All posts by Jonathan Chevreau

Vanguard Canada advisor event focuses on its actively managed mutual funds

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While indexing giant Vanguard Group and its Canadian unit are best known for their pioneering work in passive investing, both through index mutual funds and ETFs, they are also significant players in active fund management.

On Monday, it educated Canadian financial advisors at its 2019 Investment Symposium in Toronto, with the focus on two of the four actively managed mutual funds it first announced last summer.

Vanguard Investments Canada Inc. head Kathy Bock, who took over the position on January 1st, reminded the (mostly fee-based) financial advisors in attendance that Vanguard actually started life as an active manager over 40 years ago, and the firm now actively manages more than US$1.6 trillion globally, which is about a quarter of the firm’s total assets under management of more than US$5.3 trillion. That makes Vanguard the third largest active fund manager in the world. See also this Hub blog on this from last September: Vanguard, the Hidden $1.3 Trillion player in active management. (As you can see, the figure has risen with the markets since then).

Vanguard Canada head Kathy Bock

These mutual funds do not pay advisors trailer commissions: they are F series funds, which means fee-based advisors are free to set whatever additional fee they negotiate with their clients, just as they do with ETFs. They can also be purchased at some, but not yet all, discount brokerages

The management fees on these actively managed mutual funds are a maximum 0.5%; but in the first year, the fee ranged from 0.34% to 0.4%, which makes them only marginally more costly than Vanguard’s popular asset allocation ETFs that were unveiled just over a year ago (and which spawned several imitators). This is partly achieved through a management fee waiver that can apply, depending on manager performance, as explained at the bottom of this blog.

These mutual funds are managed for Canadians, although the actively managed subadvisors are global active giants, as outlined below. Because they are new funds, they have not disclosed the Management Expense Ratios (MERs).

True, at least one advisor in the question period seemed ambivalent about how fee-based advisors can reconcile such an approach to the indexing gospel that Vanguard has so thoroughly dispensed over the years. The answer, according to one of the sub advisors featured, is that the two approaches can complement each other, potentially reducing overall volatility. Buying exclusively ETFs means that over the coming ten years you’re “dooming yourself to a lot of failing businesses,” said Nick Thomas, partner with Baillie Gifford, one of two sub advisors to the Vanguard International Growth Fund, together with Schroder Investment Management North America Inc.

The advisor who posed the question was understandably perplexed by the many studies indexing proponents often cite about how most actively managed funds fail to beat the indexes net of their own additional costs. But the Vanguard managers replied that there are cases where active management can outperform, at least outside the highly liquid U.S. market. Portfolios will be more concentrated than the broad indexes and if an investing thesis pans out, there is an opportunity to “pick” winners at the outset of major trends like A.I. and the cloud, and avoid losers.  Presumably managers with  skills in combination with good financial advisors can add the kind of “Advisor’s Alpha” to client returns that Vanguard has pioneered.

And if active management makes a good complement to equity portfolios, that should also go for balanced mandates. Indeed, the other highlighted fund was Vanguard Global Balanced Fund, with a 65%/35% equity/fixed-income split  managed by Wellington Management Canada ULC, headquartered in Boston. The proportion can move to 60/40 or 70/30, depending on market view.   It was launched with the other three mutual funds on June 20, 2018.

China tech big focus of Vanguard International Growth Fund

Baillie Gifford’s Nick Thomas

Most of the discussion centered on the Chinese holdings of Vanguard International Growth Fund: China accounts for 20% of the fund’s geographic allocation. The top ten holdings include three Chinese web giants: Alibaba Group Holding Ltd., Tencent Holdings Ltd and Baidu Inc. It also holds Amazon.com Inc. and MercadoLibre Inc. among its top holdings.

Schroders manager John Chisholm is slightly underweight Emerging Markets and market weight China. Baillie Gifford’s Thomas is slightly more enthusiastic, being overweight both Emerging Markets and China.  But both see promising long-term growth prospects for  the major Chinese web giants. Asked about the current Trump trade war and accusations of theft of American intellectual property, the managers downplayed this as a U.S. interpretation of the facts. Thomas said he views both Tencent and Alibaba as “superior to Facebook or Amazon.”

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Almost half of North American Boomers may delay Retirement over Savings Concerns

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Almost half of North American’s young baby boomers would consider postponing retirement because of Savings concerns, a survey out Wednesday finds. Even so, more than half  surveyed had to retire early, often because of circumstances beyond their control.

Franklin Templeton’s 2019 Retirement Income Strategies and Expectations (RISE) survey found that 21 per cent of Canadian young baby boomers (ages 55 to 64) in pre-retirement have not saved anything for retirement. And in the United States, 17 per cent of young boomers are in a similar predicament.

13 to 15% expect to work until they die

As a result, 46% of young Canadian boomers and 48% of young American boomers are considering postponing retirement, with roughly 15% of Canadians and 13% of Americans expecting to work until the end of their life. Furthermore, 22% of self-employed Canadians don’t ever plan to retire.

However, things don’t always go as planned: 54% of young Canadian boomers and 60% of their American counterparts retired earlier than expected, compared to 32% and 37% of Canadian and American older boomers aged 65 to 73.

More Canadian young boomers retired due to circumstances beyond their control than Canadian older boomers (34% versus 20%, respectively). There was a slightly wider gap amongst Americans: more American young boomers retired due to circumstances beyond their control than American older boomers (33% vs 17%, respectively).

Boomers in different life situations after post 2009 bull run

“In 2009, when equity markets started to recover, many young boomers were moving up the career ladder; whereas older boomers were approaching retirement at the top of their earning years,” said Duane Green, president and CEO, Franklin Templeton Canada. “A decade later, after a long bull market run, young and older boomers are in different life situations once again. We see many older boomers benefitting from the transfer of wealth from their parents, yet the young boomers have had a challenging experience balancing more expensive lives – due to caring for elderly parents and still having financially dependent children – all while saving for that increasingly elusive retirement.”

Nearly a quarter (24%) of Canadian young boomers in pre-retirement currently support a dependent family member, compared to 9% of retired older boomers. The top three sacrifices young boomers made for dependents were: saving less money, cutting back personal spending and withdrawing from personal savings. They were least likely to use employer vacation time or take unpaid time off work for caregiving.

“With life expectancy increasing and retirement savings becoming ever more challenging, due to the high costs of living, we are seeing increased concern over having enough money for retirement across all generations,” said Matthew Williams, SVP, Franklin Templeton Canada. “Although it’s never too late to start saving, the best time to start contributing to retirement savings vehicles is when a person starts out in their career and may not have big financial commitments like a mortgage or childcare costs: and to find a way to maintain healthy savings habits as they age.”

Those employed by companies offering group RSP or pensions that allows employees to make contributions directly from their paycheque — and perhaps receiving a company match to their contributions — should fully take advantage of this and potential ‘free’ money, as it will assist their retirement nest egg in compounding over time, Williams said.

Americans more concerned about medical expenses in Retirement

Of those Canadians who plan to retire within five years, 86% expressed concerns about paying expenses in retirement. 27% of these Canadians nearing retirement ranked lifestyle as their top concern, compared to 17% of Americans.

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Retired Money: Work Optional and the FIRE movement

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My latest MoneySense Retired Money column looks at the so-called FIRE movement: (an acronym for Financial Independence/Retire Early), as well as a new book by a FIRE blogger titled Work Optional. You can find the full column by clicking on the highlighted headline here: How “Work Optional” can fit into your Retirement Plan.

You’ll see that regular Hub blogger Doug Dahmer — founder of the Retirement Navigator planning software — has been using the phrase Work Optional for at least five years, even though the new book of that name was just published in January 2019. It’s a useful phrase that describes the kind of thing Mike Dark and I refer to as Victory Lap Retirement in our jointly authored book of the same name.

There are many ways to describe this phase, but generally it refers to a period after full-time employment. FIRE proponents often declare that they “retired” in their 30s or 40s but of course most of them do not spend the next half century doing absolutely nothing. They really create encore careers based on self-employment, and often build businesses based on book-publishing, blogging and public speaking, wherein they reveal “how they did it.”

Victory Lap and Findependence

To some extent this very website does a similar thing, focused as it is on Financial Independence, or my contraction of it, Findependence. Continue Reading…

FP: Bank on Yourself — Why women need to focus on Financial Independence with or without a spouse

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My latest Financial Post column looks at an upcoming book, Bank on Yourself, which focuses on how Canadian women need to focus on Financial Independence, whether or not they are currently part of a couple. Click on the highlighted headline here for the full review: Why Women shouldn’t let a solo retirement catch them by surprise. The review also appears in the print edition of Tuesday’s Financial Post (page FP 3, April 2, 2019).

The book, which is being published this month (April) by Milner & Associates, is co-authored by a lifelong single woman, Ardelle Harrison, and a financial advisor, Leslie McCormick. McCormick is a Senior Wealth Advisor with Scotia Wealth Management but Ardelle is not a client.

The subtitle says it all: “Why every woman should plan financially to be single. Even if she’s not.”

The authors say 90% of women will end up managing their own finances at some point, whether because of divorce, widowhood or because they never married in the first place. And because women tend to live longer, expect five female centenarians for every male who reaches 100 years (according to the 2016 Canadian census).

Allegedly one of women’s biggest fears is ending up in old age as a “bag lady” destitute on the streets. In fact, 28.3% of unattached women live in poverty and single older women are 13 times more likely to be poor than seniors living in families, the authors say.

They cite Pew Research’s eye-opening finding that when today’s young adults reach their mid 40s and mid 50s, 25% of them are likely to never have been married, and that by then “the chances of marrying for the first time after that age are very small.” (Whether by choice or circumstance.)

But even those who do “couple” earlier in life may not always remain in that state. A 2013 Vanier Institute of the Family report says 41% of Canadian marriages end before their 30th wedding anniversary. 68% of divorced couples cited fighting over money as the top reason for the split. 2011 Canadian census data shows the average age at which women are widowed is 56.

Multiple Streams of Income

A key concept emphasized throughout the book is having Multiple Streams of Income, at least three in Retirement. Employment income is the springboard to other income streams,  including employer pensions.

A second is government benefits unlike CPP and OAS. Other streams are business, investment and real estate income, and annuities. Home owners have a potential backup in their home equity, although the authors rightly say “Debt is not something you want in retirement.”

I asked McCormick if these principles apply equally to single men. General financial planning principles apply across genders, she replied, but women have longer life expectancies, so when you add the gender wage cap, it’s harder for women to build wealth. Female baby boomers can expect to outlive their spouses by 10 to 15 years, “yet so few women plan for it.” While 31% of women view themselves as being financially knowledgeable, 80% of men do.  Her hope is the book will help bridge that gap. So might a planning tool at her Plan Single website (www.Plansingle.ca).

 

MoneySense ETF All-stars 2019

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The latest MoneySense ETF All-stars has just been published for 2019. click on the highlighted text in the headline to access the full article: Best ETFs in Canada for 2019 (you don’t need to subscribe to access).

I’ve been writing this annual feature every year since 2013, always with the help of several ETF experts. This year, as the article reprises, there were a few changes in the makeup of the panel but we more than replaced the departing analysts, for a total of nine in total, including several returning experts. Among the newcomers are two regular Hub contributors: fee-only planner Robb Engen of Boomer & Echo, and CuttheCrapInvesting blogger Dale Roberts. Bios of the rest are below.

While there are more than 800 ETFs available on Canadian stock exchanges, our “All-Star” list remains an elite one: despite the multitude of new product launches in 2018, we increased the number of All-stars from just 21 to 25, although we also added a new feature we dubbed “Desert Island picks” to give a little more latitude to the individual preferences of each analyst.

Canadian Equity ETFs

All four Canadian equity ETFs are returning under the new revised panel: VCN, XIC, HXT and ZCN. There were also a couple of vigorous debates about Canadian equities, particularly about the fate of Horizons HXT, a swap-based total return product that has long been a pick of the All-Star panelists because of its tax-efficiency in non-registered portfolios. Last week’s federal budget added the possibility of regulatory risk to HXT and more than a dozen other similar products from Horizons. For 2019 at least, the panel opted to retain HXT as an All-Star, and we will monitor developments in the meantime. In the meantime, caveat emptor. (See Dale Roberts’ post on the topic.) Go to this MoneySense link for the chart of the winners and further commentary.

US equities

Here the panel again stood pat, opting to retain all four of our 2018 US equity picks: XUU, VFV,  VSP and ZSP. Go to this MoneySense link for the chart of the US equity winners and further commentary.

International Equities

The panel was in favor of retaining our three international ETF All-stars from previous years but also decided to add two new ones, both from Vanguard. The returning picks include the two from BlackRock: the iShares Core MSCI All Country World ex Canada Index ETF (XAW) and the iShares Core MSCI EAFE IMI Index ETF (XEF.) Also back is Vanguard’s Emerging Markets ETF (VEE). A new addition this year is VXC, the Vanguard FTSE Global All Cap ex Canada ETF. Also new this year is VIU, the Vanguard FTSE Developed All Cap ex North America Index ETF. Go to this MoneySense link for the chart of the International winners and further commentary. Continue Reading…