Archive for August, 2012

This and That: High-Frequency Trading, Cottage Ownership and more…

August 30, 2012

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Wired magazine ran a story on high-frequency trading (HFT) in which computers execute thousands of trades maniacally hoping to earn profits of a fraction of a penny per share. The story details the lengths that Wall Street firms go to earn a few microseconds advantage over their competition. Hat tip to the Canadian Money Forum for sharing this article.

But before we think that we should put an end to speculative activity in the stock market, we should recall that thanks to electronic trading, transaction costs for retail investors has come down quite significantly, says financial advisor Equius Partners.

It’s not just Canadians who are chasing investments that sport a high current yield. Jason Zweig of the Wall Street Journal reported on the curious case of royalty trusts that trade in the US for far more than they are worth.

SmartMoney magazine is closing down its print edition and going digital. In its final print issue, the magazine staff shared lessons they have learnt over two decades of putting out a financial publication.

This article in the Financial Post argues that for many Canadians owning a cottage where they spend summer weekends and a couple of weeks vacationing just doesn’t make financial sense.

It was hard to escape news about the Canadian banks this week. The big five reported total profits of $7.8 billion in their latest quarterly report — enough to buy Tim Hortons outright and have some change left over to buy some double-doubles. Also, every one of the big five boosted their dividend payments to shareholders. If you own a fund like XIU, you are covered: the big five represent more than a quarter of XIU’s holdings.

Scotia Bank announced this week that it is acquiring the pioneering online bank ING Direct. Scotia Bank is making the right noises about keeping ING Direct largely intact and one hopes that the big red will follow through once the acquisition goes through.

The Star’s Ellen Roseman reported on a heart-breaking story in which a Group RESP subscriber lost more than 90 percent of his investment to fees due to the tragic death of his child.

The New York Times reported that with manufacturing jobs disappearing, it is women who bring home the bacon in many families these days.

And now for something different. This TV anchorman is probably wondering if he should have consulted a dictionary before using an unfamiliar word on the air.

Canadian Stocks Paying US Dollar Dividends

August 22, 2012

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Imagine for a moment that Joe Canadian purchases shares in Encana (TSX: ECA) on the Toronto Stock Exchange. Joe holds the stock in the CAD side of a taxable investment account. It so happens that Encana, like many other Canadian resource companies pays dividends in US dollars. When Joe receives Encana dividends in his account, his broker will charge a hefty foreign exchange conversion fee and deposit Canadian dollars into Joe’s investment account.

The disclosure of exchange fees charged on dividends received in a currency that is different from that of the holding account leaves much to be desired. TD Waterhouse, for instance, adds the note “CONVERT TO CAD @ x.xxx” to such dividend payments in the activity screen but if you look at the monthly brokerage statement, there is no indication that dividends were converted and foreign exchange fees charged. Therefore, Joe might remain blissfully unaware that a foreign conversion fee is being charged on dividends that he receives.

Fortunately, Joe can take some steps to avoid at least some of the foreign exchange fees on his dividend payments. If a Canadian stock pays dividends in US dollars, Joe can contact his broker and request the shares be journaled to the USD side of the account. Dividends received after the shares are journaled will remain as US dollars and will be credited to the USD investment account. The reverse is also true. If a stock purchased on an US exchange pays dividends in Canadian dollars (Canadian banks are a good example), Joe can avoid currency conversions by journaling the shares to the CAD side of the account. If Joe holds all his accounts at a brokers who is able to segregate CAD and USD holdings in registered accounts such as RRSPs and TFSAs, Joe may be able to avoid these forced foreign exchange conversions altogether.

The TSX website is good place to check the currency of the dividend payments. The following Canadian stocks pay dividends in US dollars (the list is courtesy of a Canadian Money Forum member):

Agrium Inc. (AGU)
Barrick Gold Corp. (ABX)
Brookfield Asset Management Inc. (BAM.A)
Brookfield Infrastructure Partners LP (BIP.UN)
Brookfield Office Properties Inc. (BPO)
Brookfield Renewable Energy Partners LP (BEP.UN)
Constellation Software Inc. (CSU)
Encana Corp. (ECA)
Goldcorp Inc. (G)
IAMGOLD Corp. (IMG)
Inmet Mining Corp. (IMN)
Kinross Gold Corp. (K)
Magna International Inc. (MG)
Methanex Corp. (MX)
Open Text Corp. (OTC)
Potash Corp. of Saskatchewan (POT)
Silver Wheaton Corp. (SLW)
Talisman Energy Inc. (TLM)
Thomson Reuters Corp. (TRI)
WaterFurnace Renewable Energy Inc. (WFI)
Yamana Gold Inc. (YRI)

Sleepy Portfolio 2Q-2012 Update

August 21, 2012

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Background

I started the Sleepy Portfolio in 2005 to benchmark my personal portfolio, which at that time was mostly invested in individual stocks. The portfolio started off with an initial outlay of $100,000 but no new money has been added since. This is not simply a model portfolio; it reflects investment returns that can be obtained in the real world by accounting for costs such as spreads, trading commissions, MERs, foreign exchange conversion charges etc. The portfolio is assumed to be held in a registered account, so it does not take taxes into account. The portfolio has a target allocation of 5% cash, 15% short bonds, 5% real return bonds, 20% Canadian stocks, 22.5% US stocks, 22.5% Europe and Pacific, 5% Emerging markets and 5% REITs. The entire portfolio (apart from the cash portion) is invested in broad-market, exchange-traded funds (ETFs) trading in the Canadian and US stock exchanges. The cash portion is invested in a high-interest savings account that is available through many discount brokers.

2Q-2012 Update

The Sleepy Portfolio has gained a modest 1.5% since my previous update. The big gains were made in REITs — up 9.9% since the end of last quarter. Emerging Markets ended in the losing column with a loss of 4.5%. All other asset classes were more or less flat. The portfolio also generated an income of $761 during the quarter.

Here’s how the portfolio looked as of August 21, 2012:

Since real return bonds and REITs are significantly above their target allocations, it is time to trim them back to the original asset allocation and use the proceeds to buy into the lagging asset classes: Canadian stocks and developed market stocks.

Transactions

Sell 75 shares of XRB at $25.18. Proceeds = $1,878.
Sell 183 shares of XRE at $17.64. Proceeds = $3,218.
Buy 138 shares of XIC at $19.14. Proceeds = -$2,651.
Buy 58 shares of VEA at $33.19. Proceeds = -$1,981.

It is interesting to note that the Sleepy Portfolio has fully recovered from the temporary losses in the Great Crash of 2008-09 and set a new high watermark. I hope your portfolios are looking just as healthy.