funds want to admit is that index funds sometimes "outperform" the active managers. At least give credit to Lipper for allowing an index fund to "win" a category on occasion. So take the out-of-context press releases issued by the fund companies with the proverbial grain of salt. Just to give you a feel for what the fund company public relations departments were cranking out last night, here's what Fidelity Investments announced via CNW: "Fidelity mutual funds win ten Lipper Fund Awards, coveted Best Mixed Assets Fund Family Award."Coveted? Really?? My dictionary defines the word covet as a "wish to have something, especially a thing that belongs to someone else." Good thing for Fidelity that an index fund didn't beat it out for that particular award. --62--
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