Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

MoneySense: Mutual funds still have a place, especially those without Embedded Compensation

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MoneySense.ca: Photo created by snowing – www.freepik.com

MoneySense magazine has begun to publish a package of three mutual fund articles they commissioned me to write. You can find the first article by clicking on the highlighted headline: DSC mutual funds and the future of investment advice. It ran on January 16th.

The first article looks specifically at the gradual decline of the once-ubiquitous DSC sales structure, or Deferred Sales Charge. It recaps recent regularatory developments surrounding DSC, and addresses the related issue of embedded compensation for financial advisors, or so-called Trailer Commissions. These are gradually being eliminated in various Western nations (notably the UK and Australia/NZ) and they are also being phased out in all Canadian provinces, with the conspicuous exception of Ontario.

The lesser-known “Direct-to-Consumer” mutual fund families

When it’s published, the second article will look at two particular “camps” of mutual fund providers: the big-name Embedded Compensation firms you may have heard from (because they can afford to advertise) and a lesser known camp of Direct-to-Consumer managers whose names may be less familiar because they don’t generally have embedded compensation and whose fees are lower and typically mean they don’t have as much money to throw around on big marketing and advertising budgets. The article focusses on four firms in particular you may not have heard of, except through family referrals and word of mouth: Beutel Goodman, Leith Wheeler, Mawer, Steadyhand.

Space precludes mentioning that in the good old days of mutual fund mania (the 90s) there were several other direct-to-consumer firms that either were acquired or are now a shadow of their former selves: the list includes Altamira, Saxon, Sceptre and a few others. We also look at two deep value firms that are still around but get so much publicity about their performance that they can hardly be dubbed as “firms you’ve never heard of.” They are Irwin Michael’s ABC Funds and Francis Chou’s Chou & Associates. Continue Reading…

8 ways to build Home Equity

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Nanaimo, BC

By Lynn Donn

Special to the Financial Independence Hub

If you’ve been watching the real estate market in British Columbia, you may have noticed that quite a few Nanaimo homes for sale have a large amount of equity. Equity is the difference between the market value of your home and the mortgage balance owed. Another way of thinking about equity is that it’s the profit you make when the time comes to sell.

Building equity is the largest single benefit of owning a home in Nanaimo or anywhere else. Your home equity increases in one of two ways:

  • Value of your home increases
  • Amount of debt on your home decreases
Add value to your home

Here are eight great ways to build equity in your home by increasing value and decreasing debt:

You have instant equity in your home when home values appreciate. Three things that make home values rise are:

1.) Real estate market in Nanaimo is moving upward: Appreciation is something that happens without you having to do anything. Home prices are more likely to go up in established, attractive neighborhoods and in growing areas around town.

2.) Improvements and updating: Not all home improvements have the same return on investment. So, before spending money on updating, be sure to choose the ones that will add the most value to your home. Smart home improvements include kitchen and bathroom updating, improving curb appeal with low-maintenance landscaping, and adding square footage to your home.

3.) Upkeep & routine maintenance: Although routine maintenance can be tedious, it’s better to keep everything in your kept up than to face a major repair bill like a leaking roof or broken down furnace. Nanaimo homes for sale that have been maintained poorly are also at the biggest risk of losing equity, even when the real estate market is appreciating.

Decrease debt on your home

Decreasing the debt on your home while adding value can build equity surprisingly fast. Techniques to reduce mortgage debt include: Continue Reading…

Currency investing may seem appealing but you’ll lose in the long run

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It’s A Rare Investor Who Makes Enough Profit From Long-Term Currency Investing Activities To Compensate For The Risk Involved

As a general rule, we advise against long-term currency investing speculation for many of the same reasons we advise against options trading and bond trading. It’s a rare investor who makes enough profit from these activities to compensate for the risk involved.

Our view is that if you like a currency’s outlook, you should buy stocks that will profit from a rise in that currency. Our longstanding advice is to invest mainly in well-established companies. Avoid exposure to currency trading, penny stocks, new issues, options, futures or any high-risk investments. That way, while you may experience modest losses when markets drop, you should show overall positive results over time.

Keep hedged ETFs as a long-term currency investing strategy out of your portfolio

If you want to buy U.S. stocks and hedge against currency movements, you could buy a hedged ETF.

Hedged ETFs, like, say, the iShares Core S&P 500 ETF (symbol XUS on Toronto) are funds sold in Canada that hold U.S. stocks. However, they are hedged against any movement of the U.S. dollar against the Canadian dollar. That means that the ETF’s Canadian-dollar value rises and falls solely with the movements of the stocks in the portfolio.

For example, if a stock rises 10% on, say, New York, but also rises a further 5% for Canadian investors due to an increase in the U.S. dollar, a holder of a hedged ETF would only see a 10% rise in the value of that holding in their hedged ETF. At the same time, the reverse is also true: If a stock rises 10% on New York, but falls 5% for Canadian investors due to a decrease in the U.S. dollar, a holder of a hedged ETF would still only see a 10% rise in the value of that holding as part of their hedged ETF.

Note, though, that hedged funds include extra fees to pay for the hedging contracts needed to factor out currency movements. Of course, those costs can rise or fall regardless of currency swings.

Hedging against changes in the U.S. dollar only works in your favour when the value of the U.S. dollar drops in relation to the Canadian currency. If the U.S. dollar rises while your investment is hedged, it reduces any gain you’d otherwise enjoy, or expands a loss. Continue Reading…

Preparing to pay Taxes on Cryptocurrency

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By Sia Hasan

Special to the Financial Independence Hub

Taxes are essential for the government to continue operating smoothly. Without the payment of taxes, programs such as school lunches, Social Security and health services cannot function. Even though no one really enjoys paying taxes, everyone has to fill out their tax forms. These taxes apply not only to traditional forms of currency such as wages received for a job but also to cryptocurrency. Follow these tips to make sure you are prepared to pay taxes on your cryptocurrency.

Know what you have

Log in to all of your accounts associated with cryptocurrency and find out how much money you have in each system. Then, check how much you invested into the currency, how much you have spent and how much money you have earned. You also need to know how much money each of the amounts is worth in US dollars, because that is how the Internal Revenue Service (IRS) calculates taxes in the United States. Keep in mind the fact that the amount of taxes you pay is based on the worth of your cryptocurrency when you made it, not its current worth, as long as you can prove the date of acquisition. If you do not keep track of this information, it may be stored with your account data, but you should also keep a record so you can double-check the company’s calculations. Once you have an understanding of your finances, you can begin preparation of your taxes.

Know what’s required

Just because your income is in the form of cryptocurrency does not mean that you are not responsible for taxes. The IRS has recently released new guidelines about the payment of taxes and will be holding people accountable for not reporting cryptocurrency in the past. To avoid fines or even imprisonment for tax fraud, you need to understand the tax laws and how they apply specifically to the kinds of cryptocurrency you use. Continue Reading…

Can Private Equity’s stellar run continue?

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By Noah Solomon

Special to the Financial Independence Hub

While Outcome is not a private equity (PE) firm, we are humble students of markets. As such, we feel compelled to write about the explosive growth in PE investments over the past several years and what this growth implies for the future.

Flavour of the Month

 Private equity has certainly had a good run. From 1990 to 2010, PE firms produced an annualized return of 14.4%, compared to 8.1% for the S&P 500 Index. Unsurprisingly, this strong performance has been a lightning rod for inflows. According to Prequin, a leading data provider for alternative investments, global fundraising for PE totaled an unprecedented $453 billion in 2017, topping 2007’s previous record of $414 billion. This avalanche of money has pushed the industry’s dry powder (capital committed that has yet to be deployed) to a record $1 trillion.

Victims of their own success

Owing to unprecedented inflows and low interest rates, there have been large shifts in the financial metrics of the PE industry. According to S&P Global Market Intelligence, average buyout multiples in 2018 climbed to a record 10.2x EBITDA, a level surpassing 2007’s pre-crisis peak.

The potentially ominous implications of huge inflows and increased competition for future returns is well illustrated by the experience of the hedge fund industry. At the beginning of 2000, there were relatively few hedge funds, and the global hedge fund industry had roughly $300 billion under management. Between 2000 and 2007, the HFRX Global Hedge Fund Index produced annualized returns of 9.75%. Even during the “tech wreck” of 2001-2, when the MSCI All Country World Index of stocks fell 33.1%, hedge funds rose an impressive 13.8%. This stellar performance attracted a massive influx of assets from investors and prompted the launch of countless new funds. The resulting increase in competition has had a dramatic impact on results. From the beginning of 2008 through the end of last August, the HFRX Index declined at an annualized rate of -0.5% and has fallen 5.7% on a cumulative basis.

Massive inflows and low rates have also encouraged a dramatic increase in the use of leverage. S&P Global Market Intelligence estimates that buyout debt levels currently stand at about 5.7x EBITDA, up from 3.7x for deals done in 2009 and not far from the 6.05x peak at the height of the buyout boom which preceded the financial crisis.

Stephen Schwarzman, chairman and CEO of the Blackstone Group, recently acknowledged the challenges facing PE firms, stating,” If we were a hockey team, then in the past, with less competition, we used to get 30 shots at the net,” Mr. Schwarzman said in an interview. “Today, we might only get five shots. But most of the time, we are shooting at an open net. We still score, we still win.” In contrast, Mr. Schwarzman predicted thousands of smaller private equity and real estate funds are facing declining returns on their investments, partly because of increased competition for deals.

The history of financial markets echoes with a warning: beware markets where investors are not only bullish but also borrowers.

The Stability illusion

PE funds have exhibited far less volatility than stocks. However, valuations of public equities are determined by transparent, liquid markets, while those of PE-owned companies are typically based on managements’ forecasts of long-term value.

From the end of 2012 to September 30, 2015, the S&P 600 Energy Index dropped 52% as energy prices plummeted over 50%. At the end of this period, PE energy funds from the 2012 vintage were marked at a 1.0x multiple of money invested, recognizing no losses. This shocking difference implies that either (1) PE energy funds are the most astute investors on the planet, or (2) they were applying different valuation standards than the public markets. The CIO of the Public Employee Retirement System of Idaho referred to this discrepancy as the “phony happiness” of private equity.

There will always be room for best-in-class PE investments within a well-diversified portfolio. However, given massive inflows and increased competition, investors should reevaluate risks and adjust their exposures to PE accordingly. Investors should also become increasingly discriminating and target only best in class funds that are disciplined, and which have sustainable investment strategies.

The Million Dollar Question

What should investors do in a world where both private and public assets are either fairly valued or overvalued, and in which interest rates are negative in real terms?

One advantage of public over private markets is that they are highly liquid. Publicly traded assets can be sold quickly and efficiently. However, this liquidity is of no value unless one uses it. Our Global Tactical Allocation (GTAA) strategy makes full use of the liquidity advantage of public securities by tactically shifting between asset classes. When our machine learning-based models indicate that gains are more probable than losses, we shift our portfolio into more pro-cyclical assets such as equities, high yield bonds, etc. Conversely, when our models determine the opposite, we shift out of riskier assets and into safe havens such as investment grade bonds and Treasuries. These characteristics have enabled our clients to participate in rising markets and avoid large losses during significant market declines like those of late 2018.

At this stage in the economic cycle, investors should focus their equity exposure in liquid, dividend-paying, low volatility stocks. Our Enhanced Dividend mandate, which has dramatically outperformed the TSX Index, uses big data analysis and statistical modelling to achieve an attractive yield while exhibiting relatively low volatility and losses.

Noah Solomon is President and Chief Investment Officer of Outcome Wealth Management. Noah has 20 years of experience in institutional investing.From 2008 to 2016, Noah was CEO and CIO of GenFund Management Inc. (formerly Genuity Fund Management), where he designed and managed data-driven, statistically-based equity funds. Between 2002 and 2008, Noah was a proprietary trader in the equities division of Goldman Sachs, where he deployed the firm’s capital in several quantitatively-driven investment strategies. Prior to joining Goldman, Noah worked at Citibank and Lehman Brothers. Noah holds an MBA from the Wharton School of Business at the University of Pennsylvania, where he graduated as a Palmer Scholar (top 5% of graduating class). He also holds a BA from McGill University (magna cum laude).