Well I’m sorry Bruce but that’s just plain dumb. Of course 2.5% sucks when compared to MMF or Cdn stocks.
You complained several times about the media not factoring in the tax credit when reporting LSIF returns, thus implying the tax credit was a silver bullet that would turn a sow’s ear into gold. I simply tested that. Glad you concede that a 2.5% CAGR “sucks.”
When LSIFs had great numbers going into March ’00 were they good investments?
Yes, LSIFs did very well in the late ‘90s….because they were stuffed with tech, the same crap that the media – acting on its own -- induced all those stupid DIY investors to put all of their money into. I guess the LSIF managers were following the media’s advice too, huh?
So let’s extend the CAGR window to take in those heady returns. Eight LSIFs have 10-year records. Here they are with CAGR and asset level at Mar 31:
n Dynamic Venture Opportunities, 6.0%, $60 million
n WOF Balanced I, 3.1%, $205.5 million
n Vengrowth, 1.5%, $270.2 million
n Impax Venture Income, 0.6%, $2.8 million
n GrowthWorks Canadian Fund, -2.8%, $262.4 million
n Canadian Medical Discoveries, -3.1%, $236.4 million
n Covington Fund I, -3.1%, $58.9 million
n First Ontario, -6.4%, $26.7 million
Let’s assume our example investor – let’s call him Jon – was prescient enough to buy the best performer – DVO – even though Dynamic had just taken over a fund that was on the verge of bankruptcy, was out of favour itself as a fund company and mired in net redemptions, and confined its marketing of DVO to the production of a brochure. (Indeed, wholesalers were discouraged from talking about it because of fears at head office that it would hurt the brand. Ned agreed to take it over only as a favour to an old friend.) Note that the current asset level -- $60 million – is only a bit above the generally accepted breakeven $50 million point and far below Vengrowth, suggesting Dynamic still ain’t doing much to promote the product and advisors still ain’t doing much to sell it. But we’ll be generous and assume that Jon and his advisor were clever enough to foresee its potential.
Let’s assume Jon put in $5,000 and then at the end of the lock-in redeemed and rebought to trigger another tax credit. Current value is $8,954 plus the second $1,500 credit = $10,454. If we calculate the return over 10 years on a $3,500 cost base we get a CAGR of 11.6%. Damned good but remember that we’ve assumed a case in which every star lined up.
Now let’s compare the BEST
LSIF situation to the MEDIAN
Canadian small cap equity fund. The 10-year median Canadian SC CAGR is…11.5%. So, Jon got an additional 10 basis points of return by accepting an 8-year lock-in along with weaker governance and unregulated valuation.
Now let’s look at the more likely case – a $5,000 investment in Vengrowth. Current value at 1.5% over 10 years = $5,803. Add $1,500 for the reinvestment tax credit to get $7,303. CAGR on a $3,500 cost base = 7.6%. Pretty good, but well below the plain old ordinary boring small cap fund’s 11.5%…and still loaded with the added risk of the 8-year lock-in, wanky governance and unregulated valuation.
So, exactly how is an LSIF a better investment than a small cap fund?
A review of my LSIF portfolio shows that my net cost so far is around $16K and the market value is around $34K.
IIRC, some time ago here or on boomer a number of people blew apart the methodology you’ve used to compute your returns. In any event, you’ve doubled your money over what time period? What’s the IRR?
If they should reverse their slide and post better than MMF and CDN stock numbers, will they then be good investments?
What are the odds of the slide being reversed? They’ve been flat to negative during one of Canada’s strongest bull runs. The poor sales of recent years mean most of their money is already well past the J-curve VC managers cite whenever investors get impatient. So those holdings should be in the black, but apparently they're still not doing well enough to offset the impact of sky-high fees. Looks like LSIF managers and their investees haven't been able to take advantage of a bull market to do IPOs. How are they going to do IPOs after the market turns down? Then, there's the entry of big pension funds like Teachers and CPP. Pension funds and insurers got burned in the '80s when they believed the pitches of external VC managers who over-promised and under-delivered. So they pulled out their money, making it possible for Ron Begg to sell the LSIF concept to politicians on grounds that there was a dearth of capital. Now the guys who over-promised and under-delivered for pension funds and insurance companies are running LSIFs and still over-promising but under-delivering. Now the big pension funds are moving into VC but by creating their own in-house management teams...and they have much more money and much longer horizons and much higher risk tolerance than any LSIF -- with no georgraphic requirements. (In one fell swoop CPPIB recently committed $400 million to the Canadian private equity and VC market, instantly outstripping the largest LSIFs.) It'll be interesting to see what happens to deal flow. In any event, please cite the factors that justify your belief there will be an LSIF turnaround.
I’m still in the money and since I understand the investment, it’s risk and since it represents a very small percentage of my portfolio I have no intension of redeeming anything before 8 years and I’ll continue to buy more every year.
Where and when did I advocate that anyone redeem an LSIF before the end of the lock-in? I haven’t…because, without crunching the numbers, it seems the breakeven point on the next investment would be too high to cover the cost of repaying the tax credit and DSC, if any. Especially when the conventional stock market is peaking.
There are no inherently bad funds. There are sector plays that go through extreme swings but they always recover don’t they?
Gee, unit holders of Crocus and Retrocomm will be relieved to hear that. The same goes for investors in the 42 funds with negative 10-year CAGRs, according to PalTRAK. Imagine holding Mavrix Growth Fund with a 15-year CAGR of –3.3%.
And I checked the article and I was wrong. It was FP and no, there was no analyst or advisor quoted in the article. Want me to fax it to you?
My fax machine isn't working; would you like to e-mail the article. Or just tell us who wrote it and when. Was the author an FP reporter or a financial advisor? I don't believe that an FP reporter wrote an article with a buy recommendation that did not quote an analyst or advisor. Or was the article simply a report on the company's earnings? By the way, you said that an advisor would be held "accountable" if he recommended a stock that went tits up -- a claim you've made several times before. Exactly how would this advisor be held accountable -- what sanctions, penalties and redress would be imposed? By whom? What would the aggrieved client have to do to invoke such accountability? At what cost?
The other practices you mention aren’t inherently bad.
So it’s OK for an advisor to load his/her clients down with funds, ignore their phone calls and send no materials other than the annual statements mailed by the fund companies?
And it’s OK for an advisor to take someone who has just completed a redemption period and put her into another fund that is virtually identical to the previous one, starting a whole new DSC schedule.
And it’s OK for an advisor to do the same with a series of 10% annual withdrawals.
Many advisors don’t seem to be aware that Morningstar software now does similarity ratings.
Too many funds, too few funds? Ask 5 experts and you’ll get 5 different answers. You say, “many do, in fact, have too many or too few funds”. Quite a God complex there Bruce. Who made you the supreme expert?
I’m no expert at all, let alone a supreme expert. You – the professional advisor – were the one who declared it worrisome that people wonder if they have too many or too few funds.
But I’ve seen some statements from other advisors with high tech, biotech, etc., so I’m sure there are advisors who have succumbed to the lure of bright shiny things too.
Thank you for conceding a point.
Regarding your obvious hatred for DSC I have a question. What do you suggest for the investors out there that aren’t into fee for service and the size of their account isn’t profitable for an advisor to do FE at zero and live on the trailers.
Depends on the situation, as you would say. If this client shows potential for much greater asset accumulation, the advisor could do the early business as a loss leader. I know several advisors who grade prospective clients and do that. If the client has few assets and no prospects for great accumulation in the future, the advisor would be justified in doing DSC with full disclosure. The more ethical advisor would calculate the present value of the differential between the FEL and DSC trailers and credit that against a 4% or 5% FEL. So the client might end up paying 2-3% upfront in a transparent transaction.
Or are trailers evil too?
In concept, no. In application, yes. Because it’s a hidden payment based on no standards or accountability. The industry calls it a “service fee” but sets no standards for the service to be provided. (One gripe that Bylo shares with Ned Goodman is that discount brokers get the same trailer as full-service advisors.)
Years ago Jim Rogers of The Rogers Group and I advocated a system in which mutual fund companies sent each client an annual statement itemizing how much – in dollars and cents – was deducted from the fund on his/her behalf and how much of that – in dollars and cents – was spent on dealer compensation, portfolio management and fund operations. The client could then decide if his/her advisor was delivering value. (Rogers BTW was fully commissioned at the time) Several fund company presidents loved the idea, but said nobody had the guts to do it unless the regulators made everyone do it.
An alternative would be to return to the system used by several companies in the 1980s. Each quarter they redeemed units to cover their mgmt fee and sent the client a statement. A friend of mine has a broker who currently does this to create a trailer on the PH&N funds held in the account. Unfortunately, the guy falsely told my friend that these redemptions cover a charge imposed by PH&N, not by him. But you appear to consider my umbrage at wilful misleading to be “pedantic.”
The rest of your issues were kind of pedantic weren’t they?
Huh? You have been claiming there exists a crisis because one or more investors might
misinterpret a media article and then might
act on this interpretation and then might
lose money and this loss might
be major. (You still haven’t cited one real case)
I cited cases in which:
n The client of a full-service broker is paying for professional advice in creating and maintaining a diversified portfolio that makes sense and benefits from prudent asset allocation. In reality, he has been sold a grabbag of holdings including two expensive wraps and a dubious PPN. There is no sense of coherence, let alone any benefit from effective asset allocation. The account is generating fees worth thousands of dollars each year. You see no problem with this.
n An advisor told a couple of very modest means that they must substantially reduce their already modest standard of living if they hope to retire in relative comfort. This analysis was based on a software report that was based on erroneous data, a report that obviously was not checked before presentation. What would have happened had these people not had a friend who was willing and able to do the analysis required for a second opinion? How many other ordinary people have suffered from this guy's slipshod conduct? But, shaving a store clerk's income by 20% a year is just pedantic. Isn’t it?
n An advisor wilfully sought to mislead a client about market indices in general and the use of ETFs in particular. Basically, he lied. This client just happened to know enough to recognize the lie. What if he didn’t? And what if he believed the advisor and then told those lies to his friends and coworkers? But, lies told by advisors are merely pedantic, right?
My three o’clock appointment was a client who wanted to talk about her LSIFs. When she sat down she proceeded to show me the article we’ve been talking about. I shit you not.
So she “showed” you the article. Did she tell you to redeem her fund, or did she ask you if she should redeem her fund, or did she simply ask how her fund is doing? What fund was it, when did she buy and how is she doing? What did you tell her?