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Growing Your Wealth Your Way

With Life Aligned Investing/ACPI, we are able to provide a wide variety of investment choices including mutual funds, ETFs, stocks and bonds.

We are an independent investment service. The investment decisions we develop with you are not tied to any directive or incentive to promote specific products. We assist you to design a portfolio that aligns with your objectives.

Shape of the economic recovery and what’s next for investors

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Results from April 21, 2020 survey. Click image to enlarge.

Last month we asked you to participate in our survey on the Shape of the Recovery. Thanks for taking the time to give us your prediction. The results are displayed in the bar chart to the right. You look like experts!

For months before Covid-19 hit, valuations and earnings expectations were getting very high. By the end of December 2019 many portfolio managers had become more defensive, increasing their allocations to more conservative assets. Then Covid-19 arrived, triggering a global recession.

L-Shaped Recovery

From their enthusiastic highs in mid-February 2020, global equity markets plunged and by March 23 had declined over 30 percent in some markets including the TSX. The massive selloff and liquidity crunch in March also affected fixed income. Bond markets were totally chaotic. The reality of a global pandemic had registered! During this period the price of oil collapsed, with Saudi Arabia and Russia clashing over production quotas. At that point, the markets were pricing in a dire scenario with an L-shaped recovery – basically a recessionary collapse with little economic activity expected for the next 12 to 18 months.

U-Shaped Recovery

As the indiscriminate panic selling subsided, the equity markets started to stabilize and move off the March lows. Share prices for the top ten technology companies surged. Many of the remaining stock prices oscillated, in some cases declining again to retest their March lows. Supported by unparalleled central bank interventions and government relief programs, by the end of April it seemed that the markets were pricing in more of a U-shaped recovery.

V, W or Square Root-Shaped Recovery

There is still hope for the best-case scenario, the V-shaped recovery. Sentiment rises on reports of successful vaccine research and then recedes quickly with announcements of bankruptcies and escalating US-China trade tensions. Some are hopeful but question the near-term sustainability of the April gains in equities and believe the recovery will take the shape of a W. (I’m in that camp.) Others see a recovery followed by a period of slow growth, in the shape of the square root symbol. Still many unknown unknowns!

Swoosh-Shaped Recovery

Although opinions vary widely as the story unfolds, the predominant view is that the recovery will take the path of the Nike swoosh. Canadian economist David Rosenberg pictures it as a Swoosh interspersed with numerous small Ws along the way. He is suggesting the economic recovery will be slow, marked by frequent periods of high volatility. (His nickname is “Rosie”, but his predictions rarely are!) His timeframe for recovery is at least one year, maybe 2. He expects low interest rates and deflation for the next two years followed by inflation, noting that in the Great Depression inflation rose to 5%.

Whatever the time frame for the recovery, there are reasons to be optimistic. Economies are reopening and with each day there is more clarity regarding the nature of the virus and the depth and severity of the recession. The narrative in the media is turning from the virus to speculation about the new normal – what will it look like and what will really change. No one knows yet. Trends underway before Covid-19 are likely to continue but at a more rapid pace and with some new and unexpected twists. For the markets there is an estimated $4.7 trillion USD in cash on the sidelines. When this cash is invested, it will propel equity prices higher.

Factor-Based Investing

Last fall as we explored “Investing for the Next Decade” we looked at the factors that contribute to investment success. These factors provide guidance as we review portfolios and strive to maintain the right balance between preservation and growth of capital. At this point in the economic cycle we are seeing signs of the move out of the current recession into a new economic cycle. The factors shown below help us to frame the discussion.

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Typically leading us out of a recession and back to more robust growth are the smaller, value-oriented companies. In the current environment it will also be the high-quality companies that have the resources to grow their business through the acquisition of competitors or complementary businesses.

What’s the next step?

In a recent interview Thomas Caldwell, Founder of Caldwell Securities, noted that “there is no news, only opinions” about the future, and investors need to quell their emotions and always view the present as an opportunity. We do not yet know the real depth or severity of the economic damage, but opportunities do exist. It’s time to look again at how your portfolio is positioned to meet your needs and objectives.

Click to enlarge image.

With the above factors in mind, think about how you want your portfolio to be positioned 2-5 years out and start to move in that direction now. Particularly during times of uncertainty it is beneficial to apply the barbell approach – strike an appropriate balance between defensive and offensive assets. We don’t know what life after lockdowns will bring, but with interest rates close to zero you’ll need to see some growth in your portfolio to achieve your life vision and sustain the lifestyle you desire. Don’t allow fear to get in the way of a bright future.

 

In my next blog I’ll be providing an update on different sectors and how you can use ETFs for sector-specific investing. Until then, stay safe and continue to do your part flattening the curve.

 

The information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Jan Fraser, Life Aligned Investing of Aligned Capital Partners Inc. (ACPI) from sources believed to be accurate. The opinions expressed are those of the author and do not necessarily represent those of ACPI.

What do you think economic recovery will look like post-Covid?

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The information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Jan Fraser, Life Aligned Investing of Aligned Capital Partners Inc. (ACPI) from sources believed to be accurate. The opinions expressed are those of the author and do not necessarily represent those of ACPI.

Dollar-Cost Averaging – A Strategy that Works

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Opportunity always accompanies a crisis. If you are investing on a monthly basis and have a secure cash flow throughout this pandemic, then consider temporarily increasing your contributions. It’s easy, all it takes is a phone call to authorize the change.

The tables below show why this is a powerful way to build wealth.

Market Falling

If you invest $100 each month when prices are falling, you buy more units/shares. In the example below, it may not have been emotionally rewarding to buy at $6.50 per unit (month 12) as compared to $10.00 per unit (month 1). For a long-term investor, there is a significant difference in growth on 15.38 shares compared to the 10.00 you received for your $100 in month 1.

Table and chart illustrating impact of dollar-cost averaging. When the market is falling more units/shares can be purchased at a lower price.

 

Market Rising

Table and chart illustrating impact of dollar-cost averaging. When the market is rising fewer units/shares are purchased at a higher price.

 

Market Fluctuating

Table and chart illustrating impact of dollar-cost averaging. When the market is fluctuating units/shares are purchased at different prices..

 

Side by Side Comparison

The comparison below demonstrates clearly that dollar-cost averaging is a successful strategy in all types of markets but the most beneficial is purchasing when prices are dropping.

The information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Jan Fraser, Life Aligned Investing of Aligned Capital Partners Inc. (ACPI) from sources believed to be accurate. The opinions expressed are those of the author and do not necessarily represent those of ACPI.

Blame it on the coronavirus

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Well, it’s been quite a week in the financial markets! I’m writing this Friday afternoon before the close of trading but it appears as if it’s another day of panic.

In 2019 the prices that investors were willing to pay for shares (ownership in a company) continued to rise at an above-average clip. At the same time, the earnings (profits) that the companies were reporting were not showing the same growth. The rise in stock prices was disconnected from what investors could expect to receive as their share in the profits (dividends).

In 2020, this DISCONNECT, the spread between the price per share and the profits, continued to widen… until the potential economic impact of the coronavirus sent investors into a panic. I believe that if it hadn’t been the coronavirus, it would have been some other trigger.

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When this has happened in the past, my approach has been to look for opportunities to improve our clients’ portfolios. In 1987, when I was just starting in finance, I observed the 23% one-day drop in the primary Industrial Index, the Dow Jones. Since then, there have been numerous opportunities to watch investor psychology in action.

Things to keep in mind:

  • It’s usually best to stay invested
  • Diversification doesn’t necessarily prevent short-term declines but it does stabilize your portfolio
  • When fear is at its peak in the financial markets you can be strategic and use the opportunity to strengthen your investment portfolio

On our agenda for the next few days/weeks:

  • Looking for ways to reallocate tax-efficiently by transferring in-kind from Non-Registered cash accounts into Tax-Free Savings Accounts (TFSAs)
  • Looking for ways to reallocate tax-efficiently by transferring cash from RIF/LIF accounts into Tax-Free Savings Accounts (TFSAs)
  • Investing cash currently held within accounts
  • Reviewing source of monthly withdrawals for retirement income payments

On days like this, history can offer some helpful reminders.

The source for the following is PlanPlus Global using as an example a portfolio that is allocated 30% defensive (cash and fixed income) to 70% growth (equities), for the period January 1, 1973, to December 31, 2019,

There were a total of 73 rises but 79% of these, 58 in all, were less than 10%.

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There were 72 falls of one month or longer but nearly all were less than 10% and about two-thirds of these lasted only a month.

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The information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Jan Fraser, Life Aligned Investing of Aligned Capital Partners Inc. (ACPI) from sources believed to be accurate. The opinions expressed are those of the author and do not necessarily represent those of ACPI.

5 steps for smart investing in 2020

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We are living in unpredictable times. Disruptions abound in every sphere – social, political, economic, technological, environmentalFinancial decisions are more difficult due to increased risk and complexity. Future planning is more and more challenging for government retirement systems, private pension plans, and individual investors.  

How has investing become more challenging for you?

RETIREES
In a world where interest rates are not much above zero – and in some countries below zero, how do you generate a reliable retirement income stream for an uncertain but potentially lengthy lifespan?  How do you invest to obtain sufficient cash flow while preserving your wealth? 

PRE-RETIREES
If retirement is on your horizon, how do you confidently grow your wealth to ensure that you’re there – enough for a long and joyful retirementwithout worrying about the impact of market changes?  

PEAK EARNERS
If you are at your peak 
earning potential in your career, how do you translate your current success into an investment strategy for wealth accumulation? 

BUILDING CAREER AND FAMILY
If you are building your career and family, how do you create a nest egg for a sustainable future that is also in harmony with the needs of a changing world?   

Our role as an investment advisory firm is to understand the emerging trends, not necessarily to make market forecasts. It is to help you be prepared for the future, however it unfolds. That is why it is useful to explore forward-looking projections based on different “What if?” scenarios, and to focus on things within your control. 

Implement these five simple steps to make smart decisions through 2020 and beyond in order to accomplish your investment objectives 

1. Know what is most important for successful investing.  

Define the elements of your investment strategy by characterizing them according to one or more of the following six factors you want to emphasize in your portfolio. 


Dividend
– Companies that distribute higher than average profits to investors
 


Value – Securities that are undervalued in the marketplace


Size – Smaller firms with high growth potential


Momentum
– Large and mid-cap companies with an upward price trend


Quality
– Stable companies with healthy balance sheets


Low Volatility
– Securities with lower risk and less price fluctuation
 

Focus on the factors that most effectively address your situation, not what the media may be promoting as the latest and greatest opportunity.  

__________________


Sustainability – You may also want to consider sustainable investing, where holdings are screened according to ESG criteria (environment, social and corporate governance).


2. Diversify your investment holdings
 as much as is reasonably possible across asset classes; rebalance as needed. 

Maintain an asset allocation that will enable you to accomplish your goals. Each asset class comes with its own particular risk and reward profile. Diversification helps smooth out the ups and downs as each asset class responds differently to changing conditions. Select asset classes and specific investments that meet your risk tolerance and your return objective while offering the greatest likelihood of success. 

3. Understand how your investment portfolio is constructed and what to expect.  

You may find it beneficial, for example, to know the range of results that have been achieved historically for your chosen asset allocation. Clarity fosters confidence and a greater sense of control. You are more able to filter out the noise of the market chatter. 

4. Have an Investment Policy Statement (IPS) in place to help guide your decisions. 

An IPS sets out your investment objectives, the boundaries for your portfolio and the rules to be followed when making changes to your asset allocation and investments. It helps to reinforce decisions, why they were made, and the circumstances under which they will be adjusted. Particularly for more complex portfolios, a written Investment Policy Statement helps to keep everyone rational and accountable. 

5. Be ready to act on defined triggers. 

Here are some examples of defined triggers.

Add to your investment in this stock if/when the price drops by more than 15% from initial purchase price … or 

Increase the allocation to international equities by X% if/when the US dollar declines by Y% or more against the Euro  or  

Switch from US equities to Canadian equities gradually over the next year to achieve strategic target of 15% … or  

For income tax purposes, minimize the taxable capital gains in open, non-registered accounts by using your TFSA and ETFs where appropriate …. or 

Increase the cash or near-cash in your open, non-registered account at the beginning of each year, in readiness for the annual withdrawal for your life insurance premium … 

 

Applying the steps

With a full suite of investment products, we are able to rebalance portfolios by adding individual stocks, ETFs and alternative strategies to the asset mix, where appropriate and desired, in a cost-effective manner. If you understand what you own, why you own it and the basis upon which changes will be made, you can expect to enjoy many years of successful investing regardless of market twists and turns. 

 

The information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Jan Fraser, Life Aligned Investing of Aligned Capital Partners Inc. (ACPI) from sources believed to be accurate. The opinions expressed are those of the author and do not necessarily represent those of ACPI.

Making sense of rates of return

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Financial Services has an abundance of acronyms and glossary terms that can be downright confusing. Even something as seemingly straightforward as the rate of return isn’t without a certain level of complexity.

The most important consideration is how you intend to use the information.

  1. Are you assessing the performance of the portfolio manager?
  2. Are you evaluating your personal rate of return?
  3. Are you most interested in long-term performance, looking for shorter-term buying opportunities, or assessing whether it’s time to take some profits?

There are two commonly used methods for measuring the rate of return of a portfolio: time-weighted vs money-weighted. Both are informative depending on your purpose.

When you look at the profile of a specific investment fund, you are seeing the time-weighted return. We often use data provided by independent research firms such as Morningstar and Fundata to evaluate funds (managed portfolios).

When you look at your own portfolio summary, you are seeing the money-weighted return. We always report net of fees so it is the true measure of your investment performance taking into consideration related costs.

See the following examples to understand the differences if you’d like to delve further.

 

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Determining which portfolio managers you want to have managing your money and when you want to invest are informed by these types of calculations.

Hope this is helpful if you are puzzled by different rate of return calculations. If you have any questions, you can always call us.

 

*Graphics adapted from CI Investments’ “Making Sense of Your Investment Performance”

 

The information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Jan Fraser, Life Aligned Investing of Aligned Capital Partners Inc. (ACPI) from sources believed to be accurate. The opinions expressed are those of the author and do not necessarily represent those of ACPI.

“And how will you be paying?”

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Black Monday Headlines The New Your Times

click image to enlarge

October 19th marked the thirtieth year since that famous day in 1987, when the US S&P 500 Index declined over 20% in one day. It’s known as Black Monday. I was just starting my career in financial services. I remember the news coverage and the total panic. This definitely wasn’t what I had signed up for, but it was a valuable lesson in the power of investor psychology.

If you want to learn more about that prominent day in the history of investing, see the New York Times article by Robert Schiller who studied investors’ behaviour following Black Monday. (Schiller won a Nobel Memorial Prize in Economic Sciences in 2013.)

Much has changed in finance in those thirty years since Black Monday.

We now have financial technology (FinTech) automating and accelerating the pace of money flows in the capital markets. There are thousands of publicly traded individual securities and managed portfolios (mutual funds, segregated funds, private investment pools, exchange traded funds), and a plethora of other hybrid investment vehicles that are competing for your attention.

FinTech has literally transformed our day-to-day banking experience. Remember when you saw your first automated banking machine? Pay bills online, take a picture of a cheque and send it electronically to your bank account? Really?? Now these activities are commonplace, part of our banking routine.

If you take a look at the industry updates we’ve posted this year (we only post a few of those most relevant), you can see that FinTech along with regulatory reform are causing enormous disruption in the financial services sector. With the invention of cryptocurrencies FinTech promises even more dramatic change aheadThese virtual currencies have the potential to replace the currencies of individual countries — and the banking system as we know it!

BitcoinThe first such digital currency was Bitcoin, invented in 2008 as a global means of payment. Transactions are done through peer to peer networks without the need of a bank, making it the first decentralized digital currency. In spite of the graphic, this isn’t a physical coin that you can put in your pocket. Bitcoin is virtual.

Speculators have been captivated by this innovation. With high volatility in the price of a Bitcoin (in USD up this year from $967.07 on Jan 1 to $6,400 Oct 31/17), you can imagine that fortunes have been made and lost already trading on this financial technology. Bitcoin could become the cyber equivalent of gold. It could also be a perfect example of a FinTech mania and go the way of the tulip bulbs in Holland (Tulip Mania).

Maybe other competing cryptocurrencies will prevail – Ethereum, or Dream, or Ripple… We’ll keep you posted on developments. For now Bitcoin is in the lead.

“And how will you be paying?” Someday, maybe sooner than you think, your reply just might be … “in Bitcoin please”.

As we move into the final weeks of 2017, take the time to review your current financial picture. Make sure everything is organized before year-end. Even if it’s not bitcoin, you’ll need some kind of coin to keep ahead of your taxes and everything else that goes into the business of life.

If you have any questions on your overall life plan, your portfolio or tax position, please call us. We’d be glad to hear from you.

 

The information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Jan Fraser, Life Aligned Investing of Aligned Capital Partners Inc. (ACPI) from sources believed to be accurate. The opinions expressed are those of the author and do not necessarily represent those of ACPI.

The Pendulum Swings

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Whether you’re heartened or disheartened by the election of Donald Trump as President of the United States, one thing is clear – the pendulum has swung hard to the right. It’s not easy to sift through the conflicting policy statements to discern what the Trump anti-establishment, pro-business position actually is. He was elected on promises of –

  • big tax cuts (in corporate, personal, estate, and capital gains),
  • deregulation of health care, energy, and financial services,
  • renegotiation of trade agreements, and
  • fiscal stimulus (federal support for infrastructure projects).

Actions taken to date suggest a change agenda that extends far beyond the borders of the U.S.

How Canadians will be affected remains to be seen. The fear of a trade war with the United States has been lessened by the apparently cordial meeting this week between “Joe” Trudeau and Trump.

The financial markets have responded enthusiastically to the election of Trump, in spite of social and geopolitical concerns. The markets have been on a sugar high with the prospect of massive tax reforms, deregulation, and infrastructure spending. It’s great to get a surge in the markets, but remember the role of diversification in achieving solid, risk-adjusted returns over the long-term. For a reality check note the following guidelines published by the Financial Planning Standards Council (FPSC) in 2016 in terms of portfolio performance expectations over the long haul.

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To view the full FPSC Projection Assumption Guidelines report, click here.

Change is in the Air

While the U.S. Administration has promised to lighten the regulatory burden on financial services, sweeping reforms here in Canada are geared toward tightening the regulations. These are some of the major changes we’re seeing.

1. Consolidation within the investment industry and within the product offerings of those investment firms.

A recent example of this trend is the sale of Scotiabank’s subsidiary, HollisWealth, to IA Financial Group. IA Financial is also the parent company, FundEX Investments Inc. Through a series of acquisitions, IA Financial has become prominent in wealth management in Canada with close to $800 billion of assets under administration (including $11 billion that advisors associated with FundEX oversee on their clients’ behalf).

It’s important to have a broad array of investment choices, but with over 53,000 investments tracked on the Fundata research platform it’s clear we have way more than we need. Some consolidation is certainly welcome.

2. Lower fees on managed portfolios, including all types of mutual funds, segregated funds, exchange-traded funds, private investment pools, private wealth programs.

Competition is increasing. Investment firms are tightening their belts. To obtain a competitive edge they are rationalizing their offerings and launching new “preferred” pricing options, private investment pools, and private wealth programs — all more or less synonymous with lower management fees.

3. Better packaging of information for investors on investment risk, returns and costs  

For each of their fund offerings, investment firms are now required annually to publish a concise, easily understood document called Fund Facts. You may have already received some of these documents.

4. Transparency on the cost of advice and service 

We welcome the greater transparency on fees.

There is a debate in the industry over how advisors should be compensated – embedded fees (bundled within the cost of the investment) versus fee-for-service (FFS) (unbundled from the specific investments held in your portfolio). Rather than restrict the choices investors have when it comes to method of payment, I’d prefer to see the regulators raise the bar in terms of practice standards and let investors find the service that’s right for them.

The challenge in relying on practice standards lies in the difficulty of measuring success in a financial advisory relationship. Our work is not just transactional. We don’t simply meet with you and pitch the product that’s the flavour of the month.

  1. We strive to get to know you as a whole person – your values, stage of life, family, time horizon, risk tolerance, personal financial resources, tax, hopes and dreams, your mindset about money and resilience in the face of change.
  2. We bring our knowledge, expertise, and vigilance regarding regulatory, market analysis and product analysis, so that you get the best possible benefit from what’s available to you along the way.

From my perspective, advising is values-based and personal. It isn’t just a few calculators thrown up on the monitor to determine your financial destiny. It is the human element intertwined with technical expertise that matters. We may not always be popular because we’re not always going to tell you what you want to hear. You can depend on us to voice what is real and also to explore a range of possibilities from a place of understanding.

We’re gradually transitioning to a fee-for-service model, which represents an unbundling of the cost of investment advice from the specific investments in your portfolio. There are pros and cons to FFS. It won’t be worthwhile for all of our clients to make the change, but it’s an option for everyone.

Key benefits in using a fee-for-service structure:  
1) tax treatment – the fees on open/non-registered portfolios are tax-deductible (all or in part, depending on the situation);
2) the fee-for-service fund versions in most cases are somewhat less expensive and you can enjoy a small saving on the cost of portfolio management – click here to view an actual comparison;
3) no real or perceived conflict of interest;
4) fees can be negotiated directly between the advisor and the investor (within limits placed by the firm).

Other things to think about: 
1) tax laws can change – the carrying charges for investment advice are going to be scrutinized (remember when you could deduct safety deposit fees?);
2) there is ample research to demonstrate that financial planning pays off; clients may look at the cost of the advice without considering the benefits gained from the relationship with an independent advisory team;
3) clients could end up paying more when the fees are negotiable than when they are fixed and embedded;
4) some investors may no longer have access to an independent advisory service; it may not be financially viable for the advisor to work with clients who have small amounts to invest.

The following table compares embedded fees vs fee-for-service (FFS) with an unbundled advisory fee (assuming 1% in this example) on a $100,000 investment. We compared 4 of Fraser & Partners top mutual fund holdings with different characteristics to illustrate cost differences based on the type of fund.

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“When the winds of change blow, some people build walls and others build windmills.” ~Chinese proverb

In an environment of accelerating change some things stay the same – including our dedication to helping you navigate the complexities of life along the way.

Let us know if you have any questions or concerns.

 

The information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Jan Fraser, Life Aligned Investing of Aligned Capital Partners Inc. (ACPI) from sources believed to be accurate. The opinions expressed are those of the author and do not necessarily represent those of ACPI.

New Rules for Corporate Class Mutual Funds and How They Affect You

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New Deadline on Changes to Taxation on Corporate ClassAt the beginning of the year, we hosted round table discussions to help you set your planning agenda for 2016. We discussed income tax changes being implemented by the federal Department of Finance and the potential impact on investment planning.

With the change in tax rules, it is more important than ever to think strategically about the type of income you will earn on your investments and to then position your portfolio accordingly. Initially, the government intended to change the tax treatment of corporate class mutual funds effective September 30, 2016. They have since extended the deadline to January 1, 2017 – a welcome reprieve in a year of many changes in the financial sector. 

Tax Treatment of Income Earned on Your Investments

You are aware that interest, dividends, and capital gains all receive different tax treatments. Interest earned in non-registered accounts is treated the same as employment income. For example, if your combined federal and provincial marginal tax rate is 37.90%, you pay 37.90% tax on all interest earned.

Capital gains are treated differently. A capital gain happens when you sell or transfer capital property, such as stocks, mutual funds or real estate at a price higher than you paid. For example, if you bought $10,000 of units of Investment Fund A and sold those units two years later for $15,000, you have a capital gain of $5,000. Although there are a few exceptions, in most cases this gain is taxable, but you only have to declare for tax purposes only 50% of the actual gain. In this case, you pay tax on the $2,500, not the entire $5,000. The result is you pay less tax on capital gains than on interest.

In the chart below, you can see that if you are a Manitoba resident and your taxable income in 2016 will be between $67,000 and $90,563, it will be more tax efficient if you earn capital gains (18.95% marginal tax) rather than eligible Canadian dividends (20.53% marginal tax).

 

Manitoba Personal Income Tax Brackets and Tax Rates

For investors who use mutual funds, one way to reduce the tax burden is to invest non-registered money in investment funds that are held within a corporate class structure. Mutual funds can be organized as trusts or corporations.

Historically, corporate class mutual funds have had two main benefits:

  1. Less investment income to be reported annually as taxable income. This is because corporate class funds usually reinvest their interest and dividend income or use this income to pay fund expenses.
  2. No capital gain or loss triggered as a result of switches between different fund classes within the corporation. For example, if you have money invested in class A units of Corporate Fund X, at this time you can switch some or all of that money to class B units of Corporate Fund X without triggering a taxable gain or loss.

If you would like more information about capital gains and how they are calculated, visit CRA’s website: http://www.cra-arc.gc.ca/capitalgains/

Changes to Tax Treatment of Corporate Class Mutual Funds

The federal government has decided switching between different classes within the same mutual fund corporation will now be considered a taxable event. If you have a gain in class A fund, and you want to rebalance your portfolio by moving some of this money to class B, you will have to declare that capital gain.

Originally, this change was to take effect in October 2016. The federal government has moved the date to January 1, 2017. The old rules still apply for the remainder of this year.

There will only be two exceptions to this new rule. If the change in class happens because the fund itself restructures and converts all class A shares to class B, there is no tax implication for the investor. Also, if you move from the same class of fund but into a different series, there is no tax implication. The difference between one series and the next is usually the fee structure. The government won’t penalize investors for trying to have the exact same funds at a lower fee.

According to the Globe and Mail, “Approximately $120 billion of industry assets under management (AUM) are in corporate class funds, representing 10% of total mutual fund assets in Canada.” Therefore, many people will be affected by this change.

Review Your Non-Registered Investments with Your Advisor Before December 31, 2016

While corporate class funds still offer the advantage of using interest or dividends to offset fund expenses, you won’t be able to rebalance your portfolio free of tax implications come 2017. It will be critical for you and your advisor to review your non-registered investment funds so you can make appropriate changes before the new legislation comes into effect. In light of this change, you will need to think more strategically about how to construct your non-registered portfolio and how to manage it tax efficiently.

We’ve been working hard over the past few months to evaluate the great number of changes that investment firms have been making in their offerings. In studying these trends we’ve been able to confirm strategies that will enable you to position well for the years ahead. If you have non-registered investments, please contact us to schedule an appointment before the end of the year.

 

The information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Jan Fraser, Life Aligned Investing of Aligned Capital Partners Inc. (ACPI) from sources believed to be accurate. The opinions expressed are those of the author and do not necessarily represent those of ACPI.

Carpe Diem! Volatility-not so bad after all

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Time_800pxRecent weeks in the financial markets have been dramatic. On August 10th the People’s Bank of China devalued the Chinese renminbi (yuan) and this unleashed an irrational flood of panic selling. While you may not share this sentiment, I have to confess I was glad to see some volatility returning to the financial markets. Typically that’s the time when your portfolio managers shine! It’s also a time when we at Fraser & Partners apply additional specific criteria in monitoring the investments you own. What we see will either confirm or prompt us to re-evaluate the investments we are recommending.

Every year we have events that trigger stronger than normal waves of buying or selling within the markets. This is a normal part of investing.

This is also when the stampede starts. It’s often referred to as “the herd mentality” – stronger than ever in this digital world of instant communications. Those who study finance understand that economic factors account for only 17% of stock market increases or declines. What about the other 83%? It’s the “herd” – the human factor.

Your portfolio managers are trained to seize opportunities during a stampede, whether it’s fueled by greed and optimism or fear and pessimism. We’re seeing lots of pessimism right now in terms of the energy sector and also emerging markets.

Have we hit the point of maximum pessimism? Take a look at the graphic below and watch for the signs of capitulation and despondency. Although it may seem counter intuitive, it is at this point in the cycle of market emotions that a value-oriented portfolio manager will be able to acquire high-quality investments with the greatest margin of safety.

Market Emotions Diagram

On August 24th I received an email from a portfolio manager. Included was a list of the top 10 holdings in one of their equity funds along with the price swings that had occurred in the share value of each of the 10 companies in one day. JPMorgan Chase & Co. was on the list. During the day this stock had opened at $50.07 per share and closed at $62.92, a change of 26%. If the manager was able to buy close to the low and sell close to the high, then it was a good day. By taking advantage of such price swings throughout the trading day, that manager was able to capitalize on the volatility for the benefit of investors. If the manager had a larger than normal cash position that day, even better!

When we evaluate investments during a period of volatility, we study the level of cash in the investment funds. For example, when we look at three of the equity funds that our clients own, we see that Equity Fund #1 had a cash level of 12% at the end of July; Equity Fund #2 had almost 40% and Equity Fund #3 had less than 5%. The third investment was already on our watch list because of inconsistent performance in recent periods. Based on our experience we do not expect that this fund will be able to provide as strong a return relative to the other two. We’re not naming specific investments in this blog, but if you own Equity Fund #3, over the next few weeks we will be contacting you to recommend a switch to a stronger holding.

Even if there is more decline ahead, it’s time to put your cash into the hands of the portfolio managers. They have a disciplined process. They know how to assess the value of the companies in which they are investing. They will be using this period of heightened volatility to strengthen the portfolio for strong long-term performance.

If you haven’t already done so, in keeping with your investment strategy, make your 2015 contribution now to your TFSA, RRSP, RESP. Let the portfolio managers take it from here. Call or send an email to your advisor to make arrangements.

 

The information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Jan Fraser, Life Aligned Investing of Aligned Capital Partners Inc. (ACPI) from sources believed to be accurate. The opinions expressed are those of the author and do not necessarily represent those of ACPI.