Managed Money Reporter Newsletter — Issue 189, November 2002

Editors: Carl Spiess & Allan McGlade

Tax Strategies for Non-Registered Investment Accounts

In the boom years of 1999 and 2000, many investors with taxable (non-registered) accounts incurred capital gains. If your mutual fund or other investments had realized gains in the last 3 years, you paid tax on those gains. However, depending on the current market value of those investments, there may now be a way to get some of that tax money back.

The strategy is called tax loss selling. We outlined most of the tax rules about this strategy last year, in our November 2001 issue, How to Turn a Loss Into a Gain. The details of that article are still valid. Note that in many cases, you do not actually have to reduce your exposure to a particular fund or the markets, rather you simply switch to an alternate version of the same fund.

For 2002, the rules remain the same, but now only gains from 1999, 2000 or 2001 can be reclaimed. It is also an advantage to be able to claim losses back against 1999 gains, when the inclusion rate was still 75%. (Capital gains inclusion rates are now only 50%) The important point is that clients who implemented this strategy last year, reported handsome tax refunds.

Note the 2002 deadline for tax loss selling is December 24th. If you have a taxable (non-RSP) investment account, please contact us well in advance of that date for a review of strategies that we can employ to save you some taxes this year.

Market Commentary

Last week, the Federal Reserve lowered interest rates again. This now marks the lowest rate for short term US$ investors in 40 years. Fortunately, interest rates in Canada remain higher, in fact, very similar to rates from 6 months ago. And on longer term 20 year stripped bonds, rates of over 6% are still available for long term RSP investors.

Interestingly, the return from 10-year U.S. treasuries and the S&P 500 over the past 10 years has been identical – that is, based on the current 10 year start and end points, stocks have given none of their traditional excess return for taking on additional risk. Longer term, stocks still retain their advantage as the best asset class for investing, surpassing bonds, t-bills and real estate.

The last 10-year spans in which stocks returns equaled or trailed bonds ended in 1990 and 1982 (the end of two bear markets). While history, as you know, never repeats itself exactly, it would appear to be the wrong time to now give up on stock investments. While price earnings ratios (essentially a measure of how expensive it is to buy a dollar of a company's stock earnings) seem high at around 25x for most major markets, the price to buy a dollar of short term US$ interest earnings is now at 80x, clearly even much more expensive. (At 1.25% on US$ T-bills, note that it takes 57 years to double your money investing in T-Bills.)

We are now approaching the end of three negative years and while there is nothing to say a fourth down year can't occur (especially if geo-political events conspire against us) – the odds are stacking up in equities favour. Indeed, according to Barrons, there has never been a four-year low point in which the market failed to rise over the next year with the typical gain close to 40%. Our outlook is always somewhat more conservative, with an expectation of returns in the 10-15% range over the next year or two, and 8%-10% longer term.

Manager Updates - One Contrarian

Last month we reviewed the many manager meetings we hold on an ongoing basis. In most cases, we sense a consensus with the above analysis, which indicates that equities appear to be attractive (within an appropriate overall asset allocation).

One manager we met with this month, had quite a different opinion. Larry Sarbit, manager of the AIC American Focused fund is currently only 7% invested, with 93% sitting on the sidelines waiting for opportunities.

Larry was not always so bearish. In 2000, his fund was more heavily invested, and he posted some good returns on his stock picks, which he later sold. The current holdings are the only ones he likes - for now. When asked, when he will start buying again, he is coy and suggests that the investors in his fund will benefit when he does. But he is not going to announce his change in sentiment to the world beforehand.

Fund Profile - AIC American Focused Fund

This fund, managed by Larry Sarbit, is currently 93.3% in cash. Waste Management is the top holding with 4.7% of the $1.2 billion asset base. His thinking there is that while it is a messy business, there are not a lot of new landfills being opened. The three other companies held in the fund are: smokeless tobacco producer UST Inc. (2.4%) Warren Buffet's Berkshire Hathaway Inc. (0.4%) and investment firm Neuberger Berman Inc. (0.2% of total assets).

If you are very concerned about equity exposure, or want to lock in a bit of the recovery seen over the last month, this fund may be an alternative. With this particular manager, you'll know that he really only invests when a dramatic opportunity presents itself.

View more fund information here, including a Fundmonitor report or contact us for more information on how this fund could fit into your portfolio.

Staff Profile - David Hillier

We are proud to note that your administrative associate David Hillier has recently completed his Professional Financial Planning (PFP) course. This course provides comprehensive training and a thorough understanding of financial planning issues and investment management.

David has an interest in taking quite a few more courses along the same lines to attain either the CFP, FMA, or CIM designations. David is keen to further develop his qualifications for providing financial advice.

David has been a member of our team for two years, and is responsible for answering a wide variety of daily client questions. David was born in Kapuskasing, Ontario, and studied at Brock University where he earned a Bachelor of Business Administration.

For more information about David and the rest of our team, please visit the About Us section of the website. Please do pass on your congratulations to David, if you are speaking to him next time you call with questions about your account.

Fund News - Working Ventures

On October 16th, Working Ventures announced an alliance with GrowthWorks, a major Venture Capital manager. We have met with GrowthWorks management and are encouraged by any proposal that presents a performance improvement and/or fee reduction for Working Ventures unitholders.

Unit holders will be able to vote on the proposed changes on November 25th, and will receive information in the mail. You can also find details regarding the change on Working Ventures website and Morningstar also provided commentary on Morningstar.ca.

Look for more information on Labour Funds next month in our special Venture Capital investing issue.

Please contact us if you have any questions about these funds or changes.

Mutual Fund Reporter Recommended Website of the Month

Looking for more information on your mutual funds? Each fund company has its own site of course, and some are better than others. The Mackenzie Financial site, has tools and calculators, online access, presentations on the benefits of long term investing, and of course, information on Mackenzie funds.

The Mackenzie Site also contains a link to The Mackenzie Mutual Fund Tax Guide, the most complete document we have seen on all the possible questions a mutual fund investor could have about taxes. The section on calculating your adjusted cost base for non-registered accounts is helpful for anyone considering tax loss selling for this year.