After a very brief review of the recently released OSC-commissioned report Mutual Fund Fee Research, I have seen the future and it is Spanish:
First, credit institutions heavily dominate the Spanish mutual fund industry: banks and savings banks6. In fact, 91% of mutual funds are distributed through banks (63%) and savings banks (28%), and 91% of mutual fund assets are managed by companies belonging to banks (66%) and savings banks (25%). The reason for this predominance is perhaps the traditional universal banking model, which has provided credit institutions with a vast base of clients for their mutual funds. In fact, the business of mutual fund management accounts for a non-negligible part of Spanish banks’ revenues. If we take only the three most important management companies (belonging to credit institutions) that manage 52% of all assets (as of December 2001), we find that their sales revenues contribute to 1.71% (the largest company), 2.15% (the second largest), and 3.22% (the smallest) of their respective group’s total ordinary revenues. Clearly, this situation gives rise to a number of potential conflicts of interest. For instance, bank customers are more vulnerable to marketing or advice from their bank and therefore more likely to invest in bank-managed mutual funds than to shop for better quality or cheaper funds. Also, fund managers could be biased towards investing in financial assets issued by companies belonging to their own financial group. Finally, the fact that only credit institutions can become custodial institutions of the assets held by the mutual funds gives banks and savings banks an advantage over independent management companies. The extent to which such potential conflicts of interest translate into agency costs in delegated portfolio management remains an open empirical question.
As far as total returns go (according to the OSC’s report):
Where regulation has been changed to ban or limit commission,there is evidence that this change impacted investor outcomes.
- In the absence of embedded compensation, advisors recommend lower cost products. These typically have better returns because of lower expenses.
- While removing commission lowers product cost, advisory fees may rise as a means of paying for the cost of service. There may also be new or increased administrative fees, higher costs on margin accounts and lower payments on cash balances.
- It is not yet clear whether moving from commission-based to asset-based compensation will result in a net improvement in the overall return to the investor.
…
Based on the research cited, we can formulate some high level conclusions that are backed by substantial evidence. In addition to compensation, we identify some related issues that affect investor outcomes.
- …
- In jurisdictions that have moved to fee-based compensation, people with less wealth and less income find it harder to get advisory service than others. We do not know whether it is more difficult with fee-based compensation than it was before the change in compensation regime. Alternative advisor methods (e.g., robo-advisors) are developing to fill the advisory gap.
So we all know how this movie is going to turn out, assuming the regulators get their way. Regulators were created for the purpose of insulating politicians from public opprobrium following scandals. The fewer scandals, the better they’ve done their job and the sooner they can start working in the compliance department of a bank. So the ideal is a plain vanilla portfolio for everybody, preferably provided by one of the regulators’ future employers. If a hundred people get put into ridiculously risky portfolios by a some commission driven salesmen … that’s a scandal. If a hundred thousand people retire with significantly less money than they should have, due to a long-term emphasis on short-term (bank issued) fixed income (including GICs) … that’s a statistic.
As I have come to expect, there is nothing in the OSC report that covers new issue commission and proxy solicitation fees; the former form of compensation has been alleged to have played a role in some preferred share complaints I have seen. Admittedly, these forms of compensation were not in the report’s mandate; golly, I wonder why. According to the IIAC, the “Firms that are national in scope and have extensive retail and institutional operations; includes dealers of the six major chartered banks” had investment banking revenue that exceeded their mutual fund commission revenue.
Central GoldTrust is fighting an exchange offer from Sprott Asset Management Gold Bid LP to exchange units of Central GoldTrust for units of Sprott Physical Gold Trust, and its Trustee’s Circular contains an entertaining attack on Sprott’s competence:
A large number of Sprott Inc. actively managed funds also suffer from chronic underperformance, while Sprott Inc. continues to generate very significant management fees from these funds. The table below shows that over the past three years the selected group of poorly performing Sprott funds underperformed by approximately 13% on average against their respective Sprott-selected benchmark indices, while Sprott Inc. and SAM have collected over approximately $110 million in management fees from these funds over the same three year period.
…
When looking at the broader group of Sprott funds where information is publicly available, similarly poor returns were observed relative to their respective benchmarks. As shown below, these funds over the past three years have underperformed, on average, 11% below their respective benchmarks.
I don’t see a response from Sprott Physical Bullion; Sprott’s response did not address the charges.
I keep reading a lot about how entrepreneurial millennials are:
Call it entitlement, call it independence: Millennials want to be a generation of entrepreneurs.
Roughly two in every three Gen Y-ers have aspirations of going into business for themselves. About 18% of them are actually doing it, according to a new report from Babson College that found entrepreneurship across all ages is on the incline. (Meanwhile, just 13% of millennials are interested in climbing the corporate ladder.)
Millennials fit into the role of a self-starter easily for a number of reasons; we’re digital natives, with heady career dreams and a job market that has taught us to think outside the box — because we might not be hired within it very quickly.
… which always makes me wonder why there aren’t more plumbers, electricians and computer repair shops. And I wonder how many entrepreneurs get driven to work by their moms. And I wonder how many of them are entrepreneurial and how many just dream of being a big-shot. I wonder why virtually every stranger who knocks on my door is begging for a hand-out (for charity, or to participate in sports tournament, or whatever) and why so few of them are trying to sell me a product or service (and why those that do try to sell me something are always so careful to emphasize that it’s ‘for school’). I wonder a lot of things, and wasn’t too surprised at this rebuttal:
When she started her research, “I thought that I was doing a next-generation-of-leadership focus; I thought that the criteria was age specific,” [author of The Creator’s Code: The Six Essential Skills of Extraordinary Entrepreneurs, Amy] Wilkinson said. But her research led her to a different place—it turns out that fewer millennials are starting businesses than the generations preceding them. “The most interesting and problematic thing I learned is that millennials aren’t starting companies the way previous generations did—all the research confirms this,” she said, pointing to research by the Kansas City-based Kauffman Foundation and the Brookings Institute, among others. And research that just came out this week from Kauffman only helps confirm this: for example, new entrepreneurs ages 20 to 34 fell to 24.7% last year, compared to the 34.3% of people who were in the same age demographic in 1996 when they started businesses.
It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 24bp, FixedResets gaining 1bp and DeemedRetractibles up 2bp. FixedResets dominated both sides of the Performance Highlights table, with a notable preponderance of winners. Volume was extremely high.
For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.
Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread
Here’s TRP:
Click for Big
TRP.PR.A, which resets 2019-12-31 at +192, is bid at 20.26 to be $0.71 rich, while TRP.PR.B, which will reset June 30 at 2.152% (+128), is $0.51 cheap at its bid price of 14.67
Click for Big
Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).
Most expensive is MFC.PR.J, resetting at +261bp on 2018-3-19, bid at 24.60 to be $0.45 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.50 to be $0.30 cheap.
Click for Big
The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.63 to be $0.81 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 24.16 and appears to be $0.41 rich.
Click for Big
FTS.PR.H, with a spread of +145bp, and bid at 16.40, looks $0.36 cheap and resets 2020-6-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 24.18 and is $0.17 rich.
Click for Big
Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.40%, including the outliers TRP.PR.A / TRP.PR.F at -0.33% and FTS.PR.H / FTS.PR.I at +1.00%. On the junk side, only one of the six currently extant pairs is within the range of the graph.
Click for Big
Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?
| 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 | 0.2594 % | 2,200.8 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.2594 % | 3,848.1 |
| Floater | 3.52 % | 3.52 % | 62,681 | 18.49 | 3 | 0.2594 % | 2,339.6 |
| OpRet | 4.45 % | -7.00 % | 24,394 | 0.08 | 2 | -0.1975 % | 2,777.5 |
| SplitShare | 4.60 % | 4.91 % | 70,121 | 3.28 | 3 | -0.1343 % | 3,238.0 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1975 % | 2,539.7 |
| Perpetual-Premium | 5.46 % | 4.93 % | 59,619 | 4.92 | 19 | 0.0145 % | 2,514.1 |
| Perpetual-Discount | 5.13 % | 5.08 % | 111,527 | 15.28 | 15 | -0.2443 % | 2,738.3 |
| FixedReset | 4.52 % | 3.84 % | 246,064 | 16.31 | 87 | 0.0145 % | 2,347.6 |
| Deemed-Retractible | 5.00 % | 3.08 % | 110,615 | 0.53 | 34 | 0.0191 % | 2,626.0 |
| FloatingReset | 2.52 % | 2.91 % | 51,939 | 6.11 | 9 | -0.0688 % | 2,337.5 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| MFC.PR.M | FixedReset | -1.48 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.28 Bid-YTW : 4.54 % |
| IFC.PR.A | FixedReset | -1.45 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.74 Bid-YTW : 6.13 % |
| MFC.PR.F | FixedReset | -1.34 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 17.61 Bid-YTW : 6.88 % |
| ENB.PR.P | FixedReset | -1.24 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-16 Maturity Price : 18.33 Evaluated at bid price : 18.33 Bid-YTW : 4.96 % |
| FTS.PR.M | FixedReset | -1.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-16 Maturity Price : 22.89 Evaluated at bid price : 24.18 Bid-YTW : 3.66 % |
| BNS.PR.D | FloatingReset | -1.05 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.52 Bid-YTW : 3.27 % |
| HSE.PR.C | FixedReset | -1.05 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-16 Maturity Price : 22.65 Evaluated at bid price : 23.65 Bid-YTW : 4.41 % |
| BAM.PF.F | FixedReset | 1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-16 Maturity Price : 22.92 Evaluated at bid price : 24.22 Bid-YTW : 4.04 % |
| BAM.PF.B | FixedReset | 1.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-16 Maturity Price : 21.85 Evaluated at bid price : 22.21 Bid-YTW : 4.20 % |
| GWO.PR.N | FixedReset | 1.74 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 17.56 Bid-YTW : 6.64 % |
| TRP.PR.A | FixedReset | 1.81 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-16 Maturity Price : 20.26 Evaluated at bid price : 20.26 Bid-YTW : 3.71 % |
| SLF.PR.G | FixedReset | 1.83 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 16.14 Bid-YTW : 7.71 % |
| FTS.PR.I | FloatingReset | 1.87 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-16 Maturity Price : 16.35 Evaluated at bid price : 16.35 Bid-YTW : 3.17 % |
| TRP.PR.E | FixedReset | 1.93 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-16 Maturity Price : 22.17 Evaluated at bid price : 22.75 Bid-YTW : 3.90 % |
| CIU.PR.C | FixedReset | 2.52 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-16 Maturity Price : 16.30 Evaluated at bid price : 16.30 Bid-YTW : 3.74 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BNS.PR.M | Deemed-Retractible | 114,240 | Nesbitt crossed blocks of 49,900 and 50,000, both at 25.51. TD crossed 11,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-07-27 Maturity Price : 25.25 Evaluated at bid price : 25.50 Bid-YTW : 0.74 % |
| BAM.PF.C | Perpetual-Discount | 83,558 | Nesbitt crossed blocks of 40,000 and 17,800, both at 22.05. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-16 Maturity Price : 21.65 Evaluated at bid price : 21.97 Bid-YTW : 5.52 % |
| BMO.PR.L | Deemed-Retractible | 83,162 | Nesbitt crossed 80,600 at 25.71. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-07-16 Maturity Price : 25.50 Evaluated at bid price : 25.70 Bid-YTW : 0.30 % |
| NA.PR.Q | FixedReset | 77,858 | TD crossed two blocks of 30,000 each, both at 25.25, and bought 10,700 at the same price from RBC. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.22 Bid-YTW : 3.49 % |
| PWF.PR.L | Perpetual-Premium | 75,020 | Scotia crossed blocks of 33,000 and 40,000, both at 25.10. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-16 Maturity Price : 24.86 Evaluated at bid price : 25.08 Bid-YTW : 5.15 % |
| BNS.PR.L | Deemed-Retractible | 57,544 | Nesbitt crossed 50,000 at 25.49. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-07-16 Maturity Price : 25.25 Evaluated at bid price : 25.50 Bid-YTW : -0.61 % |
| There were 56 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| MFC.PR.L | FixedReset | Quote: 22.44 – 23.30 Spot Rate : 0.8600 Average : 0.6155 YTW SCENARIO |
| FTS.PR.H | FixedReset | Quote: 16.40 – 16.95 Spot Rate : 0.5500 Average : 0.3566 YTW SCENARIO |
| ENB.PR.H | FixedReset | Quote: 17.21 – 17.68 Spot Rate : 0.4700 Average : 0.3106 YTW SCENARIO |
| FTS.PR.M | FixedReset | Quote: 24.18 – 24.55 Spot Rate : 0.3700 Average : 0.2379 YTW SCENARIO |
| CIU.PR.C | FixedReset | Quote: 16.30 – 16.95 Spot Rate : 0.6500 Average : 0.5467 YTW SCENARIO |
| CU.PR.F | Perpetual-Discount | Quote: 22.34 – 22.69 Spot Rate : 0.3500 Average : 0.2471 YTW SCENARIO |