All posts by Jonathan Chevreau

Alternative assets in ETFs and mutual funds, including a new one from Franklin Templeton

 

Alternative asset classes like private equity and real estate have long been in vogue with pension funds, institutional investors and some high-net-worth individual investors but the pickings have been slim for retail mutual fund investors. Now, Franklin Templeton Investments Canada has introduced the Franklin K2 Alternatives Fund.

The company says its new mutual fund, announced on Monday, March 11, uses “a multi-strategy approach in seeking to dampen volatility and offer downside protection, while providing added diversification and low-correlation to asset classes typically held in a traditional portfolio.

Franklin Templeton Canada Duane Green pointed to the unpredictable market environment of the past year and said “investors are looking to reduce volatility and protect capital … Our alternatives fund addresses these investor needs and combines the benefits of a sophisticated solution with the liquidity, convenience and fee transparency of a mutual fund.”

In a piece this weekend in the Financial Post, which mentioned the new Templeton fund among others, investing reporter Victor Ferreira said Canadian retail investors looking for exposure to hedge-fund like strategies that can involve leverage and short-selling are being inundated with new options, following a rule change in January. At least six firms have brought so-called “liquid alternative” products (some of them ETFs and some of them mutual funds from firms like Mackenzie and C.I. Funds) to market since regulations barring them from doing so were lifted at the beginning of 2019. Prior to the regulations being altered, he said, only a few firms were able to offer such products after applying for exclusions.

As the Post pointed out, some alternative assets — notably real estate and private equity — are seldom easily liquidated if you need some cash. It cited a 2018 Scotiabank report that projects the Canadian market for these kind of products could grow to be worth $20 billion.

According to Franklin Templeton marketing documents, alternative asset classes or hedging products can improve return potential without significantly increasing risk. It describes three possible “buckets” investors can choose from: traditional Equity Beta or “Risk On,” traditional Bond Beta or “Risk Off” and Alpha Alternatives, or “Risk Uncertain.” It said Alternative Assets can also protect client assets during declining equity markets. In addition, Alternatives have “held up well in weak bond markets.”

Green told the Post that the new Franklin Templeton fund gives investors access to three different strategies: the fund will index 50 hedge funds and aim to replicate their returns. On the long/short side, the fund will also identify the most popular stocks that alternative asset managers are buying and take long positions in them while shorting S&P 500 or futures contracts and any individual names it deems unattractive. Thirdly, the fund will target risk premia.

Or, in the language used in the Franklin Templeton press release: Continue Reading…

Franklin Templeton unveils multi-asset ETF portfolios for mutual fund advisors

Franklin Templeton Canada president and CEO Duane Green

Since Vanguard Canada introduced three (now five) asset allocation ETFs a year ago, rivals have been scrambling to catch up. Little wonder, as those first three products — bearing TSX tickers VBAL, VGRO and VCNS — quickly scooped up a billion dollars in assets. Next out the gate was BlackRock Canada’s iShares, which launched two All-in-One ETF portfolios in December 2018 with similar-sounding tickers: XBAL and XGRO. Then a few weeks ago, as Dale Roberts nicely summarized here at the Hub, BMO ETFs jumped aboard with a similar suite as Vanguard’s original suite: ZBAL, ZGRO and ZCON, driving costs down as they did. See BMO keeps it simple.

Up until now, mutual fund salespeople operating in the MFDA channel (Mutual Fund Dealers Association) have been clamouring for ETF portfolios because if they aren’t also securities licensed, they couldn’t buy ETFs for their clients directly. That’s why Thursday’s announcement by Franklin Templeton is of interest: it announced the launch of three multi-asset ETF portfolios to provide advisors and investors with a simple solution for investing in ETFs. Managed by Franklin Templeton Multi-Asset Solutions, each portfolio is a mutual fund that provides access to active asset allocation utilizing a combination of active, smart beta and passive ETFs across multiple asset classes and geographies.

These portfolios let mutual fund investors access Franklin Templeton’s new passive ETFs (see this Hub post a few weeks ago), in addition to its active and smart beta ETFs while not having to worry about asset allocation, rebalancing and currency management.

Franklin Templeton Investments Canada president and CEO Duane Green said in a press release that “Many investors are overwhelmed by the choice of ETFs available in the Canadian market.” That’s  a fair statement, which is why I am working with Dale Roberts and eight other ETF experts to select the 2019 edition of the MoneySense ETF All-Stars, which will be published later this month. A year ago we were quick to spot the trend and made all three of the Vanguard portfolios All-Stars, albeit in a new category. The question for us this year is which of the newer offerings should be added? Stay tuned!

How these differ from Balanced Mutual Funds

We’ll outline the names of the new Templeton funds shortly but I did want to add the fact that mutual fund companies have long offered balanced mutual funds and asset allocation funds, both Canadian and global. These are usually actively managed and of course generally bear the high MERs that have caused Canada’s fund industry to be so criticized. Once upon a time, I often wrote about the Rip Van Winkle two-fund portfolios, which was simply a Trimark Balanced Fund and Templeton Growth Fund. And I have written in the past that “in theory, the only fund an investor needs is a global balanced fund.” That’s because they would cover all asset classes and geographies, with rebalancing and asset allocation all taken care of by active managers. That’s pretty much what’s going on with these ETF portfolios, with the difference being that the fees are much much lower: 20 basis points plus or minus 2, or a tenth the price of a typical balanced mutual fund.

So back to Franklin’s new entry. Continue Reading…

FP: How retired seniors can use their spouse as a tax asset

My latest Financial Post column has just been published in the print edition of the Wednesday paper (Feb. 27, page FP8), under the headline Top tax asset in Retirement? Think Spouse. Click on the highlighted text to access the full story  via the National Post e-paper. Or for the website edition, click on this clever headline: Your biggest tax asset in Retirement may be sleeping right beside you.

The column looks at how senior couples approaching Retirement or semi-retirement face a slightly different tax situation than when both were working in full-time jobs. There’s limited scope for income splitting when you’re working but Pension Income Splitting — introduced more than ten years ago — is a real boon for senior couples that enjoy one fat employer-provided pension and the other does not.

For tax purposes, up to half of the pension can be “transferred” to the lower-income spouse’s hands, thereby reducing some of the highly-taxed income for the pension recipient, and putting more of the pension into the low-taxed hands of the spouse receiving some of the transfer. Note this doesn’t actually mean they receive the pension: it all happens on the tax returns, and is easily handled by tax software when you choose to file your taxes jointly as a couple. Note that unlike in the United States, there is no formal joint tax return for couples in Canada: each spouse must file on their own but the tax software makes it relatively smooth by creating so-called “Coupled Returns,” which helps optimize who claims deductions like charitable or political contributions and the like.

Because the column has to fit in the paper and included several sources (some of whom blog here at the Hub), I’ve taken the liberty of adding some of the points made that did not appear in the column or had to be truncated.

Income splitting options limited under age 65

Under age 65, the options for income splitting are very limited, says Aaron Hector, vice president of Calgary-based Doherty Bryant Financial Strategies.  “Generally here you are only looking at payments out of defined benefit plans (of which  up to 50% can be split) or spousal loans from non-registered investments.”

Doherty Bryant’s Aaron Hector

More from Aaron Hector:  “If each spouse has their own registered plan (RRSP/RRIF/LIRA/LIF) then the withdrawal from their own personal plan can be taxed fully to them. So if one spouse is working, they may not need or want to draw any additional income from their registered plans, but the spouse who is not working can choose to draw down their registered plan. It is important to note that regular RRSP withdrawals will never qualify for income splitting, even after 65. The withdrawals need to come from a RRIF to be eligible for income splitting. Sometimes people are hesitant to convert their RRSPs into RRIFs because they don’t yet want to commit to the subsequent forced annual taxable RRIF withdrawals. What is less commonly known is that someone can convert only a portion of their RRSP into a RRIF, leaving the remaining RRSP balance untouched until it is forced into being converted into a RRIF by the end of the year in which they turn 71. Furthermore, if someone converts to a RRIF early (ie. before 71) then they will always have the option to convert their RRIF back into a RRSP anytime before 71. Doing so would allow them to ‘turn off the taps’ that is the RRIF income stream. Once you turn 65 (but not before) withdrawals from RRIFs and LIFs become eligible for income splitting. Only the spouse who’s RRIF/LIF is being drawn upon needs to be 65; the recipient of the income splitting can be younger than 65. However, in this case the recipient spouse will not get the “pension income tax credit” until they are also 65.

It’s also important to note that when it comes to these income splitting provisions, age 65 at any point of the year is sufficient. If you turn 65 on December 31, then the same 50% splitting provisions apply to you as if your birthday was on January 1. (ie. the splittable portion does not get pro-rated in the year you turn 65 depending on your specific birth date). Because of the age 65 significance, and also as a hedge against future governments changing the tax rules (ie. taking away pension income splitting rules, which have not always been allowable) I try to have my client couples have an even amount of money in their registered plans. Spouse 1 should add up their RRSP, LIRA, Spousal RRSP, etc.. and the total should be close to the same total of spouse 2. If there is a discrepancy, then Spousal RRSP contributions should be utilized to even things out. This allows flexibility in income planning and withdrawals in the years prior to age 65. I caution on Spousal RRSP contributions the closer someone is to needing the money because of the 3 year-rule. The 3-year rule is such that if a withdrawal is made in the year of a contribution, or either of the next two calendar years, then the income from that withdrawal will be attributed (ie. taxed) back to the contributing spouse instead of the Spousal RRSP account holder.”

Taxation of Non-registered income works differently

Income from non-registered accounts works a bit differently, Aaron notes: Continue Reading…

Retired Money: What retirement savers can learn from the finances of pro athletes

My latest MoneySense column looks at the seemingly enviable situation of professional athletes, and what us ordinary folk can learn about what it’s like to retire from a (typical) five-year career of earning big bucks, but then having a half century ahead of them. Click on the highlighted text to retrieve the full story: Why so many athletes run into financial trouble.

The article is based on an interview with Chris Moynes, a financial planner who specializes in managing money for NHL and other pro athletes, and reviews his book After the Game. it is available at Amazon.com or directly through his web site at www.onesports.ca, as is an earlier book called The Pro’s Process.

Most pro athlete careers average about 5.5 years. The median is just 4 years (so half have careers that last less than that) and of course a sudden critical injury could end it all at any moment. Of course, while it lasts the pay is astronomical compared to what mere mortals can generate in regular jobs: an average US$2.4 million per season. That means the average pro athlete will earn about $13 million over that short career. However, citing sportrac.com, Moynes says 200 of the 683 players in the NHL earn less than US$1 million per year, because the stats are skewed by the huge salaries of the biggest stars.

The 6 financial “Landmines” facing pro athletes

The opening chapter of After the Game outlines the six biggest “landmines” facing pro athletes. First is overspending and the combination of big paycheques spread over a short career. They seldom understand finances and often make poor investment choices, typically being prime targets for those selling “can’t miss” investments like nightclubs, casinos, real estate ventures and other private-equity type deals. Continue Reading…

Franklin Templeton Canada unveils suite of low-cost passive Regional and Country ETFs

On the heels of BMO’s entry into the low-cost asset allocation ETF space (see Hub blog here), one of the world’s largest active money managers has unveiled a suite of low-cost passively managed regional and country ETFs for the Canadian market.

Franklin Templeton Investments Canada today announced the expansion of its Franklin LibertyShares ETF offerings with its first suite of passive ETFs. (Franklin LibertyShares originally entered Canada in 2017 with four actively managed funds branded as Franklin LibertyShares).

The new passive funds gives investors exposure to a specific region or country at rock-bottom fees (below 10 basis points). It says (and I agree) that the management fees for these new Canada, United States, Japan and Europe (excluding U.K.) passive ETFs are amongst the lowest in the industry, ranging between 5 to 9 bps.

The company says these include the first Japan passive ETF and Europe (excluding U.K.) passive ETF available on a Canadian exchange. The ETFs are market-cap weighted.

In a press release, Franklin Templeton Investments Canada president and CEO Duane Green said: “With market-moving events like trade tensions and Brexit, investors and their advisors as well as institutional investors are looking to precisely act upon specific country and regional market views … These new passive ETFs provide Canadian investors with individual country and regional exposure options … at a very low cost.”

Here are the new ETFs and their ticker symbols:

Franklin FTSE Canada All Cap Index ETF (FLCD) invests primarily in equity securities of Canadian issuers, seeking to replicate the performance of FTSE Canada All Cap Domestic Index. The management fee is 5 bps.

Franklin FTSE U.S. Index ETF (FLAM) invests primarily in equity securities of mid- and large-capitalization U.S. issuers, seeking to replicate the performance of FTSE USA Index. Management fee is 7 bps.

Franklin FTSE Japan Index ETF(FLJA) invests directly or indirectly, primarily in equity securities of mid- and large-capitalization Japanese issuers, seeking to replicate the performance of FTSE Japan Index. Fee 9 bps.

Franklin FTSE Europe ex U.K. IndexETF(FLUR) invests primarily in equity securities of mid- and large-capitalization issuers in developed markets in Europe excluding the United Kingdom, seeking to replicate the performance of FTSE Developed Europe ex U.K. Index. Fee 9 bps. Continue Reading…