Archive for May, 2009

This and That: The cost of thrift, market recovery and more…

May 29, 2009


Thread of the Week: If you are interested in bonds, check out this thread on bond basics on the Canadian Money Forum. You can browse the discussions on the forum but you need to register to post your thoughts.

  1. The age of thrift reportedly sweeping the continent is having some unintended consequences. The New York Times on how saving money ends up costing some people even more.
  2. Jason Zweig on what Ben Graham would say about stocks moving from the edge of the bargain bin to the full-price rack in a matter of weeks.
  3. Jon Chevreau interviews three pension experts to find out the implications of recent changes made to the Canada Pension Plan.
  4. Rob Carrick reminds readers to update their insurance when making expensive additions to their home.
  5. Ma Bell makes Michael James an offer he could easily refuse.
  6. Million Dollar Journey finds out that it pays to check store receipts for mistakes.
  7. Remember how bloggers were hyperventilating over peer-to-peer lending and wondering if it could replace fixed income portion of their portfolio? Mr. Cheap wrote about the dark side of being a micro-banker.
  8. Just reading it makes my head hurt. Preet runs some experiments with shorting double-exposure ETFs.
  9. Get Money Energy came up with a list of things to feel rich that has nothing to do with the bank balance.
  10. Riscario Insider shares the nuggets of wisdom he found in “Get Smarter” (a book by Seymour Schulich).

Have a great weekend everyone!

Playing devil’s advocate on Cymbria (CYB)

May 28, 2009


[A financial advisor, who wishes to remain anonymous, sent the following e-mail on reading my post on Cymbria. I’m publishing it with permission to present the other side of the story.]

I don’t know if I share the rosy feelings on Cymbria (TSX: CYB) that some advisors and media might. To best explain, let us look at this deal by playing devil’s advocate. According to an inside source, the Cymbria deal was peddled to advisors behind the scenes as a way to make money (once again) for advisors at the expense of investors. How? Advisors who bought into the offering, get a 3% selling concession, plus getting 1% trailer for seven years thereafter (and getting low cost management of 1% after that) and now they have an incentive to sell Edgepoint funds to their clients: they get traditional compensation and get to participate the in the profit of the manufacturer (Edgepoint Wealth).

The terms of the Class A shares (editor’s note: these were offered to the public) was a service fee (trailer) of 1% for the first 7 years.

The management fee was 0% for the first three years, 0.75% for the next 4 and then 1% thereafter.

This means that the subscribers (advisors) pocket 10% in commissions for the first 7 years (3% up front and 1% for 7 years), and then get a fund managed for 1% thereafter. I don’t know if the fund planned to borrow money to fund the commissions or if the subscribers are essentially paying themselves out of the NAV, but it looks like it was setup so that if they bought it themselves, they are not out any real money, but if they sold to clients they get fat commissions.

My guess is that they bought it for themselves, not focusing on the commissions, but rather on the equity in Edgepoint Wealth, which they now have an incentive to peddle with vigour (commissions PLUS profit sharing? This is a bit much don’t you think?). The fees on the retail open-ended funds (i.e. EdgePoint Mutual funds) are not low. Look at the annual report for the Canadian fund: before management absorption, MER was 15.77%. After absorption, it was still 3.01% (looking at the low load shares). Trading costs were a further 5.04%, giving a TER of 8.05%.

Now a new fund is going to have high expenses and anomalously higher MERs for the first few years, especially since there was something like only a few million in the fund. But, as the MER approaches the management fee, it can still not get below 2% and more likely will settle into the 2.2% range once they get scale.

The low turnover rate of 1.79% is meaningless in the first few years as well since portfolio turnover is based on the lesser of buys or sells of securities divided by total assets. I do know many large advisor teams bought into Cymbria and now are selling EdgePoint funds. I just don’t know how many offered their clients the same deal.

Claymore Gold Bullion Trust (CGL.UN)

May 26, 2009


I have no views as to where it [gold] will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot–and it’s a lot–it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that. The idea of digging something up out of the ground, you know, in South Africa or someplace and then transporting it to the United States and putting into the ground, you know, in the Federal Reserve of New York, does not strike me as a terrific asset

— Warren Buffett on CNBC’s Squawk Box on March 9, 2009

Claymore has filed a final prospectus for a new ETF that aims to track the price of gold bullion in US dollars. The ETF achieves this by purchasing and holding physical gold bullion and hedging the fund’s USD currency value back to Canadian dollars. The ETF will trade on the TSX under the ticker symbol CGL.UN. The MER of the fund is capped at 0.50%. However, according to the prospectus, the expense cap excludes “the implementation and on-going operation of an independent review committee under National Instrument 81-107 – Independent Review Committee for Investment Funds (“NI 81-107”), brokerage expenses and commissions, income taxes and withholding taxes, gold settlement fees and any extraordinary expenses.” If past experience with hedging is any indication, hedging is likely to add another 1% in expenses, bringing the total expenses in the range of 1.5%.

As I explained in this earlier post, I’m not sold on the rationale for holding gold in a portfolio. To the extent that an investor wants to add gold bullion to their portfolio and doesn’t care about currency fluctuations, cheaper options such as the SPDR Gold Shares (GLD) (MER of 0.40%) or Central Fund of Canada (which holds silver in addition to gold, has incurred expenses of 0.30% and trades under CEF.A on the TSX) already exist. Investors who would simply like some disaster insurance might simply want to purchase gold bullion such as maple leaf coins or gold bars directly from a dealer and hold them in physical form.

Note: The Personal Finance Clinic has attracted some interesting questions but there may be room for some more. The Clinic closes on May 31, 2009.

Update: The following sentence in the original post was incorrect: “The management fee for the fund is 0.50% and the operating expense is capped at 0.50% for a MER of about 1%”. Som Seif pointed out that the MER of the fund is capped at 0.50% and the post has been edited to reflect the correct information.