Managed Money Reporter Newsletter — Issue 127, August 1997

Editors: Carl Spiess & Allan McGlade

Market Commentary, GS Small Cap Fund Re-opens, Improved Statements, Congratulations to our Team & How to get an extra 2% on Guaranteed investments

By Carl Spiess

Worried About a Correction?

We are now seeing wild fluctuations in the markets almost daily. We are getting quite a few calls from clients who are worried that they have made too much money in the last few months, and are wondering if they should take profits. Here are some of the reasons why we think it makes sense to remain fully invested with a balanced portfolio.

Before we look at the details on current stock market valuations, let's remember that the easiest rule of thumb is that your age is the percentage which you should have in guaranteed investments (bonds or GICs). The rest should be split between Canadian and International stocks. Right now it is the portion of the portfolio in Canadian stocks about which we are getting questions.

The price earnings ratio tells us how much we are paying for a stock relative to how much it has earned per share over the last year. The P/E for the TSE is currently 23x. This means that for every dollar of earnings we are paying $23. This P/E of 23x is actually much lower than the period of 1992-1994 when it was nearly 100x. In the US, the S&P P/E is similar. The inverse of the P/E is the earnings yield. Thus a P/E of 23 is the same as a yield of 4.3%.

TSE 300 P/E Ratio When you relate that earnings yield to rates on T-bills (currently around 3.5%), the market does not look overvalued. And now that more analysts on the street are calling for even lower interest rates, it appears that calls for the TSE to hit 8,000 may not be unreasonable in the next year or two.

(Earnings yields are generally higher than dividend yields as most companies earn more than they pay out in dividends.)

Some analysts are looking for yields on long term Canada bonds to drop to 4.5% within a few years. Certainly we will have a few hiccups along the way, as our constitutional wranglings are far from over. Also, while a 100 point move in the market may set records and make great headlines today, as a percentage, a 100 point move is a lot less now than when the market was at 3000.

Even if we are wrong and the market were to correct even as this newsletter is on its way to you, we still recommend staying invested. Research has shown over and over, that being fully invested is the way to go. A recent Templeton Growth fund analysis demonstrated the difference between investing at the market high vs. the market low over the last 25 years. The person who purchased at the low each year got 18.0%, the person who purchased at the high got 16.9%, a difference of only 1.1%. This is certainly a powerful reason to stay invested. Please call us for more details.

Global Strategy Cdn Small Cap Fund Reopens

John Sartz, manager of Global Strategy's Canadian Small Cap Fund, has reopened the fund to investors. John is now working exclusively for Global and feels that he can now effectively manage more assets in the fund. His past performance has been excellent. Please call us if you would like more information on this fund or wish to place an order.

New Statements Help Our Investors

We have received great response to our new improved client statement. Here are a few items to note:

Unit cost should begin to appear on non-registered accounts at the end of this month.

Remember, unit cost does not tell you exactly how much you paid for an investment, as re-invested dividends (common to most mutual funds) will steadily increase your cost. This makes it appear that your investment has not grown as much as it really has. It is helpful to request information such as BellCharts (which we provide free of charge) on your specific fund to properly analyse your investment performance.

Investment Associates

There have been some changes in titles and offices for some of our team at the Mutual Fund Reporter. Barb Daley and Fred Winterburn who staffed our remote office at 700 University, have returned to be a part of our larger team at King & Bay. This central location will help them meet with fund managers and keep abreast of market events.

Barb Daley has also recently been accepted as a member of the Academy of Fellows, the professional association of FCSIs (Fellows of the Canadian Securities Institute). The FCSI is currently the premier designation bestowed by the Canadian Securities Institute. Barb regularly attends meetings of the Toronto Society of Financial Analysts as a result of this designation. Congratulations Barb.

In addition to that new designation for Barb Daley, Fiona Ali, (who is on maternity leave) Sharon Calvert, Jane-Ann Crombeen (formerly Kellam) and Nicole Keeler, have all earned the ScotiaMcLeod title of Investment Associate. Only 20 employees at ScotiaMcLeod have so far earned that title, and we are proud to have 5 of those Investment Associates working for you at the Mutual Fund Reporter.

We are also pleased to report that Allan McGlade, our estate planning and insurance specialist has earned the title of C.L.U. (chartered life underwriter). Our training is ongoing to ensure we are abreast of all the best investment vehicles for your needs.

Would You Give up 4% to Get 6% Guaranteed?

For many years we have used stripped bonds for the guaranteed portion of our clients' portfolios. Typically clients will have a stream of these bonds, with maturities in various years. Many of these bonds were purchased years ago, when rates were much higher. Some of these bonds are coming close to maturity and we are recommending that clients sell. Here is why.

Back when the bond was purchased, the rate to maturity was high, lets say 9% over 8 years. This means that the $5,000 investment would grow gradually to $10,000 over the period guaranteed. As a bonus on these bonds, they can be sold prior to maturity at market rates. As interest rates have dropped, the market value has increased. Seven years later, with one year to maturity, that bond is now worth $9,600, representing potential growth of only $400 (4.1%) over the last year when it matures at $10,000.

8% Coupon Example

The reason that the 9% bond will only yield 4% in the last year is that it is trading at a premium, rewarding the investor for having invested in the longer bond years ago. The bond, with a year to mature is essentially a T-bill, and is priced like 1 year T-bills. If you don't need the money in the short term it makes sense to sell and extend term.

Also, to avoid having that bond mature in a year and have rates be even lower than today, we strongly recommend giving up the 4%, and instead purchasing a longer bond. Going out another 8 years will yield over 6%, an increase in yield for the first year of 2%. (Please note that these examples are approximate values, your actual yields will vary).

Please call us for our recommendations on any changes to your bond portfolio. Call 863-7777 or 1-800-387-9273 or e-mail us at


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