Archive for November, 2009

What are these home owners thinking?

November 18, 2009


We are just recovering from a punishing recession in which millions of jobs were lost and portfolios were decimated by a market downturn. Across the border, home owners are defaulting on their mortgages in record numbers because they loaded up on mortgage debt at teaser rates and are unable to make mortgage payments when the rates reset at a much higher level. Therefore, it is surprising to read that many Canadians refuse to learn from recent experience and are loading up on long amortization, variable-rate mortgages at record low interest rates. The Globe and Mail reported today that mortgage brokers are doing brisk business as many first-time home owners rush in to take advantage of today’s (probably temporary) low rates:

It’s these buyers who have raised fears of a bubble, negotiating mortgages at historic lows, opting for 35-year terms and making small 5-per-cent down payments to keep monthly outlays down and put previously unaffordable homes within their reach.

“They are taking advantage of things that are a lot more attractive initially but they could find themselves in a position where they couldn’t afford their mortgage if rates start to go up,” Mr. Averbach says.

This report comes in the wake of a recent interview The Toronto Star conducted with Peter Aceto, CEO of ING Direct Canada:

Aceto said he is so concerned about the market that he has instructed staff to advise customers not to go with longer-term amortizations if they can help it. More than 50 per cent of all mortgages in Canada this year were amortizations longer than the standard 25 years, says Aceto.

As a result, the lender said he is worried that some consumers are biting off more than they can chew.

Those who fail to study history are condemned to repeat it. Those who ignore very recent experience are just being stupid.

New PowerShares Mutual Funds

November 17, 2009


Unlike Mackenzie, which opted for a strategy of attacking the enemy, Invesco Trimark is adopting a strategy that can only be described as “if you can’t beat them, join them”. As Jon Chevreau reported yesterday, Invesco Trimark has launched mutual funds that hold US-listed PowerShares ETFs and pay a trailer fee, which would make it attractive for the advisor channel.

It is hard to get excited about these new-fangled mutual funds because rather than providing investors with a genuinely better product, Invesco Trimark’s approach smacks of a fund company trying to cash in on a hot trend. The first thing you notice about these funds is that five of the six new funds track narrow, niche sectors such as Agriculture, Water, Precious metals, Clean Energy and China –hardly the first, or for that matter, last, choice of index investors.

The funds are also pricey — the cheapest fund sports a fee* of 1.65% and all the funds are front-end loaded. The new fund line up has just one fund that can be called broad market: the PowerShares FTSE RAFI Emerging Markets. It has a fee, excluding operating expenses and taxes of 1.90%. In comparison, a financial advisor licensed to sell stocks and charging a 1% fee would be able to capture emerging market exposure for less than 1.5% including MERs and trading commissions.

Investors should keep in mind that the ideal ETFs track broad-market indices efficiently at a very low cost. All other ETFs or mutual funds holding them should be approached with caution.

PS: Rob Carrick says these mutual funds are taking ETFs to the masses.

PPS: Michael James isn’t impressed with the new funds: “they walk and talk like mutual funds, but advisors can call them ETFs”.

Derek Foster Attempts a Comeback

November 15, 2009


I was a big fan of the Getting Going column that Jonathan Clements used to write The Wall Street Journal. Mr. Clements does not write for the Journal anymore but he has a book out called The Little Book of Main Street Money: 21 Simple Truths that Help Real People Make Real Money. The book isn’t exactly new (published in June 2009) but I’ve been meaning to read and review it — Mr. Clements is a terrific writer and anything from his oeuvre is worth reading. I dropped into a Chapters store near my home hoping to pick up a copy of the book but instead I stumbled on a new book by Derek Foster “Stop Working too: You Still Can!”

Regular readers might wonder why I would waste any more time or pixels on Mr. Foster but I confess to the same morbid curiosity displayed by drivers slowing down to rubber neck at a crash site. I did not buy a copy of the latest book but I did browse through it. Here are the highlights:

  1. Foster has ditched the “Canada’s Youngest Retiree” tag and is now calling himself “Canada’s Millionaire Investor”. Which begs the question: Didn’t he claim in the first book that even young retirees don’t need anywhere near $1 million to retire?
  2. If you ignored Foster’s background, you would concede that the book isn’t bad overall. The book is filled with conservative tips: negotiate a discount from the posted rate on the mortgage, take advantage of mortgage pre-payment privileges, don’t take on credit card debt, invest in TD e-Series funds and ETFs, check out DRIPs, construct your own Principal-Protected fund, etc.
  3. Believe it or not, you’ll even find some discussion on risk. For instance, Foster even acknowledges that his “money for nothing” strategy has a “catch” — an investor could miss out on substantial gains. He should know: stocks are up 30% (excluding dividends) since he sold his entire portfolio to implement a strategy of selling put options.

There is little to quibble with the do-as-I-say part of the book but Foster maintains that “his strategy” of dividend-growth investing is still working even though he got off that train earlier this year. Overall, this isn’t a bad book but with the beating that Foster’s credibility has taken, I wonder if this will be as successful as some of his earlier books.