Archive for August, 2006

Pitfalls of the Sleepy Portfolio

August 23, 2006


Larry MacDonald, columnist for Canadian Business magazine, has kindly included the Sleepy Portfolio in an article on Canadian “lazy” portfolios. While the Sleepy Portfolio is very simple to assemble, there are some pitfalls to be aware of:

  1. As I use the Sleepy Portfolio to benchmark the returns of my personal portfolio, its asset allocation makes sense for my personal situation (young, aggressive, growth-oriented investor) and will not be suitable for someone nearing retirement. In other words, you should tweak the allocation so that it makes sense for your circumstances.
  2. When the portfolio was launched, foreign content in retirement accounts was capped at 30%. If I were launching now, I would replace the XSP and XIN with their US counterparts IVV and EFA, as they are cheaper to own and hedging currency exposure is probably unnecessary over the very long term.
  3. I would also replace the small-cap Russell 2000 index fund with the iShares S&P SmallCap 600 index fund (IJR) for reasons elaborated in this post.
  4. As Mr. MacDonald points out in his article, the portfolio has a large allocation to mid-caps (20%) and small-caps (7.5%). This is deliberate as the returns of small-cap stocks are greater than that of large-caps over the long-term (with higher risk). Again, such a high exposure may not be appropriate for less risk-tolerant investors.
  5. At 45%, the portfolio is over-weighted in foreign equities. I feel that such a high exposure is warranted because Canadian equities are dominated by just two sectors: finance and resources. Investors looking for exposure to sectors such as consumer staples and health care are forced to look elsewhere.

Avoiding High Mutual Fund Fees

August 22, 2006

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Canadians can vote with their wallets by avoiding mutual funds that charge outrageous fees and invest their money in lower-cost alternatives such as:

  1. Low-cost mutual funds like those from Vancouver-based money manager Phillips, Hager & North. PH&N’s bond fund charges fees of 0.59% compared to 2.36% for the median Canadian bond fund and 1.16% for its Canadian Equity fund (compared to 2.81% for the median stock fund).
  2. Low-cost index mutual funds offered by TD eFunds (for smaller portfolios) and CIBC Mutual Funds (for larger portfolios).
  3. Numerous ETFs that track a mind-boggling variety of asset classes are available from providers such as iShares (Canada and United States). My benchmark Sleepy Portfolio is largely constructed using ETFs.
  4. Patient investors who have the time and the inclination to research equities can build a portfolio of stocks and bonds. Investors who need some help can use the services of newsletters like The Investment Reporter and The Successful Investor.

Mutual Fund Fees

August 21, 2006


Jonathan Chevreau, personal finance columnist for The National Post, has highlighted a study that points out that mutual fund fees in Canada are the highest in the world. It is widely known that mutual funds domiciled in the United States are cheaper, but the fund industry has argued that there are economies of scale in operating in the United States. But the new study points out that the fees charged by the median fund in Canada is the highest among 18 countries covered by the study in every fund category.

The fund industry would no doubt spin the report, trotting out lame excuses as to why it is expensive to operate in Canada. But, the bottom line is that it will be tough for Canadian mutual fund investors to accumulate a decent nest egg for retirement while paying 2.36% for the median bond fund and 2.81% for the median stock fund in fees every year.

The Canadian mutual fund industry will not change its merry ways if investors are apathetic about the fees that come out of their pockets. As Mr. Chevreau writes in a blog post: “the only way fees would come down in Canada would be if consumers voted with their wallets for lower-cost funds.”