Archived Articles • 2004


December 2005

We spend the year accumulating wealth. Now is a good time to share it with those who are less fortunate. Consider especially these organizations who need your help now to provide aid to victims of the recent South Asia natural disaster.

Would-be whistleblower found dead [, 31Dec04] "A would-be whistleblower from the financial services industry has been found dead, apparently of suicide. Reports say Kent Shirley was found dead in his parents' home on Christmas Eve. Shirley was embroiled in a constructive dismissal lawsuit against Advocis' founding chairman Brian Mallard, with both sides alleging regulatory wrongdoing. Shirley was an assistant in Mallard's Assante practice in Saskatoon, between 1996 and January 2004."

An Open Letter to Canadians [Gadsden Creative, 31Dec04] "Canadians should start thinking seriously about what’s been happening to their fortunes over the years and why. Just how long will we continue to tolerate the greed, manipulation and rot that appear to permeate our financial service industry from top to bottom? How long will we continue to ignore the damage and pain that has been inflicted, and continues to be inflicted, on investors and advisors alike by a financial system that is clearly out of control in its duplicitous, self-dealing drive for profits?"

The Naked Investor [Penguin, Dec04] "Sounds a dramatic wake-up call for Canadians hoping to retire in comfort and security. Revealing the investment industry’s darker side in dramatic fashion, The Naked Investor is certain to disturb participants in a system more focused on generating wealth for itself than its clients."

How To Invest Like Harvard [Business Week, 27Dec04] "Can private investors draw any lessons from what Harvard does? Meyer says they can, but should be guided by four key principles. First, "get diversified..." Second, "you want to keep your fees low..." Individuals must also pay close attention to the taxes on their investments... And finally, invest for the long term."

None of us is smarter than all of us [Financial Post, 21Dec04] "Since 1965, the world has tried to prove Fama wrong, but no one has been able to do that. This presents a moral quandary for a number of stakeholders in the financial services industry. Most of them make money through the promise, either explicitly or inferred, that they can 'beat the market.'"

Questions linger as investigation winds down [Globe & Mail, 20Dec04] "The market timing scandal is all but over...but there's a long list of unanswered questions that have left many in the mutual fund industry scratching their heads." Among them, "When will mutual fund unit holders be paid?" and "Will the market timers that profited face any penalties?"

Brokerages ignored warnings on market timing [Globe & Mail, 18Dec04] "Three of Canada's bank-owned brokerage firms continued to execute trades for a handful of sophisticated market players after repeated written warnings from mutual fund companies that they were hurting long-term fund investors... These revelations, contained in settlements reached this week, show that the brokerage firms were not just passive order takers but 'actively encouraged and promoted market timing activities in a number of ways.'"

Some funds don't serve your interests [Toronto Star, 18Dec04] "Market timing is not illegal. That's what the industry likes to say. But the OSC built its case on fiduciary duty, the idea that fund managers have to treat investors' money as carefully as if it were their own. In this case, they were failing to protect the interests of long-term investors by letting short-term traders take away some of the profits... Market timers trading in AIC's funds realized about $127 million in profits from 1999 to 2003. That's more than short-term traders earned in other companies' funds—and certainly more than long-suffering investors earned. This is undignified and demeaning behaviour from a company with the advertising slogan: 'Buy. Hold. And prosper.'"

Efficient Market Canada "is an independent online investment journal for self-directed Canadian investors. We focus on bringing advances in the theory of investment to everyday Canadian investors in a way that is easy to understand, practical, and useful in the context of an ordinary RRSP. We will also help you avoid the rent-seeking behavior of the financial services industry, and provide a variety of common sense financial planning advice."

Invest some time in Shakespeare's Primer [Montreal Gazette, 17Dec04] "The primer aims to help people get rich slowly by examining the crucial issues of asset allocation, risk control, cost management and portfolio rebalancing. It also looks at the ins and outs of different asset classes ranging from stocks to bonds to income trusts. And it considers other important issues like how much retirees can sustainably withdraw from their portfolio, the use of options and foreign investing."

Mutual-fund giants pay price of betrayal [Globe & Mail, 17Dec04] "When the mutual fund market-timing scandal broke, industry kingpin Ned Goodman took the stage at the Toronto Society of Financial Analysts annual forecast dinner and proclaimed it was much ado about nothing. To the cheers of Bay Street's finest, the founder of the Dynamic fund family claimed the affair was a media creation, and an American problem... The regulators found 15 institutions made more than $300-million from market timing. The pros get to keep that cash. By any measure, it's an impressive score... The settlement spotlights an amoral attitude among certain players on the Street. It's an attitude that says if there's no law forbidding an activity, and that activity earns us a profit, then it must be fine to do it, right?"

TD Waterhouse ignored warnings [Toronto Star, 17Dec04] "TD Waterhouse Canada Inc. has admitted it executed trades for wealthy clients that financially hurt mutual fund investors — including those of a sister company — despite many warnings. In some of the most explosive revelations concerning controversial market timing practices among three big Bay Street brokerages, TD Waterhouse acknowledged yesterday that it had received and ignored eight written warnings from six mutual fund companies between 2002 and 2003."

iUnits Canadian Bond Broad Market Index Fund [BGI Canada, 15Dec04] "The Fund's new investment objective is to replicate the return of the Scotia Capital Universe Bond Index™ [which] consists of a broadly diversified range of investment grade Canadian government and corporate bonds with a term to maturity of more than one year."

Born Suckers [Slate, 14Dec04] "Human beings, it turns out, are wired to make dumb investing mistakes. What's more, we are wired not to learn from them, but to make them again and again. If there is consolation, it is that it's not our fault. We are born suckers."

Measuring All Mutual Fund Costs [Scott Burns, 07Dec04] "A new study shows that mutual fund investors pay substantial expenses they don't even know about. In some instances these expenses are larger than the easily obtained "annual expense ratio" figure -- so it is possible that some of your fund choices cost twice as much as you think."

Report card shows benchmark indexes beat mutuals to top of the class [Globe & Mail, 07Dec04] "The quarterly Standard & Poor's [Canadian] Indices Versus Active Funds scorecard, which tracks how mutual funds in various categories have fared against their respective benchmark stock indexes,...uses more exacting methodology than most of these comparisons, but the relevance to investors is the same. If funds can't beat the index, then it makes sense to buy the index through either exchange-traded funds or index mutual funds."

Beware funds bearing gifts [Macleans, 13Dec04] "This is a defensive move, born out of a mounting sense of desperation in the industry. Fidelity's fee cut is not about generosity, it's about ensuring long-term survival... While Fidelity's fee cuts are a welcome step, it's not clear whether the industry really understands how its feast turned into a famine. It's not just high prices that are turning people off. It's the quality of the product."

How to give with a passion and get the best tax relief [Globe & Mail, 04Dec04] "This year, don't just give. Take the time to determine your passions, then give to charities that are in line with those passions... When making donations, think outside the box. Consider these ideas to make your giving easier."

Bank-sold wrap accounts don't live up to sales pitch [Globe & Mail, 04Dec04] "Beyond this portfolio-in-a-box convenience, there's not a single good reason to invest in a bank wrap. The fees are comparatively high, the returns all too often are mediocre or worse and the methodology behind them can be questionable... You're better off just buying individual funds to build your own portfolio."


November 2004

New Rules For Retirement Spending? [Scott Burns, 30Nov04] "Sustainable return and real return, not counting changes in valuation levels or yields, have averaged, respectively, 3.3 percent and 1.9 percent. This return is nowhere near the 5 percent spending required of foundations, nor does it approach the 5 to 6 percent spending rules that prevail for most endowments."

Index Funds: The Next Generation [Scott Burns, 28Nov04] "Robert Arnott, editor of the Financial Analysts Journal, is circulating a paper that may one day be credited with launching the next generation of index funds... Mr. Arnott has found that noncapitalization-weighted index portfolios have returns that are 2 percentage points better than traditional index funds." See also Redefining Indexation .

Fidelity fires first salvo in likely mutual fund fee war [Globe & Mail, 25Nov04] "Fidelity is cutting fees on all of its funds sold with an upfront sales commission, a move that by all rights should spark an industry price war in the months ahead. Management expense ratios on equity, balanced and asset allocation funds will fall about 0.20 of a percentage point, while MERs on fixed-income and money market funds will fall by 0.30 of a point."

Seven Ways to Stop Saying 'Oops!' [Wall Street Journal, 21Nov04] [If link is dead, search Archive for "clements", then select Nov 21 article.] "We all make foolish financial decisions. But if you want to see things get really ugly, find folks who mistakenly think they're on the right track, so they end up making the same error over and over again. Want to avoid becoming a serial blunderer? Watch out for these seven popular misconceptions."

Retirees Don't Have to Be So Frugal: A Case for Withdrawing Up to 6% a Year [Wall Street Journal, 17Nov04] "Retirees may be able to withdraw as much as 6.2% initially, provided they follow three rules. 'There's nothing radical to this,' Mr. Guyton says. 'It's just a matter of being street smart. These are things you would sensibly think about doing after a tough year.'"

New exchange-traded fund brings you the whole bond universe [Globe&Mail, 16Nov04] "Barclays Canada, the company behind the iUnits series of Canadian exchange-traded funds, announced yesterday that it wants to convert its 10-year government bond exchange-traded fund into a new product that tracks the Scotia Capital Universe Bond Index... The new broad market ETF would be more of an alternative to a standard bond mutual fund, and a good one at that."

Advisers should give seniors better treatment [Globe&Mail, 11Nov04] "Seniors are especially vulnerable. [They] tend to be more trusting, especially when relying on the advice of people they regard as professionals. You'd think professionalism would be enough to ensure that seniors received proper advice. But, failing that, how about advisers showing some basic human decency toward seniors and really trying to do right by them?"

Reflections on the Efficient Market Hypothesis: 30 Years Later [The Financial Review, 10Nov04] "The evidence is overwhelming that active equity management is, in the words of Ellis, a 'loser’s game.' Switching from security to security accomplishes nothing but to increase transactions costs and harm performance. Thus, even if markets are less than fully efficient, indexing is likely to produce higher rates of return than active portfolio management. Both individual and institutional investors will be well served to employ indexing for, at the very least, the core of their equity portfolio." A financial calculator megasite with "150+ tools in ten financial categories. Whether you need business, loans, mortgage, debt management, personal finance or tax tools we have you covered!" Although a US site, it includes many calculators that are designed specifically for Canadians.

William Sharpe on Personal Investing [Morningstar, 05Nov04] "[brings] the methods of asset pricing... into the mainstream for those devising individual portfolios thus making the older tradition of mean/variance analysis... an important but special case."

Why Your Stock Index Fund Is Lagging the Market [NY Times, 07Nov04] "The major stock indexes may be systematically under-reporting the true returns of the market. That is the view of several researchers, whose work could point the way to better-performing index mutual funds. Their research, which is to be published in the Financial Analysts Journal early next year, raises basic questions about how to define the stock market." See also Redefining Indexation .

Relax, You've Got Plenty of Time [Wall Street Journal, 07Nov04] [If link is dead, search Archive for "clements", then select Nov 07 article.] "Before you plunk down money for any investment, you should think carefully about when you will need your money back. And if you do that, you will likely come to a surprising conclusion: Often, your time horizon is a whole lot longer than you imagined -- and you don't need to be quite so cautious with your portfolio." [03Nov04] "A safe haven where you can learn what you need in order to think for yourself as an investor."

Fund firms woo advisers to get onside [Globe&Mail, 02Nov04] "Fund companies flirt closely with the regulatory rules of engagement; planners pay their own way but fund companies lay out a big spread for events, two of which recently featured tickets to concerts by Quebec chanteuse Celine Dion and Celtic rockers Great Big Sea."


October 2004

Decision Rules and Portfolio Management for Retirees: Is the 'Safe' Initial Withdrawal Rate Too Safe? [FPA Journal, Oct04] "This paper establishes new guidelines for determining the maximum "safe" initial withdrawal rate... [and] finds that applying these Decision Rules produces a maximum "safe" initial withdrawal rate as high as 5.8 percent to 6.2 percent depending on the percentage of the portfolio that is allocated to equities."

Assante Recognizes DFA’s Excellence [FundLibrary, 28Oct04] "While other advisory companies are thought to have a hidden agenda of trying to capture higher earnings by earning higher margins on proprietary products...the presence of DFA’s index funds in Assante’s wrap accounts is a clear example that no such ulterior motive exists. In the interest of full and plain disclosure, I should also mention that the MER on the DFA pools is about 3.10% plus the fee for the Asset Management Service (AMS), which is extra."

Taking a lesson from Teachers' plan [Toronto Star, 28Oct04] "Retirement savers can learn important tips from Ontario's largest pension plan, which has grown from $17 billion to $75 billion in assets in just 13 years. Not that we could hope to do as well in retirement without becoming a teacher, or marrying one... Yet crumbs of intelligence can be gleaned from a trail of annual reports and news releases on the Web site, at"

Users' Guide to the Business Media [PH&N, Oct04] "Many of us are hooked on the financial press and, as a result, we get most of our investment information from the newspaper, the Internet or the specialty cable TV channels. In light of this dependence, it's useful to pause once in a while and think about how we use it... If you are a true media junkie, none of these suggestions will enable you to kick your habit, but they may help you become a controlled user. "

'Certifiable lunatic' runs market today [CBS MarketWatch, 27Oct04] "Would you willingly allow a certifiable lunatic to come by at least five times a week to tell you that you should feel exactly the way he feels? Would you ever agree to be euphoric just because he is, or miserable just because he thinks you should be?"

Insurers getting dragged out of disclosure stone age [Globe&Mail, 26Oct04] "Where funds differ from insurance is that you can pick up a mutual fund company's simplified prospectus and read in plain English how much an adviser receives when selling a fund and over the period you own it. Most investors never do this, but they could. With insurance, there's no such disclosure available. All you know is the bottom-line premium that is presented to you by the broker."

Bank offers affordable way to make endowment [Toronto Star, 21Oct04] "Donating a sculpture, tree or other landmark is not the only way to leave a reminder of yourself. A sum of money invested on your behalf could fund good works for years after you are gone... Most of us are excluded from this option by the cost of setup and administration... But there are more affordable ways to leave an enduring charitable legacy."

Report urges more OSC accountability [Globe&Mail, 19Oct04] "The Ontario Securities Commission should be more accountable to the public, while the victims of rogue advisers should be compensated for their losses, says a report recommending sweeping changes to the regulatory system... 'The testimony received by the standing committee revealed a deep-seated skepticism on the part of the investing public,' the report says. 'They simply are not confident that complaints will always be handled in an objective manner under a system of self-regulation.'"

Peter Bernstein interview [Money, 15Oct04] "Understanding that we do not know the future is such a simple statement, but it's so important... That's what diversification is for. It's an explicit recognition of ignorance... In 1995 I said, 'Dividends don't matter.' I've been eating those words ever since."

A few of my favourite things [Financial Post, 16Oct04] "Herewith 10 top investments that may have a place in your own portfolio, provided you heed the asset allocation suggestions of your financial advisor. They are ranked in order of descending importance."

Standing up for the little guy is Stan Buell’s calling [Investment Executive, Oct04] "We’re not saying the industry is all wrong, that it should be disbanded or scuttled. We just want to see some problems cleaned up. We feel there are lots of good people in the industry and regulators that are trying to do it right."

Discount brokers are good for trading stocks, but not bonds [Globe&Mail, 14Oct04] "My guess is that they're taking advantage of retail buyers who really aren't that familiar with the bond market... There's not a lot of sensitivity to bond prices because they're not made accessible to retail buyers. Brokers are really able to charge enormous spreads on these things."

Buffett's Berkshire could be the right 'fund' for you [Globe&Mail, 9Oct04] "In uncertain investing times like these, it's nice to have someone smart looking after your money. How about Warren Buffett? ... Berkshire Hathaway is somewhat like a U.S. equity mutual fund in that it's invested in a wide range of companies chosen by Mr. Buffett and his team. Better, it charges no management fees and its performance is simply outstanding over the long term."

Build wealth in any market [Money, 12Aug04] "Much of what passes for unassailable historical truth turns out to rest upon shaky assumptions. Stocks haven't returned what you thought they did. Investors never saw anything close to the market rate of return. And the market's future looks a lot bumpier and perhaps a lot less lucrative than you likely expect."

Asset Class Illustrator [Barclays Global Investors Canada, Oct04] "Enables you to view a historical analysis of how an index (or a portfolio of up to 15 indexes) would have behaved over different time periods. Using the modular set of indexes tracked by Barclays North American Exchange Traded Funds to represent asset classes, this tool is designed to offer a convenient means for modeling and viewing the benefits of diversification by style, market capitalization, and even individual sector and country exposures."

Real-World Strategies for Saving [Wall Street Journal, 03Oct04] [If link is dead, search Archive for "clements", then select Oct 03 article.] "Hunting for the next hot stock is a thrill. Trimming $10 off your phone bill is a drag. But if you want to get rich, I would focus on the $10... How are you going to amass a decent-size nest egg? Don't bank on beating the market. Instead, to have a good shot at retiring in comfort, focus on this simple formula for financial success: Spend less than you earn."

OSC wants funds to make restitution [Globe&Mail, 02Oct04] "While market timing is not illegal, a fund manager who allows it can breach his fiduciary duty to act in the best interests of all investors. That is because the market timers can hurt a mutual fund's long-term investors by siphoning off a fund's returns. Investor advocates have said that any fund manager who allowed market pros to scoop up quick profits by zipping in and out of their funds should compensate long-term unitholders for their losses."


September 2004

Convergence! The Great Paradox [BFMRC, 30Sep04] "Just as active fund management becomes more and more like passive indexing, so passive indexing becomes more and more like active fund management."

Mutual fund industry 'maligned' in media [Toronto Star, 30Sep04] The industry simply doesn't get it. "'It's not a huge sum of money,' Ned Goodman, chairman of Dynamic Mutual Funds Ltd., told the annual meeting of the Investment Funds Institute of Canada. Speaking at an industry panel on the trends and issues facing mutual fund companies, Goodman said the controversy over market timing has been 'sensationalized' by the media. 'It's a fine industry. I'm passionate about it. I intend to stay with it and I think it's terrible the way we're being maligned,' Goodman said to the applause of 675 delegates attending the conference." See also, Mutual fund officials criticize media and regulator [G&M]

Mutual fund cleanup merits real team effort [Toronto Star, 29Sep04] "Most boomers invest for retirement or their kids' education—predominantly in mutual funds. Many think something's wrong with a system that rewards advisers for pushing high-fee investments—and makes disclosure to investors a low priority. Reform is a tough nut to crack. But with CARP beavering away, I feel better already."

Investor advocacy needs its own Ralph Nader [Globe&Mail, 28Sep04] "One of the great untapped sources of renewable energy in this country is the hot air issued by investor advocates. These guys mean well. Really, they do. And God knows, their cause is just. It's hard to think of an industry that has a higher ratio of abused clients to well-served clients than wealth management. Still, investor advocates rarely get anything done, other than calling for changes to the system that will never happen."

Market timing probe could boost fees [Globe&Mail, 25Sep04] "While the U.S. mutual fund scandal has ushered in greater transparency and lower fees, the Canadian industry warns reform could mean higher fees... 'The message is "you have to pay to keep us honest." ... Well, darn it, I am already paying 2.7 per cent per year [in management fees] for you to exercise your discretion on my behalf,' [Stromberg] said."

Efficient Frontier • Fall 2004 [Sep04] Luigi Does It Yet Again ["Prudent, valuation-driven investing in less developed nations, while risky, is still likely to provide adequate returns."], The Philanthropy of the Uninformed ["As our society becomes ever wealthier and the return to capitalists falls ever lower, let us raise our glasses and toast the system’s great unwitting philanthropists, whose generosity funds the pullulating mass of ever riskier young companies, a few of which will eventually pay off big and power our economy."], and Links of the Month.

Regulators miss the real fund scandals [Financial Post, 25Sep04] "Stromberg says the bottom line is that by condoning practices that put their interests ahead of investors, the fund industry 'is breaching the trust that it has long encouraged investors to place in it. They are losing the right to claim that they act with integrity.'"

None of that steady income and security crap!
I just want to make a big fat killing and check out.

National Post, 23Sep04

Don't tell them what I make [Financial Post, 23Sep04] "Only one in four of Canada's financial advisors believe their compensation should be disclosed to clients, according to an industry survey."

Seniors victimized, group says [Financial Post, 23Sep04] "Canadian seniors are being victimized by abusive mutual fund sales practices, excessive fees and lax regulators, a report by the Canadian Association of Retired Persons says. It warns that seniors are particularly likely to be 'adversely affected by investing in mutual funds -- especially when given inappropriate advice.' CARP spokeswoman Judy Cutler says the report's focus is on seniors because they don't have enough time to recoup major financial losses."

OSC Investigation into Canadian Mutual Funds
The Globe and Mail • September 2x, 2004

Market-timing fines should go to investors, advocates say "'I see this whole issue as raising questions about whether the fund manager has fulfilled his fiduciary obligation to the fund or is in breach of these obligations,' Ms. Stromberg said. 'If they're in breach of a fiduciary obligation, then the unitholders should be made whole.'"

Canadian fund firms should follow U.S. lead on price competition "It almost seems as if there's a gentleman's agreement among fund companies not to compete vigorously on price... Full disclosure in dollars and cents of how much investors are paying each year in fees? No one's moved on that. Linking fees to fund performance? No company with any heft has ventured there."

Skepticism over funds seen deepening "The credibility of funds as an investment vehicle, already under pressure because of weak markets and intense competition, is likely to suffer as the scandal drags on, industry sources said."

Watchdog takes aim at mutual fund giants "Canada's top securities regulator has launched a long-awaited crackdown on the mutual fund industry, targeting four of the country's biggest companies for possible enforcement action and warning that more firms may be on the hook."

OSC strike against fund industry just first volley in wider crackdown "The Ontario Securities Commission signalled yesterday that its first strike against the mutual fund industry is just the beginning, and that it could target as many as 20 more fund companies for in-depth reviews as part of the most extensive probe in its history."

Fund companies have bigger problems to worry about "The commission sent 'notices of potential enforcement proceedings' to the alleged Fast-Trading Four, and will give each firm a chance to respond and come up with 'reasons why we should not initiate proceedings against them.' It sounds scary, and that's the OSC's intent, but there's nothing in the way of hard allegations."

OSC can still turn investigation into victory for small investors "It's a commendable thing the OSC has done in targeting four giant fund companies over allegations of market timing, an activity in which favoured investors are allowed to jump in and out of funds for quick profits. But in terms of what's needed to reform the fund industry in this country, it's as much a landmark as it would be for the two sides in the NHL hockey strike to agree on what to have for lunch at their next meeting."

Long-term investors are often the biggest losers "Market timing is the very antithesis of the buy-and-hold strategy preached by the industry, which has flourished by promoting mutual funds as stable investment havens."

Ability to deal with related parties possible "Toronto securities lawyer Philip Anisman dismissed the latest proposals as 'tinkering,' rather than a serious move to an independent governance system that has the authority to protect investor interests."

A new dimension [Financial Post, 21Sep04] "Dimensional Fund Advisors, a powerful presence on the U.S. money management scene, is quietly gaining a foothold in Canada... [DFA] has a unique investment approach that is neither active nor totally passive."

Taxes gouge investors, expert says [Financial Post, 21Sep04] "Ottawa must reform an unfair tax regime that rewards spenders and punishes investors through double taxation, Jack Mintz, president of the C.D. Howe Institute, said yesterday... Dr. Mintz proposes putting savers and investors on the same footing as consumers: 'Individuals should pay tax only on their earnings, not on invested income.'"

Taking measure of mutual funds [Financial Post, 18Sep04] "'Discipline, procedure, measurement. What gets measured, gets done.' Quite simply, he argues, the financial services industry, in general, and mutual funds, in particular, don't measure up, that they're not really held accountable for their behaviour, that they're a law unto themselves, with regulatory watchdogs largely toothless in protecting investors. 'There's such a gap between what should be and what is. Everybody is comfortable with the status quo.'"

The best debt is still no debt [Financial Post, 18Sep04] "There are three kinds of good debt. They are debt incurred to fund education, investments or income-producing real estate, and to start or grow a business. Almost everything else is bad debt."

What your fund's MER doesn't cover [Morningstar, 17Sep04] "Despite the controversy over mutual fund fees, most of the attention has focused on management expense ratios. However, there are other fees that are not reflected in a fund's MER, and instead form part of the fund's net asset value."

Getting into the head of a top fund manager [CBS, 14Sep04] "The problem is that America's fund managers have a Big Secret hidden behind their portals: They absolutely refuse to tell you where they're investing their own money. Why? Because that would expose a huge conflict of interest. These hotshots manage $7.5 trillion of your money but they don't want you to know they don't eat their own cooking!"

Before Picking A Broker or Planner... [Wall Street Journal, 05Sep04] [If link is dead, search Archive for "clements", then select Sep 05 article.] "The financial-advice business is plagued by four huge problems. Two of the problems have been largely ignored. But the other two have been the subject of fierce debate over the past two decades -- and, amazingly, the good guys seem to be winning. Nonetheless, buying financial advice remains a treacherous endeavor."


August 2004

Opt for Door 1 and use RESP for education [Financial Post, 28Aug04] "Pape says he still believes the RESP concept is a good one, made even more attractive with the grant. 'The best RESP is the cheapest one you can find, as long as it permits you to invest in the securities you want... I have never been a fan of scholarship trusts and have never recommended them... Their fees are too high and their restrictions too onerous.'" See also: A good time to think about buying an RESP [Toronto Star, 29Aug04].

Just the Facts Ma’am [BGI Canada, 19Aug04] The [data] minefield that one of Canada's largest mutual fund companies laid in Exploding fund myths [Financial Post, 10ug04] is exposed and gets cleared. (Or maybe what they laid was just a giant goose egg.) See also: Battling fund myths.

The passive investor's mantra [Financial Post, 17Aug04] "Index fund owners chant 'I don't know and I don't care'." From a followup e-mail to Jonathan Chevreau, "The corollary to the 'seven magic words' is: You must know that you do not care, and you must not care that you do not know. All in all, it is easier said than done. I doubt anywhere near even one-third of all investors have the emotional strength -- what Marcus Aurelius and Kierkegaard would call ataraxia -- to invest truly passively. On the one hand, that's a shame, since so many others could benefit from this strategy. On the other hand, it makes the truly passive approach far more lucrative for anyone who has the imperturability to persist with it."

CFP designation is consumer's first line of defence [Globe and Mail, 17Aug04] "As absurd as it sounds, anyone outside the province of Quebec can call themselves a financial planner without any qualifications. The Certified Financial Planner designation is your first line of defence against the amateurs out there."

Preaching a steady course [International Herald Tribune, 14Aug04] "The father of modern index funds at age 75 has seen nothing that has changed his core message: Diversification, simplicity and steady investment pay off over the long term. 'The rules are eternal,' he says."

Fund industry myths exposed [Financial Post, 14Aug04] "Just when you think the debate between active and passive investing has simmered down, some new argument comes to light, permitting one side or other to claim temporary victory." See also Exploding fund myths [Financial Post, 10ug04]

Build wealth in any market [Money, 12Aug04] "Much of what passes for unassailable historical truth turns out to rest upon shaky assumptions. Stocks haven't returned what you thought they did. Investors never saw anything close to the market rate of return. And the market's future looks a lot bumpier and perhaps a lot less lucrative than you likely expect."

Higher fund fees hurt long-term gains, study says [Toronto Star, 11Aug04] "But just as smoking greatly increases the odds of contracting lung disease, our evidence shows that on average and over time, investors are clearly fighting an uphill battle and tilting the odds against themselves by investing in funds with high management-expense ratios... The long-term, buy and hold investor, for whom investment funds are designed and to whom they are marketed, is also the person most harmed by high expenses."

Fund mergers bring tax headaches for unitholders [Investment Executive, Aug04] "Fund consolidation has been sweeping the industry for several years now and the bottom line may be that billions of dollars in tax credits are being lost as the industry streamlines and funds merge... If a small fund holding big capital losses merges with a large fund, the losses of the smaller fund cannot be used to offset capital gains earned the next year by the combined fund. They can only be used in the year of the merger. That means the unitholders is on the hook for more capital gains taxes."

It's time to change how bonds are traded [Globe and Mail, 07Aug04] "The 'markups' or 'spreads,' the difference between the bonds' selling and the purchase price, can be extortionate by equity trading standards. Not two or three times as much. Try 10 times."

The way of the calm investor [CNN Money, 02Aug04] "Follow these five steps and you'll make better investment decisions -- and agonize less over them."

Think It's the Valuations Hurting Your Returns? Look Closer [NY Times, 01Aug04] "'The correlation between fees and performance is very clear,' says John Benvenuto, director of mutual fund research for Financial Research Corp. 'Fund fees should be a part of every fund investor's analysis.' ... 'It just goes to show that you don't always get what you pay for in mutual funds,' says Mr. Edwards of S.& P. Or, as Mr. Bogle puts it: 'The mutual fund is the only investment instrument in the world where you get what you don't pay for.'"


July 2004

The Wall Street Self-Defense Manual [Slate, 28Jul04] "So what are financial advisers good for? The best ones, in my opinion, will do less, not more. They will be decent, trustworthy people you feel comfortable with. They will help you allocate your assets appropriately and keep your costs low—a strategy that will usually generate less compensation for the advisers but higher returns for you. They will warn you not to expect to beat the market (and explain why) and encourage you not to trade actively or change your strategy every year (unless, again, your primary goal is to have fun playing the game). They may offer expertise on estate planning, insurance, mortgages, or banking services... Above all, the best advisers will dissuade you from being stupid—an invaluable service, one we can all benefit from."

Index Funds: Still Your Best Bet [The Motley Fool, 28Jul04] "When Nathan Slaughter pointed his guns at the trusty, old index fund, many had to stop and ask whether The Motley Fool was abandoning one of its oldest principles. No, not a chance, says Bill Mann. We still believe that the best place for many investors' money is a good, unmanaged index. Or three."

Balancing Act: Trying to Make Money Whether the Market Goes Up or Down [Wall Street Journal, 28Jul04] "If you cannot forecast the market's short-term direction, what should you do? My advice: Forget trying to predict the unpredictable -- and instead take advantage of this unpredictability. And the way you do that is with rebalancing."

On a 12-step program to end my addiction to active investing [Financial Post, 27Jul04] "About 98% of individual investors are 'active' investors who pick their own stocks or buy mutual funds which do so on their behalf. By contrast, only 70% of institutional investors (pensions) are active investors, while the other 30% (and rising) believe in low-cost, stress-free index investing. Are professional investors aware of something you're not?"

Journal of Indexes • 3rd Quarter 2004 [Jul04] Article summaries include "explains both the rational for indexing and how pension plans use index products", "the short volume on exchange-traded funds is astonishing, and highly fluid", and "trust managers who don’t utilize index strategies may well be in default of their fiduciary obligations".

Laddered Bond Strategy vs. Active Management [PH&N, Jul04] "Generally speaking, investing in bonds can take two forms: purchasing a bond mutual fund; or, initiating a laddered bond strategy. Proponents of the latter approach argue that it provides higher returns, entails lower fees, offers more certainty about returns, and provides surety that capital will be preserved. This article addresses and challenges each of these considerations using empirical evidence and qualitative analysis."

Don't outlive your money [Globe and Mail, 24Jul04] "Outliving your money is the ultimate retirement nightmare in these times of fast-increasing life spans. It's not unreasonable to expect to spend 40 years in the work force and then 25 or 30 years drawing on the money you accumulated in your registered retirement savings plan. Will you have enough?"

Let's get fund brokerage fees out in the open [Globe and Mail, 22Jul04] "Disclosing the impact of brokerage fees on returns would give investors a better picture of how efficiently a fund is run. Despite what some people in the fund industry will tell you, low fees are a key determinant of fund performance."

Brian Costello loses securities appeal [Toronto Star, 13Jul04] "The Ontario Superior Court of Justice rejected Costello's arguments yesterday that the Ontario Securities Commission had erred in finding he was an adviser and acted contrary to the public interest by not disclosing conflicts of interest. A panel of three justices also dismissed Costello's argument that restricting his activities through registration infringed on freedom of expression guaranteed under the Charter of Rights."

Efficient Frontier • Summer 2004 [Jul04] Of Pigs, Troughs, Mutual Funds, and the Logic of Collective Action ["If men were angels, no government would be necessary."], Do Your Asset Classes Care Where They Are? [Is "a dollar of a given asset class in a tax-sheltered account is equivalent, for the purposes of policy allocation, to a dollar in a taxable account"?], and Link of the Month.

With Bond Funds, Patience Often Pays [Wall Street Journal, 11Jul04] "In a rising-rate environment, investors should switch to mutual funds that specialize in bonds with shorter maturities. Right? Yes, that's one way to go. But investors who don't need the money in their bond funds for several years may be better off taking no action at all.

Your Finances Are Under Control When... [Wall Street Journal, 11Jul04] [If link is dead, search Archive for "clements", then select Jul 11 article.] "While true financial independence may take decades, you can achieve a sense of financial freedom in just a few short years. How do you know when you've finally got your financial life under control? Here are 41 signs that you've become a savvy investor and a smart saver."

Bond mutual funds -- here's the best of a bad lot [Globe and Mail, 08Jul04] "At a time when interest rates are rising and the outlook for bonds is as poor as it has been in ages, investors are piling into -- you guessed it -- bond funds... If you're buying bond funds today, a low MER is an absolute must."

OSC site a valuable resource for novice investors [Toronto Star, 06Jul04] "Choosing the right personal financial adviser is an important step in life. You could save yourself some disappointment and heartache by preparing yourself for the task. Novices can turn to the Web site of the Investor Education Fund, a source of unbiased information established by the Ontario Securities Commission."


June 2004

North American Residential Real Estate: Bubble Trouble? [PH&N, Jun04] "In this report, we look at key indicators and drivers first in the U.S. and then in Canada to determine if a widespread real estate bubble, indeed, exists in North America."

ETF Tracking Error Needs Improvement [, 29Jun04] "iShares ETFs have not performed quite as well as Vanguard conventional mutual funds with the same target index, three new studies show... Industry analysts do not believe, however, that ETF underperformance is inherent."

The search for low-fee investments [Globe and Mail, 26Jun04] "Smart investors ready to fix up their portfolios are considering such exit routes as exchange-trading funds and low-fee products from boutique firms. We offer a guide t some easy ways to tune up your investments." See also, ETFs offer a cut-rate, transparent alternative.

Mutual funds: Seg funds [Globe and Mail, 25Jun04] "For the insurance companies and mutual fund managers who run them, seg funds represent a lucrative piece of business. But for investors, there's a cost for peace of mind — and in the case of seg funds, it has become so high that they probably aren't worth the money for most middle-class Canadians with fairly simple investment needs." See also, Seg funds 101 and An insurance policy in mutual fund clothing.

Mutual funds: the fee crunch [Globe and Mail, 24Jun04] "Canadians have invested billions of dollars in mutual funds that charge fees that eat up much or all of their returns, an exclusive Report on Business analysis shows... in too many cases, investors are not getting good value for the fees they are paying." See also, Friendly service pays off for Investors Group and Fee-to-performance value indicator.

Even in a bear market, some fund managers saw a bonanza [Globe and Mail, 23Jun04] "Poor mutual fund returns have disappointed lots of investors - but their pain hasn't been felt by all fund managers. After all, pay for some has continued to climb. The reason: fund manager compensation is tied not to fund performance but to the continually rising value of assets under administration, fed by ever-growing ranks of aging baby boomers." See also, It's not how it performs, it's about commission and PHN's entrepreneurial spirit keeps its costs low.

Who stands up for the investor? [Globe and Mail, 22Jun04] "This January, the Canadian Securities Administrators (CSA) finally released their new rules for the mutual fund industry and their former 'stand-up-for-investors' attitude was nowhere in sight." See also, IFIC lobbies for giants, critics charge and Mutual fund abuse in Canada needs prompt action.

Select few reap unfair gain [Globe and Mail, 21Jun04] "A select group of hedge fund managers and other market professionals have siphoned off hundreds of millions of dollars of value from Canadian mutual funds over a four-year period by engaging in a trading strategy of darting in and out of the funds to scoop up profits, a Report on Business investigation has found." See also, In-and-out traders unwelcome, How we probed churn patterns, Market timing hard for investors to spot and U.S. scandal exposed cosy dealings.

Shareholder coalition should start naming names [Globe and Mail, 15Jun04] "Reform can happen more quickly when more effective pressure is brought to bear. A blanket policy of never embarrassing anyone serves to protect sensibilities more than compel change."

Push on for more disclosure by fund managers [Financial Post, 15Jun04] "To relegate voting information to a list that appears long after the event is total absurdity. Enhanced disclosure is overdue, but it's a complete emasculation if it's treated as statistical information that could show up a year later. Investors need to know what's happening, when it's happening. The fund manager is the representative of individual investors, and voting decisions are an important aspect of a fund manager's obligations."

Index fund investment is simple, stress-free [San Diego Union-Tribune, 13Jun04] "The perennial gripe against index funds is that they're just average... What's ironic about index funds, however, is that investors who settle for average market performance will usually end up richer than the investors who stick with portfolio cowboys who aim for shoot-out-the-lights returns."

Five Questions That Put Me on the Spot [Wall Street Journal, 13Jun04] [If link is dead, search Archive for "clements", then select Jun 13 article.] "At age 41, I have amassed more than half the money I need for retirement. Sure, keeping investment costs low and avoiding big investment mistakes has helped. But that isn't the main reason my portfolio has grown so much. Instead, I got there by being a tightwad. Every time I have a few bucks to spare, I send it off to one of my index funds."

Why some grow rich and others don't [National Post, 12Jun04] "If you want to understand why the notion of 'transplanting' democracy into Iraq is fundamentally naive, why Africa is so poor, or why development aid doesn't work, William J. Bernstein's encyclopaedic The Birth of Plenty offers some convincing answers... a worthwhile and thought-provoking read."

Listen to the crowd: People in groups often get it right [Financial Post, 12Jun04] "Crowds are usually correct. Consider the case of Who Wants to Be a Millionaire?, the television game show hosted by the hyperkinetic Regis Philbin. He offers contestants three options when they can't figure out the answer to a question."

The true north strong and fleeced [Financial Post, 09Jun04] "Canadians have to demand greater independence and accountability for everybody from the auditors who set the deliberately weak accounting rules in the first place, to the regulators who refuse to prosecute the offenders in the end. Our current system is simply intolerable."

Joint ownership can lead to problems [Globe and Mail, 05Jun04] "I've talked about the problems of joint tenancy before but there are more problems. In addition to triggering a potential tax bill when adding a joint owner (which can happen since you are generally transferring beneficial ownership), and subjecting the asset to any creditors of the other owner(s), consider four other drawbacks."

Just who are fund firms’ clients? [Investment Executive, Jun04] "Fund companies say they work on behalf of their beloved unitholders but, in fact, represent the interests of the advisors who recommend their products. Privately, advisors verify this perspective... My sense is all this talk of financial advisors being “professionals” is really just a giant ruse to deflect attention from the reality that most financial advisors remain the sales agents they were trained to be."


May 2004

Vanguard—Child of Princeton [BFMRC, 28May04] Seventeen lessons in entrepreneurship. How Jack Bogle "created a unique corporate structure, a more efficient and economical way to serve investors, and a new way of managing investments that together have begun to reshape the way the financial community thinks about investing."

To Tilt or Not to Tilt [IndexUniverse, 31May04] "The basic difference between DFA and Vanguard is that the folks in Santa Monica believe in premia for value and small stocks, while those in Valley Forge do not... I think that DFA is right, but even if you believe in their approach, there is no certainty that they are right, or even if they are, that your time horizon will be sufficiently long enough to collect those premia -- that’s why they're known as risk premia."

Bonds vs. psychics [Report on Business, 28May04] "Bond transactions don't have to be reported publicly, ever. And the fact that the dealer's profit is embedded in the price makes it impossible to figure out if you got a good deal... Dealers do have a fiduciary responsibility to get you the best price possible when you buy something from them--except bonds. They aren't required to scour the market for the best price; they only check with their own trading desks. Who makes the rules? The [IDA], the dealers' self-regulatory organization."

One man's quest for redress ends happily [Globe and Mail, 27May04] "Justice for people who were burned by their investment advisers is such a rare commodity that it's worth celebrating even a single victory... Mr. Wotton's advice after more than six years of phone calls and letter writing? 'You have to be bloody-minded,' he said. 'Also, stay alive and learn to type.'"

Journal of Indexes • 2nd Quarter 2004 [May04] Article summaries include "Indexing or Active: Does active investing pay off?", "investors who may think they're doing well, but are mistaken", "asset allocation accounts for most variance in returns. A simple tool can make this work for investors."

They’re Called Trailing Commissions [Fund Library, 11May04] "Think of the more established professions: doctors, dentists, lawyers and accountants. Now think of your advisor. How does your advisor compare? Ask about 'trailers'. Specifically, ask your advisor if they are fees or commissions and listen carefully to the answer given. Above all, remember that saying something is so doesn’t make it so."

Shift from owners' to managers' interests has corrupted capitalism [Investment Executive, 10May04] "The shift from companies that seek shareholders' interests to companies that serve managers' interests has led to a corruption of capitalism; at least the capitalism envisioned by Adam Smith, and his 'invisible hand' metaphor. Bogle suggested that the 'rise of the imperial CEO', and the diffusion of corporate ownership, has removed accountability from the system."

Creating Sound Governance: The Shareholder’s Perspective [BFMRC, 10May04] "If we reaffirm the lofty goal set forth for us by Lord Keynes, we will serve not only ourselves, but our society, too:

The social object of skilled investment should be—not 'to beat the gun,' to outwit the crowd, to pass the bad, or depreciating, half-crown to the other fellow—but to defeat the dark forces of time and ignorance which envelop our future."

Malkiel Agrees With Buffett on at Least One Thing [Bloomberg, 03May04] "If you're saving for retirement, college or any financial goal, expenses are the linchpin for any investment plan. 'The best way to predict (higher than average) performance is to find funds in the lowest quartile (25 percent) of expenses,' Malkiel found. 'They do 3 percentage points better than the high-cost funds.'"

If You Index, You Can Still Argue [Wall Street Journal, 02May04] [If link is dead, search Archive for "clements", then select May 02 article.] "It's like a fistfight at a prayer meeting. If you get a bunch of index-fund aficionados together, they will all humbly agree that investors can't outsmart the market. But ask them how to build a portfolio and they will soon be lacing up the boxing gloves. What should you make of all this? Here's my take on three of the thornier issues facing index-fund investors."

Get with the program [Report on Business, 01May04] "The markets for many hard and soft assets are quickly becoming far more efficient than the centuries-old markets for securities... by minimizing price spreads and maximizing transparency and efficiency. Why is it that financial markets are only accepting this idea under duress?"


April 2004

Advisers should stop whining about DIY investing [Globe & Mail, 27Apr04] "The adviser argument against do-it-yourselfers sounds protectionist more than anything else, and that begs the question of what's being protected. If it's just the income of advisers, then it's easy to see the do-it-yourself ranks growing."

A Better Way To Invest: An Unbiased Guide for Individual Investors [David Jackson] "A free, unbiased investment guide for mainstream and wealthy individuals that shows you how to lower your risk and slash your investment costs using exchange-traded funds (ETFs)." See also The ETF Resource Page.

John Bogle • The Investors' Advocate [TIME Magazine, 26Apr04] The 2004 TIME 100 "list of those whose power, influence or moral example touches the lives of all of us, right now" includes John Bogle, whose "success in making Vanguard an industry giant demonstrates that it is possible to do right by the customer and still do well."

Speak up for lower mutual fund fees [Financial Post, 22Apr04] "It's lousy advisors who know the 'value' they provide is nothing like 1% of client assets who feel threatened by F class funds -- and discount brokers who make no pretense of providing advice but still collect trailer fees meant to compensate the 'real McCoy' advisors. Let the market decide. Investors should support ASL, E*Trade and the first fund companies to officially offer F class funds through discounters. And the banks' discount brokers should follow E*Trade's lead."

Small investors deserve higher standards [Toronto Star, 21Apr04] "Why is it that the interests of the people whose money is at risk always seem to be secondary to the interests of the people who wish to get their hands on it?"

Securities regulators assailed [Globe & Mail, 19Apr04] "Canadian securities regulators have come under attack by a broad cross-section of market players for proposing 'toothless' measures aimed at monitoring the powerful mutual fund industry. Investors, academics, lawyers, and even members of the industry itself have assailed the regulators for a proposed governance regime that they say would lower existing standards and do little to protect mutual fund investors." See also Comments Received.

Do advisors fear F class units? [Frugal Funds, 18Apr04] "Delayed withdrawal from E*Trade suspicious... If pressure from advisors was at least partially to blame for E&P's and AIM-Trimark's withdrawal from E*Trade's initiative, it's likely that those advisors aren't truly confident in the value of their advice - a sad statement for any professional."

A Broker's Empty Promise, a Retiree's Shattered Dream [ NY Times, 18Apr04] "Major Wall Street firms have targeted and preyed on unsophisticated 'buy and hold' Ohio investors, placing them in inappropriate fee-based accounts that generated huge annual revenue streams for the brokers. They put their own financial interests ahead of their customers'."

E*Trade completely reneges on F-class funds. So much for the fund industry's fiduciary duty to self-directed investors. [The link goes to a copy of E*Trade's F-class page (from 16Apr04) because access to the original page is restricted to clients.] See also: Loss of AIM mars E*Trade's cheaper investing bid [Globe & Mail, 08Apr04] "A breakthrough in low-cost investing has fizzled because of a mutual fund company's trepidations... Blame this setback on the folks at AIM and, by extension, any other fund companies that won't make their F-class funds available to self-directed investors. By taking this position, they've made it clear that what matters most to them is keeping their sales force -- read: financial advisers -- sleek, fat and happy." and All the Major Players Should Join F-Class Fund Parade [Globe & Mail, 03Apr04]

As The Index Fund Moves from Heresy to Dogma ... What More Do We Need To Know? [BFMRC, 13Apr04] "Whether markets are efficient or inefficient, investors as a group must fall short of the market return by the amount of the costs they incur... You get what you don’t pay for!" Got it?

Don't fall for it [CBS MarketWatch, 13Apr04] "The worship of guru-managers, even managers as good as Bill Miller, is a dead-end street for investors. In fact, it's the biggest sucker's game on Wall Street."

A few words to the wise [Canadian Business, 12Apr04] "Retail investors are piling back into the market. A sign the mini-bull market has peaked? Perhaps. But fund managers needn't worry: they'll get rich no matter which way the markets go, thanks to the exorbitant management fees paid by thousands of Canadian investors. Studies have shown those fees are a big part of the reason managed funds traditionally underperform the market. Fund salespeople don't like to talk about this, for obvious reasons. If forced to, they claim the fees are warranted--despite ample evidence to the contrary."

A question of trusts [Financial Post, 13Apr04] "Beginning in 2004, income trusts will be required to formally report the portion of their distributions that is comprised of 'return of capital' in a separate space on the T3 slips that are sent out for personal income tax calculations at the end of each year... Investors need to reduce the adjusted cost base (ACB) of their holdings by the amount of income classified as return of capital. The lowering of the ACB means that when units are sold any taxable capital gain will be greater, or the loss will be less than if calculated on the original cost of the holding."

A Bribe By Any Other Name [ Forbes, 19Apr04] "Belatedly, regulators are digging for dirt in the pension management business. They're going to need a big shovel... That's the way this game is played. Experts like Mercer that collect fees for advising pension sponsors also pocket fees from the money managers to whom they refer pension business."

Diversify! Diversify! Well, Not So Fast [ NY Times, 11Apr04] "Relatively few academic researchers seriously entertained the possibility that a significant number of managers of less diversified funds could regularly pick market-beating stocks. Yet that is precisely the conclusion of the new study, On the Industry Concentration of Actively Managed Mutual Funds... While investors may do well to favor index funds in large-cap or value-oriented market sectors, they may want actively managed funds with strong long-term records when investing in small-cap growth stocks."

When to Shop Around for Advice [Wall Street Journal, 11Apr04] [If link is dead, search Archive for "clements", then select Apr. 11 article.] "At issue is one of the most critical questions facing investors. Should you hire a broker or financial planner, or should you go it alone? I would argue there are two groups of investors who ought to shun advisers: The truly knowledgeable and the profoundly ignorant."

Efficient Frontier • Spring 2004 [Apr04] Reflections on Money Management ["Of Risk Premium Collection, Patience, and Spreading Your Bets"], The One-Fund Holy Grail ["Excellent low-cost fire-and-forget portfolio management for those averse to pulling a bunch of asset-class strings in their retirement accounts."], The Birth of Plenty ["By examining how our world prospered when and where it did, we just may be able to better divine where it is we are going."], and Links of the Month.

Are you an honest advisor? Take the test [Investment Executive, Apr04] "Despite our best intentions, sometimes we don’t live up to the standards we set for ourselves. Here’s how to deal with the conflicts."

Hard line on ‘soft dollars' [Globe & Mail, 05Apr04] "I would say that should be an absolute no-no for anybody, because that's so rife with conflict of interest it shouldn't even be touched with a 10-foot pole."

All the major players should join F-class fund parade [Globe & Mail, 03Apr04] "It's entirely fair for advisers who aren't fee-based to receive compensation for building and maintaining client portfolios. Folding that fee into fund MERs isn't a perfect way to do this, but that's the system we've got for now. If anyone has a right to complain about this arrangement, it's do-it-yourself investors. They receive no advice or continuing portfolio monitoring, yet they pay an MER that reflects the cost of such help. F-class funds address this unfairness beautifully. So why aren't they widely available to self-directed investors?"


March 2004

Stop the slide in trust [Globe & Mail, 26Mar04] "Embedded compensation through commissions and trailing commissions causes a massive bias toward products that may not always be in clients' best interests. Through all of this, most advisers are little more than commission-based sales agents masquerading as bona fide 'independent' professionals -- and most consumers have no meaningful way of sorting out the bad apples."

The Tragic Perils of Passive Investing [FundLibrary, 24Mar04] A commissioned financial advisor is "disheartened to see how many investors and reporters are falling for the so-called benefits of passive investing." Then again, perhaps he's simply Hoodwinking innocent investors (if not also himself.)

Brutal but honest friend has his say [Financial Times, 15Mar04] "Mr Bogle says the shame of the fund industry and its current attempts at reform is that [it] is less about structure and strategy and more about spirit. 'Damnit,' he says, 'if we don't return to the spirit of serving shareholders, no reform will work.'"

Investors, Do Not Try This at Home [ NY Times, 14Mar04] "With around $35 billion invested in publicly traded stocks at the end of 2003, Berkshire Hathaway's equity portfolio, if seen as a mutual fund, would be the 10th-largest stock fund in the [US], according to Morningstar."

A New Darling for Some Inflation-Wary Investors [ NY Times, 13Mar04] "Treasury Inflation Protected Securities [TIPS] are being snapped up by individual investors as well as pension funds and others who are concerned that inflation could erode their returns in coming years."

1983-2003: Annual returns of key indices • Canada and 1984-2003: Annual returns of key indices • US [FranklinTempleton] "By diversifying across asset classes, you can manage your portfolio risk and volatility, while investing in the top performing asset classes for consistent returns."
1984-2003: Periodic Table of Investment Returns [Callan Assoc.] is a "representation of relative asset class performance over the last 20 years... ranked from best to worst. Each asset class is color-coded for easy tracking. Well-known, industry-standard market indexes are used as proxies for each asset class."

Buffett faults mutual fund directors [Globe & Mail, 09Mar04] "Billionaire investor Warren Buffett condemned directors of mutual funds for not firing management companies that allegedly let trading abuses boost managers' fees at the expense of shareholders. 'Can you imagine directors who had been personally defrauded taking such a boys-will-be-boys attitude?'"

Canadian fund fees not that much higher than U.S. [Globe & Mail, 09Mar04] "Are Canadian fund companies off the hook, then, when it comes to fees? Hardly. There are still way too many funds that charge way too much for way too little performance. This is the reason to get mad at the fund industry for the fees it charges, not the fact that fees are somewhat higher here than south of the border."

What Is That 1% Fee Buying You? [Wall Street Journal, 07Mar04] [If link is dead, search Archive for "clements", then select Mar. 07 article.] "Charging commissions or charging a percentage of assets is just a convenient and relatively painless way for advisers to extract their fee. In fact, investment management is probably the least valuable service you get. It doesn't take any great brains to put together a well-balanced portfolio of mutual funds. At the same time, it's also highly unlikely that the funds selected will generate market-beating performance."

Warren Buffett's Annual Letter [Bershire Hathaway, 06Mar04] "Those index funds that are very low-cost (such as Vanguard’s) are investor-friendly by definition and are the best selection for most of those who wish to own equities."

Wrap up your investments [Globe & Mail, 06Mar04] "Wraps are better than owning a disorganized jumble of mutual funds or stocks, but savvy investors and advisers can do just as well or better without them."

Sent packing [CBS MarketWatch, 01Mar04] "Listen to the biased ideas of this radical because this stuff could not only create a massive outsourcing wave, leave all the poor folk working in the fund industry worse off than America's Rust Belt unemployed, his policies would further undermine the economic recovery, kill the new bull market, sabotage capitalism and destroy the American Way of Life (did I leave anything out?)."


February 2004

It’s High Time We Return Capitalism to its Owners [BFMRC, 26Feb04] "Corporate America can only be an engine of the nation’s growth and prosperity and a major source of innovation and experiment if its managers are focused on creating long-term value for its owners. To the extent that managers sit unchecked in the driver’s seat, furthering their own interests at the expense of their owners, capitalism cannot flourish. Since no one—no one!—looks after assets as well as their owners, we must return them to their former preeminence."

When money funds are more like piggy banks [Boston Globe, 26Feb04] "Regardless of which strategy you call yours, Statman's and Fisher's research -- due out in the next few weeks -- will say it doesn't work. The duo looked at the US, British, German, and Japanese markets, and found that investment patterns that held up in one place crumbled in the next. Likewise, the researchers found that systems that appeared to work over certain time periods generally failed when those intervals were altered."

Small investors looking to politicians for investment help [Globe & Mail, 26Feb04] "'Everybody's said everything about regulation and the system and all of these technical things,' Mr. Buell said. 'What they seem to be missing is that there are people being affected'... The real message is contained in the sometimes horrifying quotes from about 50 investors who were victimized by advisers who provided unsuitable advice, traded accounts without authorization or who were involved in alleged frauds, scams and other inappropriate financial dealings."

Forget RRSPs — pay down debt first [Toronto Star, 24Feb04] "You should probably hold off if you are paying 29 per cent interest for a loan from a finance company or department store, 18 per cent for your credit card balance, or even 6 per cent for a mortgage loan."

Index Fundamentalism Revisited [Feb04] From Bill Bernstein's summary: "Bottom line: what's important is low cost, low turnover, and high diversification. There's nothing magic about indexing; if you do all three of the above things, the difference in performance between active and index will be so small that there won't be any statistical daylight between the two approaches."

Moneychimp "seeks to be the most coherent, logical, useful and accessible financial education resource on the face of the earth... The name comes from that old joke about the dart-throwing, stock-picking monkeys."

Journal of Indexes • 1st Quarter 2004 [Feb04] Article summaries include "It doesn't need to be difficult or costly. Russell index pioneer takes a detailed look at how investors deal with recon transition.", "Though recently under fire, ETF inventor Nate Most says that specialists are critical to ETFs' vaunted liquidity" and "In his new column, the author maintains that the best ETFs are separate funds, and not share classes."

Foolproof portfolio is easy to assemble [Financial Post, 19Feb04] "Buy a few ETFs or low-cost funds and sit back in your chair... Costs still matter but there's more to this debate than active vs. passive. It's all about asset allocation, sticking to the program and keeping things simple."

AIC takes "Buy, Hold and Prosper" to new heightsdepths "Advisors should note that the new AIC trailer commission schedule features:
• Trailers that increase over the long term to align with our “Buy. Hold. And Prosper.” investment philosophy.
• Trailers that increase without switching units to minimize administration.
• Trailers that grow to 75 basis points which, when combined with asset appreciation, creates the potential for an attractive income stream for advisors for their continued advice and service.
• Trailers that are increased with no corresponding increase in management fee or MER.

Money Puzzlers for You to Ponder [Wall Street Journal, 15Feb04] [Search for "clements", then select Feb. 15 article.] "When it comes to managing money, there are all kinds of puzzling questions. For proof, take a look at the list below, which I put together with the help of William Bernstein, an investment adviser in North Bend, Ore., and Meir Statman, a finance professor at Santa Clara University in California."

A Bargain at Half the Price [Forbes, 12Feb04] "Two academics assert that mutual funds tend to gouge retail customers. [They] simply compared what fund company managers charge to run their in-house funds for the gullible masses with what they charge for the same kind of work done for pension sponsors, headed by sophisticated folk. [They] found that portfolio management costs average 0.28% annually for pension clients but 0.56% for mutual funds."

Be assured: OSC fund industry investigation will find abusers [Globe & Mail, 13Feb04] "There's too much money, too few controls and too many smart people with dubious ethics wandering around to think that Canada is going to emerge pristine from the swamp that's engulfed the U.S. fund industry."

Who's Minding the Store? [FirstQuadrant, Feb04] "A host of transgressions, outbreaks of corporate malfeasance, accounting chicanery, and scandals in the mutual fund business have prompted me to summarize some of my own musings on ethics in business and society...we should brace for the possibility that ethical scandals will continue to be commonplace for the balance of our careers."

Vanguard: What Flag Are They Flying Now? [, Feb04] "All industries, the fund industry included, need competition and new ideas. Through Vanguard, John Bogle has proven the benefits of low-cost, long-term equity investing. But Vanguard had little to do with the great technological capitalization of the last century. From the gun-slingers to the penny-pinchers, all mutual fund companies have their benefits and drawbacks."

Performance of Index vs Active Portfolios A 15-year (ending 31Dec03) performance comparison between portfolios comprised of the median actively managed funds versus similarly-weighted portfolios of index funds. Indexing continues to beat active by a substantial margin--despite the now 3-year old bear market. How does your portfolio measure up?

More choice for frugal investors [Financial Post, 05Feb04] "Barclays now has real competition in exchange-traded funds: New ETFs give Canadians access to Vanguard funds. American index fund giant Vanguard Group never did formally come to Canada -- but it no longer matters."

Clash of the indexing titans [ CBS Marketwatch, 01Feb04] "At long last, the Vanguard Group has jumped with both feet into the burgeoning market for exchange-traded funds with 14 new offerings...Undoubtedly, Vanguard's launch will bring a new wave of investor attention and press coverage to ETFs." See also: New Vanguard exchange-traded VIPERs begin trading.


January 2004

White comes full circle on fund fees [Financial Post, 31Jan04] "When it comes to mutual funds, investment management costs matter. Who says? None other than 'Doctor' Jerry White, the financial author, speaker and broadcaster."

Some U.S. index funds provide a 'natural hedge' [Globe&Mail, 29Jan04] "The S&P 500 made about 26 per cent last year in U.S.-dollar terms, and 3.4 per cent when converted to Canadian dollars. If you held the TD U.S. Index Fund, you'd have made 4.3 per cent, while the TD U.S. RSP Index Fund made 29.7 per cent...You can't assume a U.S. index fund will deliver the actual returns of its target index just because it's fully eligible for RRSPs, however."

Few beat the odds long term [Scott Burns, 27Jan04] "Only 13.2 percent [of 234 surviving US domestic equity funds] beat what the fund salespeople like to call 'merely average,' the Vanguard 500 index fund."

Index-linked GICs can take returns on risky ride [Toronto Star, 27Jan04] "A risky form of GIC has now been thoroughly crash tested. And the good thing is that no holes have been ripped in anyone's life savings....Long-term investors would generally do better investing directly in an index-linked mutual fund or tradeable index share than a GIC."

A Short History of the Other MIT [, 25Jan04] "How much longer before public awareness begins to catch up with the sweet deal that the fund managers have cut themselves? The answer is that it has already begun to happen. As Bogle told his audience last week, 'I have no illusions that a return of the industry to its original …model will be easy — not in the face of the powerful forces that are entrenched in this industry and whose economic interests are at stake. But I believe that this is the direction in which shareholders, competition, regulation and legislation will move. While we won’t get all the way to that goal in my lifetime, and maybe not even in yours, I am certain that investors will not ignore their own economic interests forever.'"

Vanguard guru comes into his own [Wall Street Journal, 11Jan04] "Despite Bogle's Mr. Clean status, fund-company leaders making up the Investment Company Institute trade group haven't sought out his insights or requested his participation in post-scandal task forces. Bogle, who served as the ICI's elected chairman decades ago, says he 'can guarantee' the industry won't come calling: 'They would rather die,' he declares tartly."

Survival of the Fittest? Or Is That Lion a Lamb? [NY Times, 11Jan04] "Some mutual fund companies bring new funds to market in a way that exaggerates the funds' attractiveness. That is because the companies often do not disclose crucial aspects of the process, known as incubation, that led to the funds' creation."

Efficient Frontier • Winter 2004 [Jan04] It's the Execution, Stupid [Index funds vs. ETFs], Almost Normal ["Although the evidence for mean reversion is weak, most financial economists believe that it exists."], A Preview of The Birth of Plenty ["By examining how our world prospered when and where it did, we just may be able to better divine where it is we are going."], and Links of the Month.

Watchdog to abolish mutual fund conflict rules [Globe&Mail, 10Jan04] "Securities regulators plan to abolish existing rules prohibiting self dealing and conflicts of interest between a mutual fund and a related entity and instead leave it to independent committees to oversee such transactions... 'I think what the commissions have done is simply outrageous,' said Glorianne Stromberg, a former commissioner of the Ontario Securities Commission and author of a report calling for sweeping reform of the more than $430-billion fund industry. 'It's a very, very poorly thought out move.'"

Poll shows lack of trust, respect for mutual fund industry [Globe&Mail, 10Jan04] "Participants in the first annual Globe Investor poll were strikingly negative in assessing the ethics, costs and practices of the fund industry, as well as the performance of its products... They're unhappy with their funds' performance; they believe management fees are too high; they feel the fund industry isn't giving them enough information about those fees; and they're concerned that the U.S. mutual fund scandal could spread to Canada." See also Fraud, scandals keep investors on the sideline and Fund firms should listen to their clients.

Consider the “Stewardship Quotient” [BFMRC, 05Jan04] "I recommend that funds be considered (or, for that matter, ignored) by the extent to which they place the interest of their shareholders ahead of the interest of their managers...Through what I call the Stewardship Quotient (SQ), we can measure twelve elements that help to reflect the degree to which the funds balance these two distinct, and often competing, interests."

Where to Go When the Easy Gains Are Gone [NY Times, 04Jan04] "I see four risks for equities over the next 10 to 20 years. The longest-horizon risk is demographics: baby boomers will be liquidating assets to pay for goods and services in retirement. Valuation is a second risk. By any conventional metric, the market is not inexpensive... Third, the risk premium of stocks relative to bonds is a problem... The last risk is the most immediate: the quality of corporate earnings is poor."


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