It is always interesting to compare Dollar-Weighted returns with Time-Weighted returns as an indicator of how much retail loses by trying to time the market. Bloomberg estimates an enormous figure:
Americans have missed out on almost $200 billion of stock gains as they drained money from the market in the past four years, haunted by the financial crisis.
Assets in equity mutual, exchange-traded and closed-end funds increased about 85 percent to $5.6 trillion since the bull market began in March 2009, trailing the Standard & Poor’s 500 Index’s 94 percent advance, according to data compiled by Bloomberg and Morningstar Inc. The proportion of retirement funds in stocks fell about 0.5 percentage point, compared with an average rise of 8.2 percentage points in rallies since 1990.
The retreat shows that even the biggest gain since 1998 failed to heal investor confidence after the financial collapse that wiped out $11 trillion in U.S. equity value was followed by record price swings in equities, a market breakdown that briefly erased $862 billion in share value and the slowest recovery from a recession since World War II. Individuals are withdrawing money as political leaders struggle to avert budget cuts that threaten to throw the economy into a new slump.
Unintended consequences is a persistent theme on PrefBlog – largely because regulators never think things through:
Policy makers are disappointed that lower yields on mortgage-backed securities haven’t led to more savings on home loans after the Fed expanded its balance sheet to an all-time high of almost $3 trillion through bond purchases. Bernanke this month called the trend “unfortunate,” and the Federal Reserve Bank of New York held a workshop to examine the issue.
The gap between the bond yields and home-loan rates is blunting the economic benefits of the Fed’s record accommodation, New York Fed President William C. Dudley said in a speech in New York this month. Among the reasons for the spread: banks are reluctant to take on the expensive fixed costs of new staff to process the paperwork and tougher capital requirements are making it less attractive to service loans.
…
It’s also tough to find and train workers, and harder for new mortgage companies to gain approval to enter the business as oversight becomes more stringent in the wake of the financial crisis, said Willie Newman, head of Taylor Capital Group Inc.’s home-loan unit, which originated $1.4 billion of mortgages last quarter
An Assiduous Reader sends me a link to Ken Kivenko comments on Trailer Fees – which, regretably, strays far afield from the subject of trailer fees. The arguments rest on the same fallacious assumption made in most other arguments I have seen: an assumption that the salesman has or should have some kind of duty to serve the best interest of the investor – even though the investor is paying nothing for this service. Life sure would be nice if we could all get something for nothing! Mr. Kivenko goes so far as to assert:
Fund manufacturers pay online brokers a trailer but no service is provided- at a minimum ,this s a breach of portfolio manager fiduciary duty; worst case: an illegal misappropriation of fund assets.
I fail to see how this is a breach of portfolio manager fiductiary duty, much less how the it becomes an “illegal misappropriation of fund assets.
However, I did agree with one part!
Encourage competition by allowing Canadians access to lower cost U.S. Mutual funds
I would go further: encourage competition by allowing Canadians to sponsor lower cost Canadian funds! Let us, for instance look at the Acker Finley Canada Focus Fund 2011 Interim Management Report of Fund Performance and Financial Report, which is available on SEDAR dated August 24, 2011. Specifically, we’ll look at “Statements of Investment Operations Six months ended June 30 (Unaudited)” The fund had slightly under $4.3-million under management at the time of the report.
INVESTMENT INCOME | ||
Dividends | 44,870 | 63,123 |
Less: Interest expense | 63 | 107 |
44,807 | 63,016 | |
EXPENSES | ||
Management fee (note 7) | 30,014 | 34,681 |
Security holder reporting costs | 38,259 | 37,921 |
Custodian fee | 8,438 | 8,061 |
Independent Review Committee fees | 26,776 | 26,818 |
Legal and filing fees | 16,343 | 17,575 |
Audit fee | 7,923 | 7,934 |
Harmonized Sales Tax or Goods and Services Tax | 14,933 | 6,650 |
142,686 | 139,640 | |
Net investment loss | (97,879) | (76,624) |
Holy smokaramas, look at those expenses! The MER was 5.95%! It may well be that the sponsor was simply paying above the market rate for the various things a public mutual fund might have – it’s not a question I have investigated closely – but when you add the cost for preparing and filing a prospectus (about $100,000, I believe), I suspect most readers will understand why my fund is not a PUBLIC mutual fund but relies on prospectus exemptions.
At any rate, all the various arguments against trailer fees run into the same problem: a salesman is not a fiduciary. Maybe he should be a fiduciary (in which case, who will the salesmen be?), but right now, he ain’t. The trailer fee debate, as it has been framed by the CSA should be abandoned, as it is simply a subset of the fiduciary vs. salesman debate, which is being discussed separately for some reason.
It has also occurred to me to question why new issue commissions have not been included in the trailer fee debate, assuming that we want a trailer fee debate. Salesman can make 3% (before his brokerage gets its cut) for selling a perfectly routine preferred share new issue. All the principles applicable to mutual fund trailer fees are applicable to new issue commissions, as far as I can see.
The motto of Mr. Kivenko’s organization, Kenmar Associates, is “The Voice of the retail Investor”, but it is unclear to me whether this is more than just another marketting slogan. Neither Kenmar nor Kivenko is registered with the OSC – but, of course, some might consider this a good thing!
Mr. Kivenko’s comment letter did lead me (by a circuitous route) to a most illuminating article by Kieth Ambachtsheer and Rob Bauer titled Losing Ground:
The study specifically compares the net excess returns produced by a large sample of Canadian mutual funds with domestic equity mandates against the net excess returns produced by a large sample of the domestic equity components of Canadian pension funds. An important study finding is that, over the nine-year period from 1996 to 2004, the Canadian equity components of Canadian pension funds outperformed their Canadian equity market benchmark by an average +1.2% per annum, net of expenses. Over the same nine-year period, Canadian equity mutual funds with domestic mandates underperformed their Canadian equity market benchmark by an average -2.6% per annum, net of management fees, but before any applicable sales charges. Any such sales charges would reduce mutual fund net returns even further.
This in turn led me to another interesting paper by R. Bauer, R. Frehen, H. Lumb and R. Otten titled Economies of Scale, Lack of Skill or Misalignment of Interest?:
This paper provides empirical evidence on the comparative performance of three important players in the US financial services industry: defined benefit (DB) pension funds, defined contribution (DC) pension funds, and mutual funds. We have access to a pension fund database, which provides fund-specific cost, benchmark and equity return information at the total plan level. This allows us to study both net and gross equity returns in great detail. Our empirical results clearly show that equity investments of DB and DC pension funds perform according to their fund-specific benchmarks, whereas mutual funds on average under-perform by about 150-200 basis points in the same period. We find modest evidence of persistence in mutual fund returns, while there is none in pension fund returns. The performance differential between pension and mutual funds cannot be fully explained either by differences in costs, as a result of economies of scale, or by size, risk and style deviations. We conclude that other factors must play an important role. Agency costs are a usual suspect.
…
How do we interpret these results? Do pension fund managers have more skill than mutual fund managers in relative terms? Yes, but both are unable to beat the corresponding benchmarks. Moreover, pension funds hire (and fire) institutional asset managers who provide mutual funds to individual investors as well. So, if they are using the same portfolio managers, why do we find different returns? Is the lower cost level of pension funds an explanation? Potentially, but it cannot fully explain the difference in returns. Moreover, the multi-level panel analysis shows that other drivers of the return difference cannot be found.
Based on my own, totally anecdotal observations, I’ll vote for “manager skill” as the big factor, which is exacerbated by cash flows and the fear of cash flows.
It was another good day for the Canadian preferred share market, with PerpetualPremiums gaining 2bp, FixedResets up 8bp and DeemedRetractibles winning 22bp. Volatility was low. Volume, as befits the season and the market hours, was extremely low.
HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1999 % | 2,480.8 |
FixedFloater | 4.37 % | 3.73 % | 32,567 | 17.83 | 1 | -1.3605 % | 3,684.0 |
Floater | 2.80 % | 2.99 % | 56,915 | 19.74 | 4 | -0.1999 % | 2,678.6 |
OpRet | 4.63 % | -0.08 % | 55,128 | 0.44 | 4 | 0.1337 % | 2,598.0 |
SplitShare | 4.63 % | 4.60 % | 55,408 | 4.38 | 2 | 0.2419 % | 2,879.3 |
Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1337 % | 2,375.6 |
Perpetual-Premium | 5.25 % | 1.96 % | 71,270 | 0.79 | 30 | 0.0241 % | 2,327.6 |
Perpetual-Discount | 4.84 % | 4.87 % | 132,824 | 15.59 | 4 | 0.0508 % | 2,641.0 |
FixedReset | 4.92 % | 3.01 % | 224,220 | 4.04 | 77 | 0.0788 % | 2,461.3 |
Deemed-Retractible | 4.87 % | 0.07 % | 117,239 | 0.33 | 46 | 0.2169 % | 2,431.1 |
Performance Highlights | |||
Issue | Index | Change | Notes |
BAM.PR.G | FixedFloater | -1.36 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-12-24 Maturity Price : 22.37 Evaluated at bid price : 21.75 Bid-YTW : 3.73 % |
CU.PR.C | FixedReset | -1.10 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-01 Maturity Price : 25.00 Evaluated at bid price : 26.08 Bid-YTW : 3.03 % |
Volume Highlights | |||
Issue | Index | Shares Traded |
Notes |
BNS.PR.Z | FixedReset | 34,177 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.74 Bid-YTW : 3.28 % |
BMO.PR.M | FixedReset | 21,950 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.05 Bid-YTW : 3.18 % |
BAM.PR.R | FixedReset | 14,635 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-12-24 Maturity Price : 23.69 Evaluated at bid price : 26.35 Bid-YTW : 3.57 % |
RY.PR.F | Deemed-Retractible | 12,949 | YTW SCENARIO Maturity Type : Call Maturity Date : 2013-01-23 Maturity Price : 26.00 Evaluated at bid price : 26.18 Bid-YTW : 0.13 % |
ENB.PR.B | FixedReset | 11,174 | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-01 Maturity Price : 25.00 Evaluated at bid price : 25.50 Bid-YTW : 3.59 % |
TD.PR.Y | FixedReset | 10,900 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.12 Bid-YTW : 3.28 % |
There were 2 other index-included issues trading in excess of 10,000 shares. |
Wide Spread Highlights | ||
Issue | Index | Quote Data and Yield Notes |
TD.PR.Q | Deemed-Retractible | Quote: 26.55 – 26.77 Spot Rate : 0.2200 Average : 0.1316 YTW SCENARIO |
MFC.PR.F | FixedReset | Quote: 24.03 – 24.32 Spot Rate : 0.2900 Average : 0.2147 YTW SCENARIO |
ENB.PR.N | FixedReset | Quote: 25.44 – 25.64 Spot Rate : 0.2000 Average : 0.1286 YTW SCENARIO |
CU.PR.C | FixedReset | Quote: 26.08 – 26.29 Spot Rate : 0.2100 Average : 0.1509 YTW SCENARIO |
RY.PR.T | FixedReset | Quote: 26.80 – 26.97 Spot Rate : 0.1700 Average : 0.1130 YTW SCENARIO |
TRI.PR.B | Floater | Quote: 22.43 – 22.63 Spot Rate : 0.2000 Average : 0.1433 YTW SCENARIO |
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