Toronto District School Board Continuing Education Investment

Transcription

Toronto District School Board
Continuing Education
Investment Planning
Fall 2015, Week 3
Instructor Gail Bebee
gbebee@gailbebee.com
Gail Bebee, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
What was the most
important thing you
learned from last
week’s lecture?
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Week 2 Take Aways Bonds
1. Fixed income, rate ∝ risk
2. No guarantees -check credit quality
3. When interest rates rise, existing
bond prices fall
4. No maturity date - bond funds BUT
5. Low bond fund fees are critical
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Week 2 Take Aways Stocks
1. No guarantees.
2. Higher risk, higher reward than
fixed income, + real return
3. Research before you buy:
financials, management, etc.
4. Dividends are good.
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Stocks are risky
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Today’s Topics

Preferred shares

ADRs

Real estate

Currency hedging

Funds
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Initial Public Offering

IPO

First time stock offered

Best IPOs sold to institutional
investors/ preferred clients

Retail investors must buy
once trading starts
E.g. Tim Horton’s
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Should you buy IPO?

Many perform poorly first 3 to 5
years

Some companies fail

Best to wait a few years before
buying stock
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Preferred Shares

Dividends paid before common
shares

Fixed income-like return

Issuers mostly well-established
e.g. banks, utilities, insurance
 Less
tax due to Can. dividend
tax credit
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Ontario Marginal Tax Rate
2015 Taxable Income
Capital
Income
Gains
Eligible
Dividends
First $40,922
20.05% 10.03%
-6.86%
Over $40,922 to
$44,700
24.15% 12.08%
-1.20%
Over $44,700 to
$72,064
31.15% 15.58%
8.46%
Over $72,064 to
$81,847
32.98% 16.49%
10.99
Data from taxtips.ca
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Preferred Shares

Company symbol.PR.letter
e.g. Bank of Nova Scotia - BNS.PR.S

Issue price $25

Many variations

Features as required to attract
buyers
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Perpetual

No retraction date

Price fluctuates with interest rates
Retractable

Right to sell shares to issuer on
call date at specified price

Call date = bond maturity date
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Straight Rate

Fixed interest rate
Floating Rate

Rate linked to established rate
e.g. bank prime

better when rates
rising
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Rate Reset

Interest rate reset on specific date(s)
based on prevailing rate
Convertible

Convertible to common shares

Specified formula

Price moves with common share price
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Cumulative

Unpaid dividends accrue

To be paid in future
Non-cumulative

Missed dividends disappear
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Choosing Preferred Shares

Features

Issuer reputation, financial status

Credit Rating - Investment grade

Pf-1 or Pf-2 (DBRS)

P-1 or P-2 (Standard & Poors)
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Choosing Preferred Shares

Real yield?
Yield to Call
– Yield if redeemed on next call date
Yield to Worst Call
– If several call dates/redemption
values, the worst yield

Diversify – pref share ladder
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Choosing
preferreds
is work
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Prefs can be Risky
e.g. 2015 price meltdown
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Funds are Less Work
– Horizons Active Floating Rate
Preferred Share ETF
– iShares S&P/TSX N. Amer. Preferred
Stock Index Fund C$-hedged
– PowerShares Canadian Preferred
Share Index ETF
– BMO S&P/TSX Laddered Preferred
Share Index ETF
www.gailbebee.com
More on Preferred Shares

Scotia Macleod Guide to Preferred
Shares

Raymond James Canadian
Preferred Share Report

Chapter 13 of No Hype - The
Straight Goods on Investing Your
Money
www.gailbebee.com
Income Trusts

Investment trust holds incomeproducing assets


Trading symbol XXX.UN
e.g. REI.UN, Riocan Real Estate
Investment Trust
Unit holders pay tax on distributions

Due to tax changes, mainly REITS
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American
Depositary Receipt

ADRs

Certificate representing
ownership of share(s) nonU.S. company

Trade like stocks on US stock
exchanges e.g. NYSE
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ADRs The Back Story

Foreign company hires U.S.
depository bank to set up ADR

Underlying shares:

Buy on company’s home stock
exchange

Kept in home country custodian
bank
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Why Companies
have ADRs?

Access US capital

Build visibility in U.S. & globally

Expand shareholder base

Improve overall liquidity

Facilitate merger & acquisitions
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Why Buy ADRs?

Companies tend to be wellestablished, low bankruptcy risk

Transactions U.S. $$, minimizes
currency management

Easy to trade

US disclosure, accounting standards

Annual reports etc. in English
www.gailbebee.com
Examples of ADRS

Major depository banks issuers
BNY Mellon, Citibank , Deutsche
Bank

List of ADRs

DEMO
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Real Estate

Property, buildings

Higher risk

Real estate values rise & FALL

Illiquid

Being a landlord is work
www.gailbebee.com
Why Invest in Real Estate?

Diversification

Consider your home
– First: place to live
– Second: investment
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Options for Investing
in Real Estate
www.gailbebee.com
Buy Land & Bricks
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Real Estate Direct
Ownership

Major $$, long term commitment

Minimal diversification

Upfront costs: taxes, legal, etc.

Ongoing costs: mortgage,
insurance, taxes, maintenance etc.

Landlord duties
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Real Estate Stocks & REITS

Malls, offices, industrial parks,
apartments –diverse or specialize

Diversification –one/few purchases

Liquid, known costs, low effort

Trading costs

Tax treatment
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Real Estate Stocks

Can. dividend tax credit

Trading on TSX
Melcor Developments, MRD-T
First Capital Realty, FCR-T
Brookfield Properties, BPO-T
www.gailbebee.com
Real Estate Investment
Trusts (REIT)

Units trade like stocks

Unit owners pay taxes on income

Best for tax-deferred accounts
Riocan REIT
Canadian Apartment Properties REIT
www.gailbebee.com
Real Estate Funds

Own pool of stocks, REITs

Instant diversification

Low maintenance

Can invest small amounts
www.gailbebee.com
Mutual Funds

Dynamic Global Real Estate Fund

Sentry REIT Fund
www.gailbebee.com
Exchange-traded Funds

iShares Global Real Estate Index Fund
(CGR-T)

Vanguard FTSE Canadian Capped REIT
Index ETF (VRE-T)

iShares S&P/TSX Capped REIT Index
Fund (XRE-T)

BMO Equal Weight REITs Index ETF
(ZRE-T)
DEMO
www.gailbebee.com
Currency Hedging
Strategy to protect
investments from
currency price
fluctuations
www.gailbebee.com
Currency Hedging



2 steps to foreign investment:
1) buy foreign currency
2) buy foreign stock
Profit 2 ways:
– exchange rate
– investment itself
Hedging removes exchange rate
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Un-hedged US
Investment
Investment return,
Exchange Can$ falls
Can$
rate stable to $0.80 rises to
US
$1.10 US
100
100
100
0
+20
-10
100
120
90
US$
Change in Xchnge
rate US$/Can$
Total Return,
Can$
www.gailbebee.com
US Investment
Hedged to Can$
Investment return,
Exchange Can$ falls
Can$
rate
to $0.80 rises to
stable
US
$1.10 US
100
100
100
0
0
0
100
100
100
US$
Change in Xchnge
rate
Total Return,
Can$
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Impact of Hedging
Average Annual Return
Oct. 31, 2015, %
iShares US Fundamental
Index ETF (CLU) C$ hedged
1 yr
0.27
iShares US Fundamental
16.98
Index ETF, (CLU.C) unhedged
3 yr
5 yr
14.84 12.76
25.35 18.64
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When Canadian dollar falls vs.
US$, return on US investment in
Can$ rises if no hedging

Some funds (mutual and ETF)
hedge to Can$, some don’t
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Financial Products
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Financial Products

Created by financial company

Marketed to investors

Sold as easy, profitable investing
solution
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1. Mutual
Funds
2. Exchange-Traded
Funds
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Mutual Funds

Pools money from many investors

Specific investing objectives

Hold one or more asset classes

Pay distributions

16,000+ funds
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5 Main Types
1. Cash-Money market, T-bill
2. Fixed Income –bonds, mortgages
3. Equity – country, sector, region
4. Balanced funds – all of above
5. Other
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Mutual Fund Choices

Investing style & type e.g. value,
Canadian equities

Most actively managed

Some passive – track benchmark
index

Different classes A,D,F etc. by fee
structure
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Mutual Funds Pricing

Unit price is NAV at end of day
NAV= current market value assets - liabilities
#units

Price changes with value of assets

Most open-ended: no limit on # units
issued
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Mutual Funds are popular
because...
1. Instant diversification
2. Low knowledge
3. Low maintenance
4. Widely available
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Mutual Funds are popular
because...
5. Small purchases, regular
contributions
6. Professional management
7. Access non-typical investmentsemerging markets
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The downside of
mutual funds
cost – among most
expensive in world
 High
 No
guarantees - return of
principal or performance
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Mutual Fund Ownership Costs
1. Management Expense Ratio, MER
–% av. daily value fund assets
–management fees
–trailer fees to advisor as long as
client owns fund
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2. Administrative Expenses
trading, HST,
accounting, legal,
borrowing costs
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3. Commissions

Front end load, low load, back end
load funds - % transaction charge

No load

No commission “load” funds most
discount brokers
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Impact of Fund Fees on Returns
$50,000 initial investment 1.00% MER 2.50% MER
5 years, 5% return rate
Fund Value without Fees
Total fees paid
Fund Value after Fees
Reduction in future value
due to fees
$63,814.08
$63,814.08
$3,127.52
$7,587.77
$60,686.55
$56,226.31
4.9%
11.89%
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Impact of MERs on Returns
from Financial Consumer Agency of Canada
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Can a mutual fund manager
add enough value to
overcome the drag of fund
fees on returns?
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Lower Fee Fund Companies

Mawer

Beutel Goodman

Leith Wheeler

Phillips, Hager & North

Steadyhand

D class – discount brokers
Gail Bebe, Canada’s Independent Voice on Personal Finance
www.gailbebee.com
How Much are You Paying
in Fund Fees?

Buyupside Investment Fee
Calculator

Investor Education Fund Mutual
fund fee calculator
www.gailbebee.com
Canadian Mutual Fund
Databases
Lots of info & fund screeners

Morningstar Canada

The Globe and Mail

www.fundlibrary.com
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Segregated Mutual Funds

Fund & insurance contract
– guaranteed return of % principle at
contract end (10 years)
– creditor protection
– avoid probate taxes
– guaranteed value if die during contract

0.5%+ to fund MER
Most people should avoid
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Selecting a Mutual Fund
1.
Which fund class(es) meet
investment objectives
2.
Fund screener - short list funds
3.
Research
– Fund Facts
– Fund Facts Document Explained
– Company & financial web sites
,
www.gailbebee.com
Selecting a Mutual Fund II
4.
Fund objectives suitable?
5.
Track record: >3-years returns,
consistently top quartile in class
6.
Fund manager? Invests own
money?
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Selecting a Mutual Fund III
7.
Fund costs: low MER, no load.
8.
Fund size vs. mandate
9.
Special policies e.g. early redemption
fees, min. purchase
10.
Decide price to pay
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Case Study: Mawer
Canadian Equity Fund

Mawer website

Fund Facts

Morningstar Canada Fund Profile

Globe and Mail Fund Profile

Fund Library
www.gailbebee.com
More Info on Mutual Funds

Chapter 14 of No Hype - The
Straight Goods on Investing Your
Money

GetSmarterAboutMoney.ca
www.gailbebee.com
Suggested Homework

Research a mutual fund you own.
– What are 5-year return rate & MER?
– Where does return rank vs. similar funds?
– Is MER competitive vs. similar funds?
– Does it own investments you intended?
– Are there better funds you could buy?
– Total cost to own over past 5 years?
www.gailbebee.com

Toronto District School Board Continuing Education Investment

Transcription

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