Toronto District School Board Continuing Education. Investment Planning. Winter 2018, Week 3. Instructor Gail Bebee

Transcription

1 Toronto District School Board Continuing Education Investment Planning Winter 2018, Week 3 Instructor Gail Bebee gbebee@gailbebee.com

2 What was the most important thing you learned from last week s lecture?

3 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, vice versa 4. No maturity date - bond funds BUT 5. Low bond fund fees are critical

4 Week 2 Take Aways Stocks 1. No guarantees. 2. Higher risk, higher reward than fixed income & real return 3. Picking stocks is work - research before you buy 4. Dividends are good.

5 Today s Topics IPOs Preferred shares Income trusts ADRs Real estate Currency hedging Funds

6 Initial Public Offering IPO First time stock offered Best IPOs sold to institutional investors/ preferred clients Retail investors must buy once trading starts

7 Should you buy IPO? Many perform poorly first 3-5 yrs Some companies fail Best to wait a few years before buying stock

8 The Downfall of the Popular IPO March 2017

9 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

10 Ontario Marginal Tax Rate 2018 Taxable Income Income Capital Gains Eligible Dividends first $42, % 10.03% -6.86% over $46,605 up to $75,657 over $75,657 up to $85, % 14.83% 6.39% 31.48% 15.74% 8.92% over $220, % 26.76% 39.34% Data from taxtips.ca

11 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

12 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

13 Straight Rate Fixed interest rate Floating Rate Rate linked to established rate e.g. bank prime better when rates rising

14 Rate Reset Interest rate reset on specific date(s) based on prevailing rate Convertible Convertible to common shares Specified formula Price moves with share price

15 Cumulative Unpaid dividends accrue To be paid in future Non-cumulative Missed dividends disappear

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17 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)

18 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 preferred share ladder

19 Choosing preferreds is work

20 Prefs can be Risky e.g price meltdown

21 Funds are Less Work BMO S&P/TSX Laddered Preferred Share Index ETF 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

22 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

23 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

24 American Depositary Receipt ADRs Certificate representing ownership of share(s) non- U.S. company Trade like stocks on US stock exchanges e.g. NYSE

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26 ADRs - How they Work Foreign company needs capital Hires U.S. bank to set up ADR ADR holds shares bought on company s home stock exchange Original shares kept in home country custodian bank

27 Why Buy ADRs? Established companies, low bankruptcy risk U.S. $$, minimizes currency management Easy to trade US disclosure, accounting standards Annual reports etc. in English

28 Examples of ADRS Major depository banks issuers BNY Mellon, Citibank, Deutsche Bank DEMO BNY Mellon ADR inventory

29 Real Estate Asset Class Property, buildings Higher risk Illiquid Real estate values rise & FALL Being a landlord is work

30 Why Invest in Real Estate? Diversification Consider your home First: place to live Second: investment

31 Options for Investing in Real Estate

32 Buy Land & Bricks

33 Real Estate Direct Ownership Major $$, long term commitment Minimal diversification Upfront costs: taxes, legal, etc. Ongoing costs: mortgage, insurance, taxes, maintenance etc. Landlord duties

34 Real Estate Stocks & REITS Malls, offices, industrial parks, apartments diverse or specialized Diversification one/few purchases Liquid, known costs, low effort Trading costs Tax treatment

35 Real Estate Stocks Possible Can. dividend tax credit Trading on TSX Melcor Developments, MRD-T First Capital Realty, FCR-T Brookfield Properties, BPO-T

36 Real Estate Investment Trusts (REIT) Units trade like stocks Unit owners pay taxes on income Best for tax-deferred accounts

37 Real Estate Funds Mutual funds and Exchangetraded funds (ETFs) Own pool of stocks, REITs Instant diversification Low maintenance Can invest small amounts

38 Real Estate Mutual Funds Dynamic Global Real Estate Fund Fidelity Global Real Estate Fund

39 Real Estate ETFs ishares Global Real Estate Index Fund (CGR-T) Vanguard FTSE Canadian Capped REIT Index ETF (VRE-T) BMO Equal Weight REITs Index ETF (ZRE-T)

40 Currency Hedging Strategy to protect investments from currency price fluctuations

41 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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43 Un-hedged US Investment Investment return, US$ Change in FX rate US$/Can$ Total Return, Exchange rate stable Can$ falls to $0.80 US Can$ rises to $1.10 US Can$

44 US Investment Hedged to Can$ Investment return, Exchange rate stable Can$ falls to $0.80 US Can$ rises to $1.10 US US$ Change in FX rate Total Return, Can$

45 Impact of Hedging Av. Annual Return Dec. 31, 2017, % ishares US Fundamental Index ETF (CLU) C$ hedged ishares US Fundamental Index ETF, (CLU.C) unhedged 1 yr 3 yr 5 yr

46 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

47 Financial Products

48 Financial Products Created by financial company Marketed to investors Sold as easy, profitable investing solution

49 1.Mutual Funds 2.Exchange-Traded Funds

50 Mutual Funds Pools money from many investors Specific investing objectives Hold one or more asset classes Pay distributions 16,000+ funds

51 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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53 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

54 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

55 Mutual Funds are popular because Instant diversification 2. Low knowledge 3. Low maintenance 4. Widely available

56 Mutual Funds are popular because Small purchases, regular contributions 6. Professional management 7. Access non-typical investmentsemerging markets

57 The downside of mutual funds High cost among most expensive in world No guarantees - return of principal or performance

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59 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

60 Mutual Fund Ownership Costs 2. Administrative Expenses trading, HST, accounting, legal, borrowing costs

61 Mutual Fund Ownership Costs 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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63 Impact of Fund Fees on Returns $50,000 initial investment 5 years, 5% return rate 1.00% MER 2.50% MER Fund Value without Fees $63, $63, Total fees paid $3, $7, Fund Value after Fees $60, $56, Reduction in future value due to fees 4.9% 11.89% Using

64 Can a mutual fund manager add enough value to overcome the drag of fund fees on returns?

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66 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

67 How Much are You Paying in Fund Fees? Buyupside Investment Fee Calculator Investor Education Fund Mutual Fund Fee Calculator

68 Canadian Mutual Fund Databases Lots of info & fund screeners Morningstar Canada The Globe and Mail

69 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 Adds 0.5%+ to fund MER Most people don t need seg funds Do you need segregated funds in your portfolio?

70 Selecting a Mutual Fund 1. Which fund class(es) meet investment objectives 2. Fund screener - short list funds 3. Research Fund Facts,

71 Mutual Fund Facts Summary of fund prospectus Fund Facts Document Explained Available at fund co. Website As of May 30, 2016 dealer must provide before purchase

72 Mutual Fund Codes Fund co. ID letters + numbers One fund many codes by sales fees Trimark Income Growth Fund Ser. A AIM1541 (DSC), AIM1545 (LSC) AIM1549 (LSC), AIM6543 (FE)

73 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?

74 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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76 Case Study: Mawer Canadian Equity Fund Fund Facts Mawer website Morningstar Canada Fund Profile Globe and Mail Fund Profile Fund Library

77 More Info on Mutual Funds Chapter 14 of No Hype - The Straight Goods on Investing Your Money GetSmarterAboutMoney.ca

78 Funds in Regular Accounts Funds issue taxable year end distributions Fund value falls after issue Near year end, buy funds after distributions issued

79 Suggested Homework Research a mutual fund you own. What are 5-year return rates? Where does return rank vs. similar funds? What is MER & is it 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?

80 Next Week Exchange-traded funds Developing and implementing your investment plan Government savings programs