Managed Money Reporter Newsletter — Issue 214, February 2005

Editors: Carl Spiess & Allan McGlade

Featured ArticlesCarl Spiess

Federal Budget Update

We waited with this month's newsletter so we could bring you breaking, and very important news about the 2005 Federal Budget.  There are two major items for RRSP investors:  

  • First, the 30% foreign content limit is being eliminated immediately for registered plans, 
  • Second, RRSP limits will continue to rise substantially in coming years.

The 30% foreign content limit elimination will be a major benefit for certain investors.  Some investors wish to invest more than 30% of their RRSPs outside Canada, due to the long term out performance of foreign investments and the fact that Canada only represents 2% of world stock markets.  As result, a whole range of RRSP clone foreign funds were introduced in the 1990's, which were RRSP eligible, but had higher management fees than the normal foreign funds whose performance they mirrored.  The budget eliminates the need for those funds, and for ongoing monitoring of the foreign content limit.  (We would expect that it will take a little time for RRSP statements to be updated, and for decisions on the best way to merge/transfer the clone funds into the regular versions of foreign funds.)  This change also eliminates a minor incentive to invest in labour-sponsored funds, which up until now enabled investors to invest beyond the regular 30% limit.  We continue to recommend a balanced approach to investing, with bonds, and Canadian and International equities diversifying a portfolio based on your investment goals and risk tolerance.

The 2005 budget commits the Government to continue raising RRSP and pension contribution limits, underscoring the responsibility of Canadians to invest for their own retirement.  RRSP annual contribution limits will be increased to $22,000 by 2010 from $16,500 for 2005 and $18,000 in 2006.  There will be corresponding increases made for employer-sponsored registered pension plans. 

Other items of interest to investors:

  • The amount of income that all Canadians may earn without paying federal income tax will increase to $10,000. 860,000 taxpayers will be removed from the tax rolls, including about 240,000 seniors
  • Proposed to add to the list of qualified RRSP & RRIF investments; investment-grade gold and silver bullion coins and bars, and certificates on such investments
  • Increased deposit insurance coverage to $100,000 from $60,000
  • RESP plan extensions for individuals who qualify for the disability tax credit
  • RRSPs and RRIFs left to dependent children may be able to be rolled into discretionary trusts instead of RRSPs
  • There is no longer a need to wind up locked in Income funds (LIFs) at age 80 and purchase annuities
  • Initiative to agree with the provinces by the end of 2005 on an enhanced system of securities regulation in Canada.

More on the Federal Budget ...

For more details on the budget visit the Government of Canada website:

Warren Buffett On Canadian TV

Normally, you don't get to hear directly from the worlds best investor and 2nd richest man.  But this weekend is different.  So, take an hour to relax at home and enjoy the wit and wisdom of the world's greatest investor, Warren Buffett.

Now, for the first time on Canadian television, a special documentary gives you a behind-the-scenes look at the life and investment genius of the legendary Warren Buffett. AIC is proud to sponsor the Canadian broadcast premiere of "Warren Buffett, Money Master" on Global Television Saturday, February 26 at 9:00 p.m. and also on PRIME Sunday, February 27 at 10:00 a.m.  Be sure to tune in.

Active vs. Passive Management - The Debate Continues By Carl Spiess

There has been much debate in the media lately as to whether good active fund managers provide value after their fees vs. the after fee cost of investing in their comparable indices.  Here is the debate:

In a rising market, inevitably the vast majority of actively managed mutual funds under-perform their benchmark indices. We reviewed this in 1999-2000, when Nortel drove the TSX to record heights, and virtually all actively managed funds under-performed. However, over the next 5 years, most actively managed funds outperformed the TSX, because they weren't stuck with Nortel and their cash balances helped to reduce downside risk during the bear market of 2001 and 2002. 

Today, we find clients again asking whether it is worth having fund managers try to actively manage your investments, or if you are better off passively indexing your portfolio. Compounding this are articles like "The Truth about Mutual Funds" which I personally think are misleading for several reasons. Please excuse the rant... 

First, this article like many others, offers no new information. It merely harps on a theme that has been written about for years, i.e. that many active funds under-perform in rising markets. Since most markets go up long term (some spectacularly like the S&P 500 in the US in the 1990s), most actively managed funds will under-perform their indices in rising markets. We grant that as a given, and there is much research to validate that commonly accepted view, but there is always more to the story.

Shocking headline: 
50% of funds below average!

In the last few years, it has become almost humorous to see headlines like this in the media.  Well of course half of all funds are below average, that is the definition of average (or more technically, median, where half are below, half above).  But half of all funds are above average, and most people's assets are in above average funds.  See article from last year.

Second (and this one is dangerous), it simply accepts statistics gathered by an index provider (S&P - SPIVA report) to highlight a weakness of index funds' competitors.  While the S&P report is laudable in that it adjusts for survivorship bias, its simple assumption that all funds that have been merged in the last 5 years are under-performers significantly drives the data to the indexers side.  Not all merged funds were under-performers.  As an example, CI Canadian Equity, had a terrific record of outperforming the index when it was merged into the similarly excellent CI Canadian Investment fund, to reduce costs and eliminate duplication, as both were managed by the same manager.  To say that it did not survive and therefore must have been an under-performer skews the analysis. 

In all fairness, the other side in this argument is guilty of biased stats as well. Active managers like Russell have published reports showing over the same time that active managers outperformed, but those reports also don't factor in fees on either the active managers or the index they are compared to.

Third, the article fails to point out other factors that may be important. Some of these other factors would be to look at risk adjusted returns, and compare them to the after fees returns of commonly available index funds. (Imagine an article that pronounced "Buying at Costco less expensive than at Loblaws" based solely on research done by Costco, and without looking at factors that might also be important like convenience and selection. Both have their place, but arguing one is better than the other simply based on in store prices is not really helpful.) 

Fourth, it ignores the most significant factor that affects individual client performance, namely actual holding time. True, the average time clients are in most active managed funds is now only two years (with both clients and some advisors guilty of constantly switching funds and moving into last year's hot fund - with long term disastrous effects). But the average client holding period of the largest index exchange traded funds is actually only days, which clearly invalidates any long term benefits those clients may have seen by having lower fees over the long term. 

Fifth, the active managed funds with their higher fees generally come with advice, which is considered helpful (at least from good successful advisors like your team at ScotiaMcLeod) and provides simple and useful services like PAC and SWP plans, and investment commentaries which may help clients stay invested long term. 

A Headline you should see:  100% of index funds under-perform the index!

Finally, none of the "most active managers under-perform" articles mention the corollary statement, which is that 100% of index fund managers under-perform their index. It turns out that, continuing into 2005, the iUnits S&P60 Exchange Traded Fund remains the largest under-performing Canadian equity fund in Canada (rated 2 stars out of 5 by Morningstar against its peers, with 2004 being the only year in 5 years that it outperformed its peer group of actively managed funds after all fees). Even index funds have costs, so at least "research" into active funds performance (which are reported after fees) should be measured against a comparably available index fund's performance after fees.

Balance, Balance, Balance

As our investment philosophy states: Fees matter, but since a good number of active managers do outperform, so does advice and risk. We know you hear this from us all the time but the key is balance. Experience has shown us again and again that the right blend of reasonable fees, good advice and moderate risk ensures that our clients see suitable growth for their needs while still being able to sleep at night. As a personal note, it seems that each time a client asks me about index funds, we compare their current funds with comparable index funds or ETFs.  Most often, the majority of their active funds (even after their higher fees), have outperformed comparable index funds.  Please contact us if you have any questions about your account or would like to see a comparison. 


There are some new versions of index investing out there that we will continue to examine for our clients, and we will continue to suggest that 20% of a portfolio could easily be indexed. That is what large pension funds are doing to balance risk and return (and isn't your RRSP your own personal pension?). However, until we actually see our clients being more successful with their index investments than with the funds we recommend, we'll keep a foot in both camps on this important debate.

You may wish to look at other vehicles for "index-like" investments, too. We continue to like our recommendation of 5 years ago: for index-like diversification, and potentially better returns with lower risk in the Canadian market, we recommend Synergy Canadian Style management fund - click to see performance. 

More on Active vs. Passive Investing ...

Here is a good article about both sides:  

You say "Tomato"
And to cap it off, there is also a debate as to whether the term index should be pluralized as "indices" or "indexes".  A quick search on, indicates that "Stock Indices" (135,000) is in more common use than "Stock Indexes" (104,000) and "Market Indices" (543,000) much more commonly used than "Market Indexes" (104,000).  We'll defer to the more common usage of "Indices" as a result.

Tax Receipts

ScotiaMcLeod RRSP receipts for contributions made from March - December 2004, have already been mailed.  RRSP receipts for the first 60 days of 2005 (including the March 1st deadline), will be mailed as contributions are made, or for payroll accounts, by March 10th.  For other tax reporting information, please see:
Tax Planning Tips 

Recommended Reading

ScotiaMcLeod's Economic and Market Outlook Conference Summary - A quick update on the economy, interest rate predictions, and where the dollar may be headed

Investment Portfolio Quarterly (Winter 2005) - A detailed review of recommended equities, funds and more

AIM/Trimark Introduces Innovative Interest Fund

AIM/Trimark has recently introduced a unique fund that will provide a hedge for people worried about the effects of rising interest rates on their fixed income investments.  The Trimark Floating Rate Income fund, will invest in floating rate loans taken out by corporations.  This fund is a great way to diversify a typical bond portfolio of laddered government bonds. For more information, visit: 

Fun With Numbers - Statements & Performance

With the recent run up in the markets, many clients who have been dollar cost averaging into their accounts through payroll deduction are likely achieving returns that are better than they think, and better than the posted 5 year returns for their actual funds.

Let us explain more about the difference between the posted return for a fund, and your actual return, by way of examples.

To help review fund returns, most websites, papers and advisors use common time frames (1, 3, 5, 10 year) returns for a fund, to help compare, on an apples to apples basis, the performance of various managers against each other and their benchmark indices.

However, your return may be better or worse, even in the same fund, since it is unlikely that you purchased all of your investment exactly 1, 3, 5 or 10 years ago. For clients contributing through payroll deduction or PACs, of course your individual return will be different, so how do you calculate it?

ScotiaMcLeod is unique among full service brokerage firms in that we actually provide the change in plan assets (what you invested vs. what the account is worth), since the account was opened.  So for example, a client who opened an account in January 2000, and has been putting in $1,000 a month since then, would have contributions of $60,000.  If invested a typical balanced fund, for example Trimark Select Balanced Fund, their market value may be around $71,400 showing a plan growth of $11,400.  While this may not seem like a lot (19% over 5 years - which you may conclude is approximately 3.8% a year), the reality is that not all that money was there for 5 years, only $1,000 was there growing for the full time, and the last $1,000 was invested for less than a month - not much time to grow.  So given that on average the money was there for 2.5 years, we have an account that has grown 19% in 2.5 years or 7.6% as a rough calculation, and more accurately 7.12% a year compounded.  Hopefully this gives you a rough idea of how to look at your plan growth where money has been contributed regularly.

For more complicated situations where transfers in and out have occurred, ScotiaMcLeod has a system that can generate a personal rate of return for your account, factoring in your individual, unique timeframes.  Contact us for more details or if you have any questions about your account's performance.

More on Understanding your Account Statement ...

For more information on your ScotiaMcLeod statement, visit our statement page.

Mutual Fund Reporter Recommended Website of the Month

This month's Link of the Month is on Understanding your Statement from



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