Tag Archives: mutual funds

How to pick US and Canadian Dividend-paying stocks

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By Ian Duncan MacDonald

Special to the Financial Independence Hub

Once upon a time there was a man who loved apples so much that he wanted to own an apple tree. So, he went to an apple-tree broker to buy one.  The man was impressed to see an apple tree one hundred feet tall with apples the size of basketballs. He asked how much it would cost to buy such a magnificent tree.

The apple-tree broker smiled tolerantly and said, “No one person can own such a magnificent tree. You can only own one tiny piece of it, a small branch a few inches long. How much do you have to invest?”

The man replied that he would like to own more than one tiny branch. Surely there must be something in your orchard that I can buy?”

The apple-tree broker said of course there is, but you must understand that for twenty years the apples that come from this magnificent tree have got increasingly bigger and even more plentiful. Even these  little twigs, in time, will produce several more giant apples than they do now.

“What else do you have?”

“Well over in this corner are 10 trees you could buy for the same amount of money; however, some years they do not produce apples and the apples are very small but if you really want a  bargain, I can give you 100 apple trees for one dollar. Hold out your hand.”

The apple broker poured one hundred apple seeds into the man’s palm who testily responded, “These aren’t magnificent apple trees?”

“No, these are speculative apple trees.  You are buying them for their potential.”

“What else do you have?”

“Well, see those fellows over there. They operate apple tree funds.  They buy 500 apple trees at a time and sell people like you a piece of their apple tree fund.”

“Are these 500 apple trees all magnificent trees?”

“No. Of course not. There are fewer than 100 magnificent trees available to buy.  The fund may have partial ownership of a dozen magnificent trees but for diversification they spread the risk of apple trees over five hundred trees. They call it their safe apple tree index.”

”Would this include some that are just seeds, some a few inches high, some a few feet higher and some fully grown ones whose production of apples may be spotty from year to year?

“It would but some might grow into magnificent trees, and you might be able to sell units in the fund for more than you paid.”

Safer to invest in 20 dividend-paying stocks than funds

This allegory is an attempt to explain why you are safer investing in 20 financially strong companies paying high dividends then investing in index funds, mutual funds, and ETFs. Why would you invest in hundreds of weak, mediocre stocks when you could invest the same amount of money in financially strong companies paying high dividends?  Strong companies with easily accessible historical records that can show their share price and dividend payments increasing yearly for decades.   Continue Reading…

Vanguard Canada launches two actively managed global mutual funds

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Vanguard Investments Canada Inc. has announced the launch of two new globally diversified and actively managed mutual funds it describes as being “low cost”: Vanguard Global Credit Bond Fund [VIC500] and Vanguard Global Equity Fund [VIC600.] complement the firm’s current line-up of 37 ETFs and four mutual funds.

Management fees will be 0.40 and 0.55% respectively. Asked whether this means payment of trailer commissions to financial advisors, Vanguard Canada spokesperson Matthew Gierasimczuk told the Hub: “No. Vanguard doesn’t pay trailing commissions in any of our markets since we have a longstanding belief it leads to a conflict of interest for investors.” The funds are available through most wealth advisors and also on Questrade and Qtrade, he added.

In a news release issued on Sept. 13, Vanguard Investments Canada Inc. Managing Director and Head Kathy Bock said:

“Within an uncertain investing climate, Canadian investors and their advisors are looking for quality, long-term and high-performing investment products, at a low-cost … These mutual funds provide that and reflect our deep 45-year history in active management with proven portfolio manager expertise that can help investors achieve success.”

Globally, The Vanguard Group, Inc. manages over USD $8.1 trillion in assets and is one of the world’s largest active managers with USD $1.7 trillion in global actively managed assets under management.

“Since introducing our mutual funds three years ago, Canadians have embraced our differentiated approach to active management, providing investors with access to skilled global investment managers with a long-term view,” said Tim Huver, Head of Intermediary Sales, Vanguard Investments Canada Inc. “These two global funds can act as a core holiding or complement to an investor’s equity or fixed income portfolios.”

Vanguard Global Credit Bond Fund seeks to provide a moderate and sustainable level of current income by investing primarily in non-government fixed income securities of issuers located anywhere in the world. The fund will have a management fee of 0.40%. The fund will be sub-advised by The Vanguard’ Group Inc.’s Fixed Income Group, a global team of more than 185 tenured and dedicated professionals overseeing USD $2.1 trillion in total assets. For 40 years, Vanguard Fixed Income Group has been distinguished in the industry by its deep investment capabilities, disciplined security selection process, rigorous risk management techniques and strong long-term performance.

Vanguard Global Equity Fund seeks to provide long-term capital appreciation by investing primarily in equity securities of companies located anywhere around the world. The fund will be sub-advised by Baillie Gifford Overseas Limited and Marathon Asset Management Limited. These sub-advisors have worked with Vanguard for decades and collectively manage over USD $500 billion in assets under management. The maximum management fee for the fund will be 0.55%.


			

	
	


							


	

		
				

			Lack a DB pension? Pros and Cons of the Purpose Longevity Fund
		

		
		

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By Mark and Joe


Special to the Financial Independence Hub


Hello readers of the Financial Independence Hub! We are the founders of CashflowsandPortfolios.com,  a free resource dedicated to helping DIY investors in getting started with their portfolio right up to planning efficient withdrawal strategies during retirement.


We are honoured to have been invited by Jon Chevreau to contribute a piece on a new income product for retirees: the Purpose Investments Longevity Fund.


If you are close to retiring or already a retiree, you’ve likely thought a lot about the following questions:


    

  1. Did I save enough for retirement?
    2. 

  2. How will I generate sufficient income for my retirement?
    3. 

  3. How long will my money last?
    4. 



If you are lucky enough to have worked for a Government entity for 25-30 years, then you are probably not too worried about funding your retirement.  However, for the rest (most) of us, we need to save and invest on our own over the long-term. If that’s not enough, we then need to figure out ways to decumulate our savings as efficiently as possible.


For DIY investors, there is not much in the form of “forever” payments until death, except of course Canada Pension Plan (CPP) and Old Age Security (OAS). We consider these as one of the three pillars of retirement income for Canadians.


Another common source of “forever” income that acts like a government defined benefit (DB) pension are annuities: which are guaranteed by insurance companies. With annuities, investors are trading their capital for a steady income stream, which is essentially a DB pension.


Why aren’t annuities more popular? For DIY investors, it’s likely because of the fact that you are giving up your capital for a yield (currently around 4-5%) that can be obtained by your own DIY portfolio (see below for an example).


So what if there was a product out there that would provide:


    

  1. Income for life
    2. 

  2. A yield higher than annuities
    3. 

  3. An option to “sell” the product to regain some of your invested capital if needed?
    4. 



That’s the opportunity and challenge that Purpose Investments has taken on with the creation of their latest mutual fund: The Longevity Pension Fund.


There has been a lot of buzz about the Purpose Investments Longevity Pension Fund and for good reason:  it solves a number of big problems that retirees face.


What is the Longevity Pension Fund and what are the pros and cons of owning such a fund?


Pros and Cons of the Longevity Pension Fund


At a high level, the Longevity Pension Fund is a cross between a balanced index mutual fund (47% equities/38% fixed income/15% alternatives), an annuity, and a defined benefit pension. While the fund does offer income for investors, a solid yield, and an option to “sell” the product if needed, these potential benefits must be considered with some drawbacks. As always with financial products, the devil is in the details.


With the basics out of the way, what are the PROS and CONS of the fund?


PRO – Reduces longevity risk (i.e., outliving your money) by offering income for life, but without the guarantees


As mentioned, the Longevity Purpose Fund is a mutual fund that any investor will be able to buy. Once purchased, and the investor is 65 or older, the fund will pay a distribution for life (at least that is the plan). Purpose Investments has stated that the 6.15% yield may sound high, but to maintain that yield they would only need to achieve an annual return of 3.5% net, which is well below historical returns for a common 60/40 stock/bond balanced portfolio.


Combined with mortality credits (investors who die sooner than expected, leaving their money invested in the fund for other investors), Purpose Investments has stated that 6.15% is conservative and can possibly go higher in the future.


PRO – You can get some of your investment back


With annuities and defined benefit pensions, you don’t typically get your contributions back. With this Longevity Fund, if you sell the fund you will get your initial investment minus any income payments. For example, if you have invested $100k into the fund, and have been paid out $10k, then you get back $90k if you sell. At a yield of 6.15%, essentially you can get some capital back up to 16 years of being invested in the fund. After that point, co


nsider yourself invested for life.


PRO – The taxation of the distributions will be tax efficient


While the fund is available for all kinds of accounts — including tax-free savings accounts (TFSAs) and registered retirement income funds (RRIFs) — potentially the best home for this fund could be in a taxable account. That is because monthly income distributions in the first year are expected to be roughly half a return of capital (RoC) with the remainder from capital gains, dividends and interest. This means that in a taxable investment account, the distributions will be tax-efficient (much more so than a defined benefit pension payment).


PRO – No Binding Contract


A key feature of this Longevity Pension Fund is a script from the annuity playbook: mortality credits. Similar to an annuity, you are participating in a pool of credits: those that die. When you die, your estate gets your initial contribution minus the total amount of income payments. The investment gains generated by your investments over the years stay in the fund and are used to top up monthly payments for everyone else.


Unlike an annuity though, you can get out of the fund: it’s not a one-way binding contract.


From Purpose:


“Unlike many traditional annuities or other lifetime income products, the Longevity Pension Fund is not meant to feel like a binding contract. You can change your mind and access the lesser of your unpaid capital** (i.e., your invested capital less the distributions you’ve received) or current NAV. Your beneficiaries are entitled to the same amount if you pass away. Once your cumulative distributions surpass your invested capital, there will no longer be any redeemable value left. Please speak to your advisor or see the prospectus for further details.”


The fund is also designed similar to many pension plan funds or funds of funds:  a balanced mix of stocks, bonds and other investments that should* meet their income obligations to unitholders.


*Target income is just that. This fund does not offer an income guarantee.


CONS – The fund does not pass onto heirs


As mentioned above, the mortality credits are how this fund will sustain its yield into the future, which also means that the fund and its payout do not pass onto your spouse/heirs. For investors with a spouse/heirs, this is one of the largest drawbacks of the Longevity Pension Fund.


CONS – The distributions are not guaranteed 


The monthly payments seem juicy right now but the Longevity Pension Fund is not like an annuity whereby income is guaranteed for life; the 6% or more income target is just that: a target.  Continue Reading…

			

	
	


							


	

		
				

			Retired Money: Has Purpose uncorked the next Retirement income game changer?
		

		
		

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Purpose Investments: www.retirewithlongevity.com/


My latest MoneySense Retired Money column has just been published: you can find the full version by clicking on this highlighted text: Is the Longevity Pension Fund a cure for Retirement Income Worries? 


The topic is last Tuesday’s announcement by Purpose Investments of its new Longevity Pension Fund (LPF). In the column retired actuary Malcolm Hamilton describes LPF as “partly variable annuity, part tontine and part Mutual Fund.”


We described tontines in this MoneySense piece three years ago. Milevsky wasn’t available for comment but his colleague Alexandra Macqueen does offer her insights in the column.


The initial publicity splash as far as I know came early last week with this column from the Globe & Mail’s Rob Carrick, and fellow MoneySense columnist Dale Roberts in his Cutthecrapinvesting blog: Canadian retirees get a massive raise thanks to the Purpose Longevity Fund. Dale kindly granted permission for that to be republished soon after on the Hub. There Roberts described the LPF as a game changer, a moniker the Canadian personal finance blogger community last used to describe Vanguard’s Asset Allocation ETFs. Also at the G&M, Ian McGugan filed Money for life: The pros and cons of the Purpose Longevity Pension Fund, which may be restricted to Globe subscribers.


A mix of variable annuity, tontine, mutual fund and ETFs


So what exactly is this mysterious vehicle? While technically a mutual fund, the underlying investments are in a mix of Purpose ETFs, and the overall mix is not unlike some of the more aggressive Asset Allocation ETFs or indeed Vanguard’s subsequent VRIF: Vanguard Retirement Income Portfolio. The latter “targets” (but like Purpose, does not guarantee) a 4% annual return.


The asset mix is a fairly aggressive 47% stocks, 38% fixed income and 15% alternative investments that include gold and a real assets fund, according to the Purpose brochure. The geographic mix is 25% Canada, 60% United States, 9% international and 6% Emerging Markets.


There are two main classes of fund: an Accumulation Class for those under 65 who are  still saving for retirement; and a Decumulation class for those 65 and older. There is a tax-free rollover from Accumulation to Decumulation class.


There are four Decumulation cohorts in three-year spans for those born 1945 to 1947, 1948 to 1950, 1951 to 1953 and 1954 to 1956. Depending on the class of fund (A or F),  management fees are either 1.1% or 0.6%. [Advisors may receive trailer commissions.] There will also be a D series for self-directed investors.


Initial distribution rates for purchases made in 2021 range from 5.65% to 6.15% for the youngest cohort, rising to 6.4 to 6.5% for the second youngest, 6.4% to 6.9% for the second oldest, and 6.9% to 7.4% for the oldest cohort.


Note that in the MoneySense column, Malcolm Hamilton provides the following caution about how to interpret those seemingly tantalizing 6% (or so) returns: “The 6.15% target distribution should not be confused with a 6.15% rate of return … The targeted return is approximately 3.5% net of fees. Consequently approximately 50% of the distribution is expected to be return of capital. People should not imagine that they are earning 6.15%; a 3.5% net return is quite attractive in this environment. Of course, there is no guarantee that you will earn the 3.5%.”


Full details of the LPF can be found in the MoneySense column and at the Purpose website.

			

	
	


							


	

		
				

			Fixed Income: Down but not Out
		

		
		

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Franklin Templeton Investments: Licensed from GettyImages


(Sponsor Content)


While many equity markets have performed well year to date, the last few months have not been as kind to fixed income investors. Last quarter, fixed income markets recorded some of the worst returns in 40 years as central banks and governments worldwide continued to rack up a mountain of debt in ongoing support of the global economy and consumers during the COVID-19 pandemic. But don’t despair; as Franklin Bissett fixed income portfolio manager Darcy Briggs points out in this Q&A, the market still offers value — if you know where to look.


 


Q: How would you describe the current environment for Canadian fixed income?


After seeing significant returns in Canadian fixed income last year, we expect more subdued performance in 2021. Given the year’s starting point of very low interest rates and tight credit spreads, we see corporate credit as offering the best risk-adjusted return opportunities in the current environment. As active, total return managers focused on generating income and capital gains, we know bond selection will remain important this year. Small interest rate moves can lead to significantly different outcomes for different fixed income sectors. Uncertainties remain high, and we are seeing a wide range of forecasts on how the balance of 2021 will unfold. Although interest rates have been up as much as 100 basis points so far this year, we think they may have overshot, as happens from time to time. We would not be surprised if they drifted lower later in the year. Realistically, we expect the path ahead to be a little messy.




Source: FactSet, Franklin Templeton


How so? 


This recession/quasi-depression was prompted by a dramatic health crisis and the resulting government-mandated shutdown; it was not caused by normal business cycle dynamics. While fiscal and monetary policy have prevented a full-blown financial crisis, those tools have limited ability to solve the current recession. We believe it will end once the pandemic subsides and the economy fully opens, functioning in a more familiar pre-pandemic way. Vaccines are key to the pace of progress. Continue Reading…