My Approaches & Beliefs:

I believe that people can do better with their investments if they have more investment options.   I have recently moved my business from a mutual fund only dealer to Aligned Capital Partners Inc. which is securities licensed so I can access a much wider range of investments for my clients.

  • Risk is the possibility of real loss of capital and not just volatility
  • You should understand more so you are not dependent on anyone
  • I need to know you to help you manage your cash flow

Objectives of Investing

  • Long term investing – objective should be to grow your capital
  • Short term investing – objective should be to protect your capital
  • Minimizing volatility (also known as risk) is also an objective.

What I Consider When Choosing a Mutual Fund

Here are some of the things that I look for when selecting a mutual fund.

Structural Attributes of Fund Company:

Who actually owns the mutual fund management company is important.  A management company that wants to maximize their profits may clash with their fund managers and performance of their funds.

  1. Manager Must be Experienced – You are buying professional money management when you put your money in a fund. Make sure the manager is among the best. Funds managed by experienced fund managers outperform by 1.5% per quarter. (Source: The value of experience for mutual fund managers white paper by Kempf, Manconi, Spalt, 2013)    I have a belief that managers should be bald or grey!  This is a competitive industry and managers get fired if their numbers are no good. Old managers have managed to make the cut for long periods of time.
  2. Company must be “investment lead” and not lead by marketing or shareholders of the fund company.
  3. Privately held – employee owned firms can balance the needs of the investor with the demands of the shareholders
  4. Size matters – Big funds are too difficult to manage–  A fund’s performance is inversely correlated with assets under management. (Source: Does fund size erode mutual fund performance white paper by Chen, Hong, Huang and Kubik.)  This means funds can get too big to manage.
  5. Managers must have their money in their funds – Co-Investment – Managers who have $1 million in the funds they manage outperform the majority of their peers over a five-year time frame. (Source: Morningstar Research Inc. and US Securities and Exchange Commission)

Investment Approach Attributes

  1. Hold Fewer Companies – Fund managers that concentrate their holdings in their best ideas outperform the market by 4% to 10% annually (Source: “Best Ideas” white paper by Randolph Cohen, Christopher Polk and Bernhard Silli).
  2. Diversify portfolio by idea – not every investment idea works out.  Having too much riding on one idea can result in a big loss.
  3. Managers have to be Active – Fund managers with the highest active share outperformed their index by 3.64% annually. (Source: The Mutual Fund Industry Worldwide white paper by Cremers, Ferreira, Matos, Starks April 2011)  This means that funds whose holdings do not overlap the index do better.
  4. Low Turnover – manager that does not change investments often does well.  Industry average holding period is only 1.4 years!
  5. Fees – Lower MER & TER expenses help the manager outperform.
  6. Bottom up stock selection based on fundamental analysis is better.   Managers should focus on investing and not on market timing or computer algorithms,

WHO do you choose?

  • All Mutual funds have someone making the final buy/sell decisions. Therefore there is a “Who” decision.
    • Knowing that the decision maker has a good “track record” is important
    • A bank or investment company is not the person making the buy/sell decisions.

Which Fund Do I Recommend?

  • Edgepoint Global Portfolio, Cymbria (closed end fund) & Mackenzie Global Growth Class are core long term investments and I am moving into other investment options such as REIT’s, private mortgage funds, private equity, as well as some individual companies.

Your costs of owning a mutual fund?

MER (Management Expense Ratio) – a key number

  • This is the annual cost to manage your money.
  • All funds (including “no load” funds) charge a fee to manage money.
  • Trailer fees (aka service fees) are collected by the funds and this cost is also  included in the MER
  • The MER is reported as an annual number but it is generally a small amount taken daily.

TER (Trading Expense Ratio) – this is the cost incurred by the fund managers to buy and sell investments inside a fund. The largest fund companies have an average TER of 0.16%.

Sales Commissions

  • No Load – means 0% initial sales commission, it does not mean “working for free”
  • Front End –  commission charged to purchase funds, can range between 0% to 5%.
  • Front End commission of 0% has same impact as “no load”
  • Deferred Sales Commission (DSC)
    • No initial cost to purchase, 5% sales commission is paid to salesperson at time of sale.
    • Declining sales charge/ cost at time of redemption to reimburse fund company for cost of paying salesperson.
      • Sales charge declines over time, eventually to 0%.
      • DSC period ranges from 6 to 8 years depending on fund company.
  • Low Load Commission
    • This is a variation of DSC above except that the commission paid to the salesman is lower, ranging from 1% to 4% depending on the fund and the deferred sales charge period is reduced and range from 2 to 5 years.

Small Tax Saving Opportunity – F Series Funds

  • It is possible to put your money into “F” series funds
  • These funds split out the cost of the advisor and the mutual fund
  • If the funds are non-registered, then the advisor’s fee is tax deductible.

Types of Accounts

  • Some people mistake the type of investment with the type of account.
  • Mutual funds are a type of investment and can be held in any account.
  • These are the types of accounts that I deal with.
    • Open
    • RRSP/RRIF – personal, spousal
    • LIRA/ LIF
    • TFSA
    • RESP (Registered Education Savings Plans) – grant of 20% of contribution available.
    • RDSP (Registered Disability Savings Plan) – grant of up to $3,500 for $1,500 contribution
    • DPSP (Deferred Profit Sharing Plan) – set up through corporations only