We don’t spend a lot of money advertising at Steadyhand (at the end of the day, investors pay for it). If we did, you might see something similar to IA Clarington’s latest campaign on Active Mind. But with a Steadyhand spin, of course.

As part of their campaign, IA Clarington highlights Active Share, which is a term coined by a pair of Yale professors (Martijn Cremers and Antti Petajisto). Active Share is a measure of how much a fund differs in composition from its benchmark index. If a Canadian equity fund has an Active Share of 90%, for example, it has very little replication of the S&P/TSX Composite Index. A fund with an Active Share of 20%, on the other hand, is closely mirroring the index.

We’ve been writing about Active Share for a number of years (see Those Damn Academics, Active Management: What are You Paying For? and Active Share). We feel it’s an important concept because in order to beat the index, you have to look different than it. The Yale researchers came to two important conclusions: (1) funds with the highest measures of Active Share consistently outperformed their benchmarks, and (2) smaller funds outperformed larger funds.

In a Clarington video interview with Martijn Cremers, he notes that less than 10% of Canadian equity funds have a high level of Active Share and the bulk of products offered in Canada are simply “closet index” funds. Cremers suggests that one of the reasons for this is that managers have become more benchmark-oriented because investors are quicker to sell if a fund underperforms in the short term. Managers have become too afraid to deviate from the benchmark for a fear of losing assets.

The videos are worth viewing for investors interested in learning more about Active Share. They can be accessed via the Clarington link above.

We periodically calculate the Active Share of our equity funds. Our latest numbers as of March 31, 2012 are:

• Equity Fund – 89%
• Global Equity Fund – 93%
• Small-Cap Equity Fund – 97%

We hope Clarington’s efforts will bring greater awareness to the concept of Active Share and what it means to be a truly active manager. The Yale research suggests that too many Canadian investors are paying too much for what is essentially high cost indexing. We want them to get a better grasp of low fee undexing.

By Scott Ronalds

We’re in one of the greatest bear markets of all time. In natural gas, that is. The commodity’s price has fallen from over $10 per thousand cubic feet (Mcf) in July 2008 to about $2.50 today. Last month, it touched $1.90, representing a decline of roughly 85% from peak to trough.

Natural gas is used to heat and cool homes and generate electricity. It is also used in the production of plastics, fabrics and fertilizers, and among other applications, can be used to run vehicles (although until recently it has been more expensive than gasoline). Further, it’s a cleaner fuel than coal, which is more commonly used in generating electricity.

Over the past few years, advancements in drilling techniques – notably hydraulic fracturing (“fracking”) and horizontal drilling – and new discoveries in shale rock formations in areas such as Louisiana, Arkansas, Texas and Pennsylvania, have led to a massive increase in supply. Promising fields are also being developed in B.C., Alberta, Quebec and New Brunswick. Estimates suggest the new fields south of the border could provide enough gas to satisfy U.S. demand for decades. And to think that in the mid 2000’s many experts thought production was in permanent decline.

Add a warm winter to the equation (roughly half of American homes are heated by natural gas), and the continent is currently swimming in the commodity. In fact, there are concerns that storage facilities will soon be full and producers will have to turn off the taps or dump gas.

It seems a shame. Natural gas is a cleaner alternative than many fossil fuels, yet it’s not being used in enough industries to soak up the massive inventories. The commodity sells for much more in Europe and Asia ($8 - $16/Mcf), but it’s not cheap or easy to transport overseas. Advocates of the fuel also see it as a way to fight climate change and reduce dependence on foreign oil.

Why aren’t more industries and businesses using natural gas? For one, it’s expensive to modify machinery, vehicles and service stations. Also, businesses can be tied into long-term contracts for coal or other fuels. And finally, there’s no guarantee it will remain a cheaper alternative to coal and gasoline.

There are radically different views on natural gas in the investment community. Some analysts believe that prices are bound to stay depressed, if not fall much further, because supply will continue to outstrip demand. Others feel that the spread between natural gas and oil prices is unsustainable (oil is currently about 40x more expensive; the historic norm is around 10x) and the commodity is sure to rebound as more industries make the change, more governments implement green incentives, and new facilities and technologies make it easier to export.

As a Steadyhand investor, you want to know what our managers think of natural gas and the role it plays in your portfolio. We break it down by fund below.

Income Fund

With respect to the fund’s income-equities, the manager’s focus (Connor, Clark & Lunn) is on companies that generate steady cash flows and have the financial strength to pay rising dividends. Because of the volatile nature of natural gas prices, direct producers typically don’t fit CC&L’s investment criteria. Natural gas producers do not generate stable income and the manager is not comfortable with the dividend sustainability of many of these businesses. Accordingly, they do not own any direct producers in the fund.

The portfolio does have limited exposure to the commodity through oil & gas service providers such as Enbridge and Gibson Energy. These are midstream businesses, meaning they are involved primarily in storing and transporting energy. Both companies, however, are more focused on oil than natural gas.

Equity Fund

CGOV Asset Management, the manager of the fund, feels that it’s anyone’s guess as to what will happen to natural gas prices in the short term. Gord O’Reilly (the lead manager) believes the magnitude of the price decline has been so great, however, that a reversion to the mean is likely over time, particularly as liquefied natural gas (LNG) export facilities come into production over the next few years (facilities have been approved in Louisiana and Kitimat) and more electric utilities and commercial vehicles convert to natural gas.

Yet, producers aren’t making profits at current prices and Gord feels it’s difficult to find value in the sector beyond CGOV’s two holdings, Birchcliff Energy and Pason Systems. Birchcliff is focused on natural gas exploration and production in Alberta (with some light oil production as well). The manager likes Birchcliff because it has valuable land assets and the ability to rapidly increase reserves. Their light oil production also helps pay the bills. The stock has been the subject of acquisition talk and has bounced around as a result. Pason provides rental oilfield instrumentation systems for oil & gas drilling and service rigs. Although low prices have hurt gas drilling, strong oil drilling activity has helped compensate.

Global Equity Fund

The natural gas landscape outside of North America is much different. The demand/supply equation is more balanced. The closure of nuclear power plants in Japan and Germany has added to demand, while a new wave of LNG coming out of the Asia-Pacific region and the Middle East has contributed to supply. Shale-related supplies are not as plentiful, however, due to inferior geology. Natural gas prices range from the equivalent of $11/Mcf in northwest Europe, to $13 in the Middle East and close to $16 in Japan. The manager of the fund, Edinburgh Partners Limited, believes that gas will play a greater role in the world’s longer-term energy mix, with demand growth concentrated in power generation and the ever-increasing global vehicle fleet.

The fund holds three investments with meaningful exposure to natural gas. Russian-based Gazprom holds the world’s largest natural gas reserves and owns the world’s largest gas transmission network. The company accounts for 15% of global gas output, supplies roughly 25% of Europe’s gas requirements and exports gas to more than 30 countries. ENI is an Italian-based energy conglomerate with a significant natural gas division that produces and sells the fuel throughout Europe and abroad. Petrobras is a Brazilian oil and gas producer and the 5th largest energy company in the world. Although its focus is more on oil, gas is an important division.

Small-Cap Equity Fund

While there are plenty of small-cap resource companies operating in western Canada, few natural gas-focused businesses represent attractive investment opportunities in the manager’s view (Wil Wutherich). Wil feels that stock valuations are expensive at current gas prices. Unless the price of the commodity rises to around $5/Mcf in the near term (Wutherich is skeptical of this happening), he believes that most companies will be hard-pressed to produce compelling profits.

Currently, the fund does not hold any pure natural gas producers. It does, however, own some companies with business divisions that are focused in part on natural gas. Of note, Total Energy Services provides drilling rigs and gas compression equipment to western Canadian producers. As well, Badger Daylighting provides excavation services that are used in the energy field for tank and pipeline cleaning, pipeline trenching, and repair and construction activities. Wutherich has a handful of other gas-related businesses that he knows well and watches closely, but feels they aren’t attractive investments at current prices.

Summary

If you hold a balanced portfolio of our funds (or the Founders Fund), you have modest exposure to natural gas. Our managers’ focus in North America is primarily on natural gas service providers that also serve the oil industry and therefore have a more diverse revenue base. CC&L, CGOV, and Wutherich & Co. are more cautious of direct producers (Birchcliff Energy provides the greatest direct exposure). The landscape is quite different outside North America, where natural gas prices can be 4-6X higher. The Global Equity Fund has holdings in Russia (Gazprom), Italy (ENI) and Brazil (Petrobras), providing you with diversified exposure to a number of international gas markets.

By Scott Ronalds

In the final installment of our series marking our 5th anniversary, we look at a distinguishing feature of our investment philosophy - undexing.

Our Small-Cap Fund is at the top of its game. Over the past year (ending April 30th) it has gained 13.6% while the market, as measured by the BMO Small Cap Index, has fallen -13.8%. It’s been zigging as the market’s been zagging. Over the past five years the fund has gained 6.2% per year, while the small-cap index and the S&P/TSX Composite Index are up 1.3% and 1.1%, respectively.

What’s more, the fund’s annual returns since inception have been less volatile than those of the market, although it hasn’t been a smooth ride. There have been stretches of time where the fund has significantly underperformed the market. In 2009, for example, the fund was up 14.6%, while the index was up 75.1%. The table below shows the fund’s dispersion of annual returns in comparison to the BMO Small-Cap Index.

*Feb 13 - Dec. 31, 2007

The manager’s style (Wil Wutherich) is clearly not benchmark oriented – a distinguishing feature of all our funds and a key tenet of our investment approach. We call it undexing. This approach has rewarded investors so far, and we believe it will generate superior returns over time (see our blog posting on Active Share). But patience is key. Unitholders have had to stomach periods of underperformance.

It will be the same going forward, in that the fund will lag the market over the short- and medium-term at times. Wil’s strategies won’t always be working out and there will be periods when his approach is out-of-favour (e.g., 2009) and unitholders will be cursing us (our Global Fund is currently going through such a stretch).

But we’ve got thick skin. And one of the most important things we can do is to help build some ‘investing calluses’ on our clients’ hands by shedding light on performance and other related issues. It’s what helps make them better investors.

Note: The indicated rates of return are the historical annual total returns including changes in unit value and reinvestment of all dividends or distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Important information about the Steadyhand funds is contained in our simplified prospectus. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

iShares fixed income turns 50. The global leader in exchange traded funds (ETFs) recently launched their 50th U.S.-based fixed income ETF (iShares offers 22 fixed income ETFs in Canada). Investors can access a wide array of products, including 8 different U.S. government bond funds, 10 municipal funds and 12 credit-based (corporate) funds. Indeed, iShares offers investors more tools than ever to customize their portfolios, as highlighted in a brochure celebrating the milestone.

Is this a good thing? Do investors need access to a 3-7 Year Treasury ETF, a Baa-Ba Rated Corporate ETF, or a Ginnie Mae bond-focused ETF? Professional money managers, perhaps. Average investors, no. Yet, the products are being marketed to average investors. The fixed income world is complicated. Investors need a firm understanding of the yield curve, duration, credit risk, and inflation in order to use these ETFs properly. Otherwise, they’re just different shades of gray.

Broad-based funds such as the iShares Barclays Aggregate Bond ETF can be useful tools to gain diversified exposure to an asset class, but the more slicing and dicing non-sophisticated investors do through the use of specialized products, the greater the risk of cutting themselves.

The once-simple ETF product shelf is quickly turning into a messy closet, not unlike the mutual fund space. Likewise, the graveyard continues to grow. Last week, for example, Horizons announced that it will be terminating five ETFs including the Horizons BetaPro COMEX Long Gold/Short Silver Spread ETF (try saying that five times in a row).

Our advice is to keep it simple. If your portfolio is swelling with products you don’t understand, pluck the gray.

By Scott Ronalds

In the third installment of our series marking our 5th anniversary, we look at the concept of rewarding client loyalty with lower fees.

At the end of this month we’ll be rewarding our earliest clients with an additional fee rebate, as our first tenure discounts come into play. Clients who hold our funds for 5 years receive an additional 7% reduction on their total fees. This discount is in addition to any rebates they receive based on the size of their accounts with Steadyhand. The tenure discount will apply every year until investors hit their 10th anniversary as a client, at which time their fee rebate will be upped to 14%.

We offer both the loyalty and asset size discount in recognition that:

• The costs of servicing our long-standing clients are typically less than our newer clients, as they require less up-front assistance in setting up their accounts and establishing a portfolio of funds. They also have become familiar with and know what to expect from our reporting and communications. And they buy into our investment philosophy, meaning they stick to their strategic asset mix (SAM) and don’t trade too much.
  
• Large accounts do not cost us any more to administer than smaller accounts.
  
• Lower fees lead to higher returns.

While our base fees are amongst the lowest in the business, we recognize they are not the lowest. For long-standing clients who entrust sizeable assets with us, however, our fees are pretty much untouchable.

As far as we know, we’re the only investment firm in the country that rewards clients for their loyalty. Although, perhaps the Deferred Sales Charge (DSC) could be considered a loyalty program of sorts. Under this plan, which is offered by fund companies that charge back-end sales commissions, the fee that investors are charged to exit a fund is reduced each year, usually over a period of seven years, until it reaches 0%. A different definition of loyalty, I guess.

Surprisingly, client loyalty is poorly rewarded in many industries. Consider the telecom and cable businesses. Providers offer sweet deals to attract new customers, but as an existing client, forget it. You get the rack rate, even if you’re renewing a contract.

At Steadyhand, the ‘Client Since’ field on our statements actually means something, in dollars and sense.

By Scott Ronalds

A theme in our blog postings this month is to bring readers inside the tent. Many clients express an interest in how we run our business, so we’re bringing it to life.

In the second article of our five-part series (Five Sources of Tension), we noted that our website is one of our greatest sources of constant tension, as we aim to keep it fresh and engaging, yet clean and simple. In this follow-up posting, we look at one of the tools we use to monitor engagement and interest in our site, Google Analytics.

The program enables us to track our website with precision – it shows where visitors are coming from, which pages they viewed, how long they stayed on the site, which web browser they used (Internet Explorer, Safari, Firefox, etc.), which type of mobile device they used, what they ate for lunch, etc. We can see when a particular blog or article hits a nerve, which reports are being read (or not read), and when traffic to the client portal spikes. The analytics can get pretty granular. In fact, it’s a little creepy.

One of the cool features is the geographic tracking. It shows the countries, regions and cities that generate the most web traffic. While we generate the bulk of our traffic in the domestic market, we get visits from around the world (although we only offer our funds in five provinces). Yesterday, for instance, we had visitors from Australia, the Dominican Republic, France, Mauritius, Mexico and Malaysia, among other countries. Perhaps we’re raising some eyebrows abroad, or maybe our clients are just exotic travelers.

I was looking at our U.S. traffic yesterday for the month of April and noticed a particularly engaged visitor from South Carolina. They were on the site for nearly 30 minutes and visited 15 pages. Further digging showed they were a returning visitor, and were viewing our site from North Myrtle Beach. They were left-handed and had a dog named Trixy (OK, we can’t confirm this, but Google will probably be able to shortly).

While some of the Google features are more incredible/entertaining than practical, the Analytics help us determine what’s working on the site and what needs improvement. The geographic tracking can also be a signal that we should visit a certain city or region if the interest is there. Step it up, Hawaii.

By Scott Ronalds

It was a good start to the year for Steadyhand. We welcomed close to 200 new clients to the firm in the first quarter, our assets under management grew by 15%, and our transfer pipeline is healthy. Stocks also had a strong showing, with the Canadian market rising 4% and the U.S. and World markets gaining roughly 10%. The bond market declined as interest rates edged upwards, although losses were modest.

As we mark our fifth anniversary this month we have our first set of 5-year performance numbers, which are the focus of this discussion. It's been a turbulent period in the capital markets, but our clients with balanced portfolios have fared well.

In this podcast, we review the performance of each of our long-term funds in detail, and provide an update on how they're currently positioned.  

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By Scott Ronalds

In the second installment of our series marking our 5th anniversary, we introduce the greatest sources of constant tension within our business. 

We go through our fair share of Advil at Steadyhand. Like any business, we’re faced with strategic decisions that involve internal discussions in which not everyone sees eye to eye. While some choices are easy – the boardroom m&m’s are for clients only – others face more rigorous debate. Below are five issues that have been constant sources of tension within the walls of 1747 West 3rd Avenue.

Advertising

As a relatively young firm, one of our biggest challenges is getting our name out there. Advertising is one way of doing this. There are two problems with advertising, however: (1) it costs a lot of money; and (2) it can send the wrong message to clients (fees are going toward marketing instead of investment management). Also, the effectiveness of traditional advertising (newspapers, magazines, TV) is questionable in an age of social media and changing consumer behavior. When we’ve experimented with online and traditional advertising, the results have been unspectacular.

The topic comes up every year at our annual strategy session, with valid arguments made for and against it. Is it a necessity or just a fallback? With good 5-year numbers now on the books, the discussion continues. The Advil is extra strength.

Website

steadyhand.com is our hub. We put a lot of resources into our site to keep it fresh and informative. To date, we’ve had four different home pages, including versions with a grizzly bear, a series of animated vignettes, and a bold leading statement. The pressure to make changes often arises when business is quiet or web traffic is stagnant. Do we need to make a change to the home page? Add more tools? Prioritize different messages? Produce more videos? How do we convert more prospects into clients?

The challenge is to balance cleanliness and simplicity with new content and ideas. The last thing we want is a generic, uninspiring or overly-busy site. Again, a headache-inducing task at times.

Minimums

Our minimum initial investment is $10,000 per fund (and $1,000 for subsequent transactions). We settled on this figure because it’s roughly the break-even point to manage and administer an account. It puts us in a tier above the banks and traditional fund companies where minimums are typically $500 to $1,000, and below the ‘managed account’ programs where minimums often range from $500,000 to $1 million.

There’s been much discussion internally that our minimums are too low for the type of service, fees and investment managers we offer. The counter-argument is that as a young firm, we want investors to try us out. Even if it involves a smaller initial investment than they are capable of making, the thinking is that the ‘Steadyhand experience’ will win them over. Five years from now, our minimum could be $5,000 or $50,000. Or it could stay where it is. The decision won’t come without tension.

Balanced Fund

We put a lot of thought into our initial fund line-up. We decided on five funds that cover the waterfront. We wanted a tight offering, as one of our goals is to keep things simple. Our early thinking was that a balanced fund was unnecessary because clients can achieve the same result using our underlying funds. Indeed, we have a series of ‘model portfolios’ whereby investors with different objectives, time horizons, and levels of risk tolerance can build a portfolio of our funds suitable for their circumstances. Further, balanced funds can be perceived as expensive, overdiversified mass-market products.

Internal discussion on a balanced fund surfaced a few years ago, however, when advocates of the firm started lobbying us for an all-in-one portfolio – one where asset mix and rebalancing decisions would be made on the clients’ behalf. A key benefit of such a fund is that it can improve returns for investors who aren’t as attentive or interested in monitoring their portfolio. We had many internal discussions on the topic, with thoughtful arguments provided on both sides. The Advil jar is sealed on this one though, as we recently launched the Founders Fund.

The Elevator Pitch

We feel we offer a great value proposition to investors: experienced managers, concentrated portfolios, low fees, transparent reporting, thoughtful & informative communications, co-investment, clear-cut advice, simplicity, a steady hand, and crisp client service. The problem is, what do we lead with? Which one or two points resonate the most with investors? What will someone remember about Steadyhand after first hearing about us?

While the tenets of the firm have remained rock solid, this has been an ongoing topic of discussion and has led to some changes and refinements in our messaging over the years. The bottom line is that we feel they’re all important underlying elements that help make our clients better investors.

From our Quarterly Report:

We’re celebrating our fifth birthday this week, so this letter is going to be more about us than usual. Indeed, during the rest of this month, our plans are to share five stories, post a few ‘five’ lists and drink too much 5-year old wine at our team celebration.

Our achievements, however, don’t obscure the fact that we have lots more to do. Our Global Fund needs to perform better, we can do more to improve our client reporting and we want our ‘landscaping’ to be more bountiful. As the team sits down for our annual strategy session tomorrow, we’ll be fleshing out and prioritizing our ‘To Do’ list. The theme of the meeting is building on our strengths, not trying to replicate someone else’s...

Read Tom's full brief and the rest of our report here.

By Scott Ronalds

Steadyhand opened its doors to investors five years ago tomorrow. Since that bright spring day in April 2007, we’ve witnessed a lot – the biggest stock market decline since the Great Depression, a collapse in the U.S. housing market, derivatives gone wild, a global debt crisis, a strong market rebound, record low interest rates, investor paralysis, political revolution ... and more. It’s been an eventful period. And it’s what we live for. Investors need a steady hand on their portfolio now more than ever.

To mark our 5th anniversary, we’re publishing a series of five articles that take you inside our company and industry and touch on some of the principles and happenings that have shaped our business. The first of the series will be posted tomorrow, with a new entry each week. We hope you enjoy this peek inside the tent.

By Scott Ronalds

Emmylou is a typical Steadyhand client (notwithstanding her mono-tooth). Like Bruce, we’ll follow her investing journey and provide periodic updates on the decisions and challenges she faces.

Profile

Age: 57
Status: Divorced
Children: 1
Occupation: Pharmaceutical Sales Rep
Residence: Winnipeg
Likes: Cross-country skiing, yoga, Tom Petty, Guinness, travel, The Amazing Race
Dislikes: Asparagus, lyrics to ‘American Woman’, January, Dancing with the Stars
Steadyhand Client Since: February 2012
Investments:

• RRSP: $225,000
  
• TFSA: $20,000
  
• Non-registered: $150,000

Emmylou is 57 years old and divorced. She’s been down the road with a couple of potential partners since splitting with her husband 10 years ago, but is not seeing anyone at the moment. She has one daughter, Stacey, who is a 30 year old teacher in Toronto. Emmylou received her nursing degree from the University of Manitoba and was a nurse in Winnipeg and Calgary for 18 years. In her mid-forties, she moved back to Winnipeg and took a job as a sales representative with a large pharmaceutical company. Her dirty little secrets: Despite growing up in the ‘Peg’, she never liked The Guess Who; she religiously watches Curb Your Enthusiasm; and she prefers beer over wine.

Emmylou’s sales career has gone well and she’s able to live comfortably, pay the mortgage, max out on her RRSP contributions, visit her daughter regularly and fund her taste for travel. She owns a townhouse valued at $350,000. As for debt, she has a mortgage of $60,000 and a line-of-credit with a balance of $20,000 (used for home renovations).

Background

Emmylou held all her investments with one of the big banks prior to moving her accounts to Steadyhand this winter. She discovered the company through her son-in-law Paul, a lawyer in Toronto who has an RRSP with Steadyhand. Paul had often heard Emmylou grumble about her lack of understanding about how she’s doing and what she’s paying, so he suggested she contact Steadyhand for a portfolio review.

After spending some time on steadyhand.com and learning about the firm’s approach, she got in touch with us. We reviewed her portfolio and probed her on her investment objectives and risk tolerance. We suggested that while her asset mix was suitable, she should consider consolidating her investments to avoid over-diversification and unnecessary complexity. We also noted that she could reduce her fees. The simplicity aspect of Steadyhand particularly resonated with Emmylou.

Financial Goals

Emmylou enjoys her work, but would like to slow down in 4-5 years. Rather than retiring, however, she would like to work part-time if possible. She has some key financial goals that she would like to achieve by her 65th birthday:

1. Pay off her mortgage and credit line.
2. Grow her portfolio to the $750,000 mark (not including her townhouse).

Aside from the above, Emmylou has a keen interest in history and would like to spend some time exploring Europe and take part in an archaeological dig. She would also like to volunteer at future Olympic Games, after taking in the Vancouver Olympics with a friend.

Portfolio

Emmylou has a pension from her earlier career as a nurse. It will pay her roughly $1,200 per month (indexed to inflation). This source of retirement income, combined with the Canada Pension Plan payments, allows her to be a little more aggressive with her investments. In reviewing her portfolio, Emmylou also contemplated what other factors should impact her decisions: age (at 57 and in good health, she figures she has an investment time horizon of 30-35 years); potential inheritance (not counting on anything substantial); and children (her daughter is financially independent).

She is not comfortable taking on too much equity risk, however, so she decided on a strategic asset mix, in consultation with us, of 55-60% equities / 40-45% fixed income.

Emmlou is a perfect fit for the Founders Fund. It has an investment objective that lines up closely with hers, and she’ll get Tom Bradley’s oversight on asset mix and rebalancing. The current breakdown of the fund is (as of February 29th):

Savings Fund – 5%
Income Fund – 44%
Equity Fund – 24%
Global Equity Fund – 22%
Small-Cap Equity Fund – 5%

The resulting asset mix is roughly 30% bonds, 33% foreign equities, 27% Canadian equities and 10% cash. Emmylou will hold the Founders Fund in each of her accounts. We presented her with an option in which she would hold the underlying funds instead of the Founders Fund in order to structure her accounts in a slightly more tax efficient manner (i.e., the Income Fund would be held in her RRSP), but she opted for the benefits of Tom’s oversight and the simplicity of holding just one fund across all her accounts.

Her investments with Steadyhand totaled just under $400,000 at the end of February. At this level of assets, Emmylou’s annual all-in fee is roughly 1.09%.

We'll keep you posted on Emmylou's investing decisions as life plays out.

Tom’s Globe article on the weekend focused on Income Gone Wild (Dividends Obsession Distracts Investors From Big Picture). He opines that investors’ intense focus on dividends and income is distracting them from what really matters – “total” returns (i.e. capital appreciation, dividends and interest income).

Many investors are looking at yield and income first, without much consideration for the underlying components that drive returns. A product that promises a pay-out or distribution of 8% may sound great, but it’s crucial to look at how it’s generating the distribution and whether it’s sustainable. An 8% distribution doesn’t look so good if your investment falls by 10% and/or is paying you back your capital (return of capital).

Blogger Canadian Capitalist wrote a piece last month that provides a good example of investors’ fascination with yield. He noted that of all the new exchange traded funds (ETFs) launched last year, the BMO Covered Call Canadian Banks ETF attracted the most assets by a wide margin. He suggested that the fund’s initial yield of 10% was a big reason why investors piled money into the fund. Interestingly, the Covered Call ETF’s total return was lower than a plain vanilla ETF that invests in similar underlying investments but pays a lower distribution. The takeaway: higher yield doesn’t always equate to a higher return.

For income-oriented investors, yield should be a consideration when analyzing a potential investment. It shouldn’t, however, be the only consideration.

We’ve been banging the drum on the issue of performance assessment for good reason. Most investors don’t know how their portfolio has performed, and most firms don’t want to tell them.

This reality was expanded upon in a recent article by Larry Swedroe on CBS’s Money Watch site. He cites a study in which the researchers compared investors’ actual returns to how they thought they fared. It concluded the following:

• Investors frequently overrated themselves (only 30% considered themselves to be merely average), and overestimated their portfolio performance by over 11% per year.
  
• Investors seemed unable to admit to poor performance. Only 5% of the sample believed they had negative returns, while the actual number of investors in the red was 25%.
  
• On average, investors underperformed their relevant benchmarks.

While this is just one study, we frequently come across situations where investors think they have performed better (or worse) than their actual results indicate. This can lead to poor investment decisions. And it’s why we show investors their actual returns on their account statements and will continue to make noise on the issue of performance assessment.

Morningstar published an article today on Brian Eby, the head of fixed income at Connor, Clark & Lunn. CC&L is the manager of our Income Fund and Savings Fund.

Along with highlighting Brian’s background and experience, the piece sheds some light on the team that manages the Income Fund and its current positioning.

To read the profile, click here.

We wrapped up our cross-country client presentations this month after visiting five cities and braving mother nature in all her winter glory.

If you weren’t able to attend one of our sessions, we’ve produced a summary of the event that hits on the key themes and topics of discussion.

If you have any questions about the presentation, we encourage you to call us at 1-888-888-3147.

We recently stopped by CGOV's office to talk with Gord O'Reilly (the lead manager) about the Equity Fund. We discussed a number of topics, including CGOV's definition of core vs. opportunistic holdings, their strategy with respect to dividends, and what surprised them most in 2011.

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Warren Buffett’s perspectives on investing are worth their weight in gold (or better yet, stocks). Invest in things you understand. Wait for the right pitch. Don’t follow the herd. Buy things you’d be comfortable holding forever.

In a recent article in Fortune magazine, Buffett lays out his views on what he considers the three major categories of investment possibilities: fixed income (currency-based investments), assets that will never produce anything (gold), and productive assets (businesses, farms, real estate).

Not surprisingly, Warren thinks that the third category is the place to be: “I believe that over any extended period of time this category of investing [ownership of businesses] will prove to be the runaway winner among the three we've examined. More important, it will be by far the safest.”

He notes, “The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability – the reasoned probability – of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period.”

Consider Buffett’s views on gold. “Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be about $9.6 trillion. Call this cube pile A. Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?”

There are lots of other unique perspectives in the article, which is an adaptation of his upcoming shareholder letter. Buffett fans may also be interested in watching a 12 minute segment that aired on CBS’s ‘Person to Person’ last night, in which he takes Charlie Rose and Lara Logan through his private office in Omaha.

We last spoke with Bruce in September, when he acted on our counsel to trim his weighting in bonds and add to equities.

Bruce and Courtney’s portfolio rose roughly 2% in 2011 (its aggregate value at year-end was approx. $346,500). While Bruce isn’t popping any champagne, he realizes that their portfolio fared quite well considering its bias towards equities (which had a weak year).

At the end of December, their asset mix was:

Savings Fund – 10%
Income Fund – 26%
Equity Fund – 26%
Global Equity Fund – 22%
Small-Cap Equity Fund – 16%

The couple contributed $10,000 each to their RSP accounts this week. They want to keep on track with their strategic asset mix (SAM), so they didn’t add anything to the Small-Cap Fund (which had drifted higher, from 12% to 16% of their portfolio). They each invested $5,000 in the Equity Fund, $2,500 in the Global Equity Fund and $2,500 in the Income Fund. They had a tough time adding to the Global Fund given the mess in Europe, but they realize its place in their portfolio. They also understand that valuations for global stocks look attractive.

Bruce and his wife also contributed $10,000 each to their Tax-free Savings Accounts (TFSAs). They didn’t get around to adding to their TFSAs in 2011, so they had extra contribution room this year (reminder: you can contribute $5,000 per year to a TFSA. Unused contribution room carries forward). They used the Savings Fund in their joint investment account as the source of funds for the contributions.

The contributions slightly increased the Equity Fund’s overall weight in their portfolio to 27%, while the weight of the Small-Cap Fund was reduced to 15%. Bruce and Courtney’s bond weighting remains at the low end of their SAM range, following our advice that stocks currently represent better value. The couple continues to hold roughly 10% of their portfolio in the Savings Fund. As a reminder, the purpose of this cash is two-fold: 1) as a source of funds for a vacation property; and 2) as a source of dry powder if the market experiences a notable decline.

With their investments front of mind, Bruce and Courtney took care of one last piece of housekeeping – they RSVP’d for our Annual Client Presentation. They’re interested in hearing Steadyhand’s assessment of the markets. And they really like our cookies.

Last week we published a report on how to assess your portfolio’s performance (How is Your Portfolio Doing?).

Today we’re releasing a supplementary report that uses the framework to assess the performance of the Steadyhand Balanced Income Portfolio, which is a hypothetical model portfolio (comprised of our funds) used by a large number of our clients.

Assessing performance can be an arduous and confusing task. Not anymore.

I’ve read a few interesting books lately on some of the top technology visionaries of our time. They include Paul Allen (Microsoft), Larry Page & Sergey Brin (Google) and Steve Jobs (Apple). The books were all good reads (Idea Man, In the Plex, and Steve Jobs), although the Microsoft and Google tomes are a little too technical at times for those like me who know little about programming.

One thing jumped out at me about all of these trailblazers – they are/were extremely passionate about what they do. They’re geeks. They have an eccentric devotion to programming/creating/designing and are so engaged in their trade that nothing else matters to them. They don’t let traditional barriers get in their way, aren’t afraid of failure, and don’t compromise on what they believe in. Along the way, they’ve built some exceptionally cool stuff and changed the way we work and play. And there’s only more to come.

Google and Apple have been successful at developing software and products that are hugely complex at the back-end, yet simple and intuitive for the end user. This is a tremendous accomplishment. It’s something the wealth management industry should try to emulate every day.

Investing has its complexities at the back-end. Financial analysis is akin to the engineering that goes behind search algorithms or touch screen interfaces. Unlike Google and Apple, however, the industry does a poor job of making the user experience simple and efficient. There is no shortage of resources at the back-end (equity analysts, portfolio managers, etc.), but few firms put much thought or effort into making the customer experience simple and understandable.

Investing remains a complex activity to many people because the industry wants it to be perceived that way. It shouldn’t be. Investors don’t need hundreds of choices, undecipherable reporting and non-stop economic forecasts. They need a few sensible fund options, a clear investment approach, and plain-English reporting.

Allen, Page, Brin and Jobs threw out the old blueprint. They brought innovative thinking, fearlessness, simplicity, and a focus on the user experience to the table, with a touch of craziness. We could all use a little more geek in us.

Early last year we published a report on how to assess your portfolio’s performance. The paper laid out a framework for evaluating your investments, focusing on five areas: gathering the facts, reviewing the market environment, analyzing the numbers, assessing the potential for future returns, and determining when to take action.

The report was well received by investors and won the Best Stewardship Initiative at the Canadian Investment Awards last month (read more).

Today we’re releasing an updated version of the report. All the market returns have been updated to December 31, 2011, and we’ve made a few small refinements.

We’ll also be publishing a supplementary report next week that uses the framework to assess the performance of the Steadyhand Balanced Income Portfolio, which is a hypothetical model portfolio used by a large number of our clients.

Assessing performance is a key element of investing. Our goal is to provide a practical framework to make the task less onerous.

By Scott Ronalds

2011 was a great year for bonds and a not-so-great year for stocks. Interest rates declined further (10-year Government of Canada bond yields ended the year below 2% for the first time in a century), leading to strong price gains in government bonds, and to a lesser extent corporate bonds. Debt concerns in Europe and political lollygagging weighed on investor confidence and most stock markets around the world had a poor year. Double-digit losses were common in Europe and Asia, while the Canadian market dropped 9%. The U.S. was a lone exception and eked out a small gain.

In this podcast, we review the performance of our funds and highlight some of the key messages from our Quarterly Report.

Download, subscribe via iTunes or RSS, or listen now:

From our Quarterly Report:

It’s a remarkable time to be an investor. After decades of overspending in the Western world, we’re watching Europe melt down and the American empire decline faster than expected. The debt burden is slowing the world economy and accelerating the power shift from West to East. And while we watch with amazement, the fear factor grows.

When you look at your Steadyhand results, however, you might not think 2011 was so remarkable. Despite all the negative noise, political ineptitude and market volatility, our client returns weren’t far off of their long-term expected levels. Balanced portfolios were up between 2% and 5% (depending on the particular fund mix) ...

Read Tom’s full brief and the rest of our report here.

As we start a fresh new year, there’s no shortage of Top 10 Lists (we’re guilty, too). They can get annoying and repetitive, even for a David Letterman fan. But some are worthy of passing on, even posting on the fridge. Here’s one you should staple to the front of your next investment statement.

Top 10 New Year’s Investing Resolutions (by Larry Swedroe).

Another year, another 120 blog postings. We had some thoughtful, informative, helpful, useless, controversial and scathing posts last year, based on the emails and comments we received.

Below is a list of our most popular posts in 2011, as judged by you, the readers (well, actually judged by Google Analytics according to which postings received the most views).

1. What Now – Part II (August 10th)
2. The F-Bomb (June 22nd)
3. Monthly Income Funds: Some Useful Math (January 12th)
4. When Fear Rules the Markets, It’s Time to Say Buy (August 20th)
5. My TFSA Strategy (February 14th)
6. Investing Certainties in an Era of Economic Doubt (October 1st)
7. Steadyhand vs. ETFs (November 7th)
8. What to do About Japan – Part II (March 17th)
9. How is Your Portfolio Doing? (January 20th)
10. Hocus Pocus But no Magic (March 7th)

Thanks to all our loyal readers! We look forward to keeping you well informed in 2012.

(As a reminder, you can subscribe to our blog via email or RSS)

Michael Nairne, president of Tacita Capital, wrote a good piece in the Financial Post last weekend, titled A Gift From Risky Markets, which looks at historical stock market returns and valuations (dating back to 1825) and provides some perspective on the level of long-term returns investors can expect going forward.

If you got stiffed this holiday season or are looking for a little cheer as the bills come rolling in, this short article may be just the elixir you need.

It’s bureaucracy like this that prevents smaller firms (like Steadyhand) from offering their funds nationwide. Canada is one of few countries that doesn’t have a national securities body, which has been cited as a weakness in our system by many observers. Instead, investment firms have to deal with 13 different regulators (one for each province and territory).

The cost of filing a prospectus, and the associated regulatory expenses of dealing with each province individually, is extremely expensive. It’s the key reason why we only offer our funds in five provinces. As we grow, we hope to make our offering available in every province, but at this stage in our development, the costs are too prohibitive.

As a young business, it’s disheartening to turn down interested investors in Quebec, the Maritimes and the Territories (where the inquiries have been growing steadily). Unfortunately, the news today suggests we’re not going to see a national regulator anytime soon. Bah, humbug.

By Scott Ronalds

Is it over yet? It was a rough year for the stock markets, as ugly economic headlines, debt problems, and political gridlock instilled fear in many investors. Bonds were once again the asset class of choice, despite their scrooge-like yields.

Here at Steadyhand, we’re feeling a little merrier than the average investor – and it’s not just because of Bradley’s secret nog. Most of our funds have fared much better than the overall market, and we achieved some notable accomplishments over the year.

In this year’s Holiday Letter, we reflect back on some of the 2011 highlights.

Happy Holidays!

The year-end distributions for all our funds (with the exception of the Savings Fund) will be declared on December 15th and paid on December 16th. The Savings Fund will pay its regularly-scheduled monthly distribution on December 31st.

As a reminder, distributions represent the mechanism whereby mutual funds transfer to unitholders any interest and dividend income and realized capital gains they have accrued over the course of the year. Most investors choose to re-invest distributions into additional fund units, but clients can also opt to receive them in cash.

Remember that immediately following a distribution, the price of a fund drops by an amount equivalent to the payment. However, you will receive additional units in the fund which are equivalent in value to the amount of the distribution. The end result is that the value of your investment doesn’t change, but you own more units in the fund at a lower unit price.

For example, assume you own 100 units in a fund that is valued at $10.00/unit (your investment is worth $1,000). If the fund pays a distribution of $0.10/unit, its price will drop to $9.90 following the distribution. However, if you follow the common practice of re-investing your distributions, you will receive an additional 1.01 units in the fund ($0.10/$9.90), so the value of your investment remains unchanged (101.01 units x $9.90/unit = $1,000).

The estimated distributions for our funds are as follows:

• Income Fund: $0.19/unit
  
• Equity Fund: $0.05/unit
  
• Global Equity Fund: $0.06/unit
  
• Small-Cap Equity Fund: $0.95/unit

Please note that these are only estimates and are subject to change.

Important: The estimated distribution for the Small-Cap Equity Fund is higher than normal, as the fund generated more capital gains than in previous years. The amount may be reduced in the coming weeks, but investors considering purchasing additional units in the fund in non-registered accounts may wish to delay any purchases until after the distribution has been declared on December 15th.

If you have any questions about distributions, feel free to give us a call at 1-888-888-3147.

With the holidays around the corner, shopping is in the spotlight. It got me thinking …

We’re used to high price tags on the wet coast. We’ve got the most expensive housing market in Canada (if not the world, based on some measures). A bottle of wine typically costs more than in any other province (Tom insists, the world). Gas prices often rival the highest in the country. And high-priced yoga wear and lavish lattes fly off the shelf.

Yet, Vancouver is home to some of the lowest cost mutual funds in the country. Steadyhand, PH&N and Leith Wheeler are commonly recognized as low-fee leaders for active management (while also providing advice). Sky high real estate and low cost mutual funds makes for an interesting dichotomy. Must be something in the water.

By Scott Ronalds

A dirty little secret in this business: when a fund has an ugly performance record, it can be buried by merging it into another fund.

Fund mergers occur all the time (see Fund Company Calls the Cleaner). The latest track records to be swept under the rug belong to a handful of under-performing Investors Group funds (see below).

Given Investors Group’s dizzying array of over 500 products (in numerous classes and series), these mergers will largely go unnoticed by investors.

Morningstar Canada published its updated Stewardship Grades for 26 fund companies yesterday. The grades are designed to help investors further research, identify, and compare fund companies that do a good job – or a poor job – of aligning their interests with those of fund shareholders.

Stewardship Grades were first introduced in 2004 in the U.S., and a study published earlier this year found that funds with top grades were more likely to survive and deliver competitive risk-adjusted returns.

Morningstar introduced their Stewardship Grades in Canada last spring (see our blog on the topic), and Steadyhand scored favourably. In fact, we were the only company to receive a perfect score (8 out of 8) along with an “A” grade.

We’re proud to announce that we received an overall A grade once again. Of the 26 companies graded, four received the top mark (click here for the full list).

There are four components considered in the grading process: Corporate Culture, Manager Incentives, Fees, and Regulatory History. Morningstar made some slight changes to their process this year, motivated in part to better align the Canadian methodology with the approach employed by their U.S. fund analysts. The firm now assigns more weight to the Corporate Culture and Manager Incentives components. Steadyhand scored A’s on Culture and Incentives.

We’re unhappy that we scored a B on Fees this year, although we do understand that some other 'direct’ companies have lower fees before our fee rebate program kicks in.

Morningstar notes, “The Stewardship Grade goes beyond the usual analysis of strategy, risk, and return. It helps investors to assess a fund based on the degree to which the fund's parent – the management company offering the fund – has its interests aligned with those of fund shareholders. The methodology also examines whether shareholders can expect their interests to be protected from potentially conflicting interests of the management company.”

We pay little heed to industry ratings and awards that focus on short-term performance, but the Stewardship Grades address important intangibles that are not captured in a review of past performance alone.

I feel for the twentysomething generation. Good jobs are tough to come by, home ownership is out of reach for many (in Vancouver and Toronto, at least), skinny jeans are deemed fashionable for men, and a weekend camping now means pitching a tent downtown.

What’s more, young investors are avoiding risk at an alarming rate. A recent article in the Wall Street Journal (The Young and the Riskless) highlights a survey which showed that 52% of investors in their 20s agreed with the statement: “I will never feel comfortable investing in the stock market.” (only 29% of investors of all ages agreed with the statement)

The piece suggests: “Investors who eschew risk at such a young age might be setting themselves up for disappointment. Without the compounding effects that come with investing in equities for a long time, stock-less investors might find it nearly impossible to accumulate a big enough nest egg to retire at all, let alone in their 60s.”

We’re all aware that the stock market has been turbulent over the past several years, and that the economic headlines aren’t exactly rosy. But investors in their 20s who intend to avoid stocks altogether are making a mistake. A big one. Over a 30-40 year investment horizon, stocks will almost certainly outperform cash and bonds. This is especially true using today as a starting point – stock valuations are attractive on many measures and bond yields are close to historically low levels. Big short-term swings in the market are hard to stomach and can be particularly damaging for older investors, but the twentysomethings should use volatility to their benefit.

Young investors, no doubt traumatized by the events of the past few years, need to step up and take some risk (i.e., invest in stocks) if they want a phat portfolio down the road.

By Scott Ronalds

Exchange-traded funds (ETFs) are growing in popularity and with good reason. They’re simple, low cost, transparent and provide market-like returns. But … they’re not for everyone.

In a newly published paper, we compare the experience of an ETF investor (Jake) to that of a Steadyhand client (Julie). We focus on four areas: administration, communication, advice and most importantly, returns.

We’re doing the comparison because nobody else has evaluated or compared the two investor experiences and we think it’s important as ETFs become a more prominent fixture in the investment landscape.

For investors who are frustrated with the returns and business practices of the traditional wealth management companies, ETFs are a good option. For many of the frustrated, however, Steadyhand is a better fit.

For further details on the position and its responsibilities, click here.

If you are interested in applying for this position, please contact us via email only at jobs@steadyhand.com.

In preparing our Quarterly Report, I compiled some numbers that speak for themselves:

• Global stock markets had their worst quarter since Q4 2008
  
• Greece was down 42%. Italy, France and Germany were all down 25%. Canada was down 12%. Japan was down 11% (all in local currency terms)
  
• Almost every major European market has a P/E below 10 and dividend yields are commonly north of 4%
  
• The loonie hit $1.06 US in July and ended the quarter at $0.95
  
• Oil fell 17%
  
• Base metals fell by more than 20%
  
• The Government of Canada 10-year bond yield dropped from 3.1% to 2.1%
  
• The US Treasury 10-year bond yield dropped from 3.2% to 1.9%
  
• The DEX Universe Bond Index was up 5.1% - its highest quarterly return since 1996
  
• North American sovereign bond yields are at levels not seen since the 1940s

For stock investors, it was an ugly quarter. Bond investors, on the other hand, had a heyday. Looking ahead, it seems pretty evident where the opportunities lie. Hint: it’s not government bonds.

By Scott Ronalds

It was an ugly quarter for stocks, with most major markets suffering double-digit declines. The bond market, on the other hand, had its strongest showing in 15 years (government bond yields now stand at levels not seen since the 1940s).

Our funds declined, but held up better than the market. Their focus on high-quality, non-speculative companies helped dampen negative returns.

In this podcast, we review the quarter in further detail and highlight some of the key takeaways from our Quarterly Report.

Download, subscribe via iTunes or RSS, or listen now:

The passive (indexing) vs. active management question is a polarizing debate, but it shouldn’t be. The bottom line is that both strategies have merit when they’re done right.

As Morningstar USA’s President of Fund Research (Don Phillips) notes, credible voices within the index community are being drowned out by a vocal fringe – the indexing extremists. In an article first published earlier this year, Phillips suggests these individuals grossly overstate the indexing case, and that “many of the fund world’s recent stumbles – the misguided expectations surrounding leveraged and inverse ETFs and the poor performance of many commodity products – have come under the indexing banner.” This coming from someone who admits that indexing is a good way to invest and acknowledges to holding much of his personal assets in index funds.

There’s a paragraph in the middle of the article that’s particularly telling as to the state of the debate (in the US, at least):

“At some point, however, many index fans went from making the honest and helpful argument that indexing is good to making the hyperbolic and divisive case that anything other than indexing was not only bad, but also morally suspect. Extreme index supporters went from asserting that indexing beats the average fund to implying that it beats all funds. Ironically, they've advanced this claim during a decade when indexing has experienced unusually weak results. For the 10 years through the end of 2010, the Vanguard 500 Index fund placed in the 49th percentile of the large-blend category--hardly in keeping with its perceived dominance. The dichotomy between the facts and their assertions hasn't humbled the true believers, however. Their words have grown more extreme, as seen in a recent statement from an ETF provider that likened active fund managers to big tobacco companies, claiming that active management was as dangerous to investor wealth as tobacco is to our health.”

As a proponent of active management (undexing), I found Phillips’ article refreshing, although I’m sure it will raise the hackles of many indexers. If nothing else, the ongoing discussion is sure to be entertaining.

By Scott Ronalds

Wil Wutherich, the manager of our Small-Cap Equity Fund, is in town this week on a research trip. We booked an afternoon of his time to discuss the fund. Since we've covered his investment process in previous sessions and his philosophy is well documented on our site, Tom sat down with him to talk stocks.

Download, subscribe via iTunes or RSS, or listen now:

By Scott Ronalds

As a kid, my family and I used to go on a summer holiday every year to Savary Island (a small island about 200 km north of Vancouver). It’s a bit of a hidden treasure, with white sand beaches, warm waters and an abundance of shellfish. There was no electricity, few cars and fewer rules (don’t bury your sister and be home for dinner). We loved it.

I was back on the Island this summer and few things have changed. The tennis court still has a shoddy wood floor, there’s still no electricity (save the odd generator) and the water is just as welcoming. There are a few more boats and cars now though, which gets the old guard steaming, but we won’t go there.

Surprisingly, the owner of the cabin we used to rent dropped by one day with something we left behind 30 years ago – a copy of Canadian Business magazine from June 1981. It cost $2 and had my dad’s name and office address on the front. I took it to the beach one afternoon to flash back to what was going on in the Canadian business world when I was seven years old and the only thing that mattered was how big a fort my gang could build on the beach before the tide swept it away. Aside from some laughable ads from the top word processors of the day, an article on money market funds caught my eye.

The piece led off by noting that most Canadians were investing their spare cash in bank accounts or GICs: “Both these vehicles are safe and now yield a generous, though by no means princely, 13% to 15% a year.” Ah, the good old days! The author goes on to pitch the virtues of money market funds, “where you can earn 16% or more on your money … it’s a game that takes some getting used to but the rewards can be substantial.”

At the time, there were only two such funds in Canada (compared to 99 in the U.S.), the AGF Money Market Fund and Guardian Capital Money Market Fund. The former was yielding 16.7% and the latter 16.4% at the time of writing. (And to think I was wasting my allowance on Dr. Pepper and Bazooka Joe) Neither fund, however, had caught on with investors. The author suggested the major factor holding the funds back was that “Canadians don’t share the dis-satisfaction many US investors have with banks and trusts ... to most people, it seems a lot easier to just throw their money in the bank.”

Today, there are over 300 money market funds in Canada, most of which are yielding 1% or less (after fees). Further, the banks now have a disproportionately large share of the overall mutual fund industry. Canadians still love their banks. With their huge branch network and distribution channels, many investors still feel it’s a lot easier to turn to the banks for their savings and investing needs.

The more things change, the more they stay the same.

As summer winds down, I find myself longing for a Dr. Pepper and some of those generous, but by no means princely, 13-15% returns.

By Scott Ronalds

We often remind our clients that they don’t need to do much once their portfolios are set up, as our managers do most of the heavy lifting. While it may sound like lip service, it’s a phrase that carries weight.

In times of heightened volatility, such as the past two months, it involves capitalizing on opportunity. The manager of our Equity Fund, CGOV, noted recently that opportunity has been plentiful as a result of investors fleeing stocks due to negative economic events, margin calls and sheer panic.

A recent article in Barron’s (Buy Stocks, Not Economic Data) sums up nicely how investors are being increasingly barraged with economic data and how it should be interpreted when making long-term investment decisions:

“The fact is that macroeconomic data and policies to influence the economy are having little impact on what's really important to equity investors, corporate performance. Yet rarely has there been more attention focused on macroeconomic data and policy decisions. Clearly, the solution is to focus with blinders on what really matters to equity investors — earnings and dividends, and the price they pay to participate in those sums.”

While the economic backdrop remains uncertain, CGOV is investing in profitable, growing businesses, not U.S unemployment numbers or Spanish GDP figures. In the manager’s words, “We are confident that Ritchie Bros will still be conducting auctions in all economic environments and that Suncor will keep producing oil.” Recently, they have added to a number of companies that have seen their share prices decline based largely on panic, including TD Bank, Home Capital Group, Suncor, Insperity and Novartis. The profits of these companies will face little impact from a downgrade in the U.S. government’s debt or new austerity measures in Greece. CGOV also recently added Mead Johnson to the fund, a dominant global player in children's nutritional products and infant formula. They’ve admired the company for a while and the market pullback has provided a purchase opportunity.

The manager has been able to boost returns by trading around core positions. In other words, adding to holdings on share price weakness and trimming on strength. Or, put more succinctly, profiting from the emotions of others. The chart below illustrates a few examples of how they have been able to benefit from an active management approach of trading around their core positions throughout the volatility of the past few years – the heavy lifting in action.

Last month we introduced Bruce, a forty-something investor with a balanced portfolio (tilted towards equities).

Bruce spent the last three weeks of August on vacation and tuned out the noise in the markets as best he could. The single malt helped. While catching up on his reading this week, however, he came across two pieces by Tom which encouraged him to make an adjustment to his portfolio (What Now? Part II and When Fear Rules the Market, it’s Time to Say ‘Buy’).

Upon reflection, he decided to reduce his position in the Income Fund by 5% (of his overall portfolio’s value) and invest the proceeds in our equity funds.

Recall that Bruce’s portfolio at the beginning of the year was broken down as follows:

• Savings Fund - 10%
  
• Income Fund - 30%
  
• Equity Fund - 24%
  
• Global Equity Fund - 24%
  
• Small-Cap Equity Fund - 12%

As at August 31st, his fund mix was:

• Savings Fund - 10.1%
  
• Income Fund – 31.4%
  
• Equity Fund – 24.0%
  
• Global Equity Fund - 21.9%
  
• Small-Cap Equity Fund - 12.6%

Even though his current mix hadn’t drifted significantly from his strategic asset mix (SAM), he felt it was a good time to take some profits out of bonds (Income Fund) and add to stocks. Sticking with our suggestion, he trimmed 5% from the Income Fund. Straying somewhat from our advice, however, he added 2.5% to the Equity Fund and 2.5% to the Small-Cap Fund. He understands the Global Fund’s role in his portfolio’s diversification, but has a sour taste for anything Europe and didn’t add to the fund.

With his portfolio now tended to, Bruce can focus his energy on finding an excuse to get out of the Keith Urban concert his wife’s trying to drag him to at the end of the month.

Tom was on BNN this morning discussing how we think about asset allocation and portfolio positioning in volatile markets. It’s all about being ‘approximately right’ rather than exactly wrong. In other words, you’re never going to pick the top or bottom of the market, so it’s key to stick to your strategic asset mix (SAM) and make modest adjustments when valuations and sentiment are at extremes.

Currently, sentiment is flashing fear, bonds are expensive and stocks are cheap. It’s a good time to lighten up on bonds and buy equities – within the context of your SAM. If you have any questions on how this advice may apply to your situation, give us a call at 1-888-888-3147.

Watch the clip here (6:00 min)

Nalco, the world’s leading water treatment company, recently entered into a merger agreement with Ecolab (a provider of cleaning, food safety and infection prevention products and services). CGOV, the manager of our Equity Fund, sold the stock following the announcement. They originally purchased shares in Nalco in the summer of 2009 and by the time they sold the stock late last month, it had gained over 85%.

We initially reported on Nalco in March, 2010. We highlighted the stock because it was an example of an opportunistic investment. The company scored top marks in three areas that CGOV pays close attention to – cash flow, competitive advantage, and management. Nalco also carried a large amount of debt, however, which was a notable strike against the company.

This follow-up posting is a summary of how the investment played out.

A new CEO, Erik Frywald, took the reins as chief executive of Nalco in 2008. His mission was to increase the company’s revenue growth from existing levels of 3-4% per year to a target of 6-8%. He also set new productivity targets and aimed to reduce the company’s debt.

After gaining a level of comfort with the new CEO and watching his words turn into actions through better financial results and an improving balance sheet, CGOV purchased the stock at a price they felt was significantly below its true value.

Nalco was positioned in the right markets (energy, mining & mineral processing, chemicals & fertilizers, etc.) and Frywald and his team were able to increase revenues by raising prices on their products and winning new business. The company’s balance sheet also improved as a result of refinancing high-cost debt at more attractive terms, and cost cutting. The stock appreciated significantly and CGOV’s investment thesis proved correct.

Following news of the proposed merger, the stock gained nearly 30%. CGOV sold it at roughly $36. At a buyout price of $38.90, the stock still had upside potential of 8%, but if the merger falls through, they believe there is downside potential of 30%, so they felt the sale was the wise course of action (the merger is expected to close in the fourth quarter). If the stock continues to fall in a jittery market, the manager would consider buying it again.

Nalco is a story of buying into a business with a wart or two on it at the right price. While the bulk of the holdings in the Equity Fund have stronger balance sheets and more consistent earnings growth than Nalco did at the time of purchase, there are a few other companies in the Equity Fund that represent similar opportunistic plays, meaning they have attractive attributes and operate in a desirable industry, but have a strike against them which can range from debt issues to problems with a segment of their business to overly-negative sentiment (e.g., Kinross Gold, Manulife Financial). The end result won’t always be as profitable, nor come as fast as it did for Nalco, but when it does the water tastes that much sweeter.

One of the richest men in the world wishes he was taxed more. Warren Buffett paid $7 million in federal taxes last year, which equated to 17% of his taxable income. Surprisingly, this was the lowest rate of any of the 20 employees in his office.

In a rare plea in the New York Times, Buffett is asking Congress to stop pampering the super rich. “My friends and I have been coddled long enough by a billionaire-friendly Congress”, he notes. His advice to Washington is to leave rates unchanged for 99.7% of taxpayers and raise taxes on Americans making more than $1 million, with an additional increase in rates for those making $10 million or more.

As for the potential backlash, he believes the super-rich will take it in stride:

“I know well many of the mega-rich and, by and large, they are very decent people. They love America and appreciate the opportunity this country has given them … Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.”

America needs to reduce its deficit, urgently. Its second richest citizen is willing to do his part, and feels that his bridge and poker buddies wouldn’t mind sharing in the sacrifice either. If nothing else, it’s an interesting message to Congress.

By Scott Ronalds

Meet Bruce. He shares several traits of investors who we deal with every day. In many ways, he is representative of a typical Steadyhand client. In this blog series, we’ll follow his investing journey and provide periodic updates on the decisions and challenges he faces.

Profile

Age: 42
Status: Married
Children: 2 (ages 8 and 10)
Occupation: Software Engineer
Residence: North Vancouver
Likes: The Boss, Running, Single Malt, Modern Family
Dislikes: Windows 7, Cucumbers, Sammy Hagar, Riesling
Steadyhand Client Since: December 2010
Investments:

• RRSP: $170,000 (Bruce); $100,000 (Courtney)
  
• TFSA: $12,500 (Bruce); $12,500 (Courtney)
  
• RESP: $20,000
  
• Non-registered: $75,000 (Joint)

Bruce is a married forty-something software engineer with two pre-teen kids. His wife, Courtney, works part-time in marketing and the couple makes a combined annual income of approx. $180,000. They own a house in North Vancouver worth roughly $750,000 (with a mortgage of $250,000). Bruce has been investing since the glory days of the early 1990s, but it was just over the past few years that he began to take greater interest in and control of his financial situation. The market downturn of 2008/09 was the catalyst.

Background

Bruce discovered Steadyhand through Tom Bradley’s column in the Globe and Mail. After following the company for a year or so, he and Courtney decided to transfer their RRSPs, TFSAs, and a portion of their non-registered investments to the firm in late 2010. They continue to hold an RESP and joint investment account at a discount broker (Bruce owns a few technology stocks that he follows closely).

The couple had dealt with an advisor at a brokerage firm for several years, but Bruce felt he wasn’t getting a lot of value from the relationship as he was paying for service that he wasn’t getting, he owned too many products, and transparency was lacking. He was tired of dancing in the dark. Bruce felt confident in his abilities to oversee his own portfolio and knew that Steadyhand could provide him with investment advice or at times act as a sounding board for his decisions.

Financial Goals

Bruce would like to retire in his early to mid-60s. Between now and then, he has some key financial goals. In order of importance, they are:

1. Put his kids through university (if they choose).
2. Purchase a recreational property (he has always wanted to own a cottage in the Okanagan, but has been increasingly looking at California and Arizona given their battered real estate markets and the strong Canadian dollar).
3. Grow his portfolio to the $1.5 million mark in today’s dollars (not including his house).

As for non-financial goals, Bruce would like to complete the New York Marathon. To Courtney’s dismay, he’s also expressed an interest in commercial space travel (Virgin Galactic), and would love to jam with the E Street band. As he often tells his wife, crazier things have happened.

Portfolio

Bruce and Courtney are comfortable taking some risk in their portfolio. They have an investment time horizon of 20+ years and do not anticipate any recurring income needs (from their portfolio) until they reach retirement. Their portfolio was hit hard during the market downturn of 2008/09 but they rode out the financial crisis without making any adverse knee-jerk investment decisions, and have since recouped their losses. That said, they aren’t comfortable with a 100% equity portfolio, as they have learned to appreciate the value of diversification in moderating volatility.

After consulting with us, they decided on a strategic asset mix range for their overall portfolio of 65-70% equities / 30-35% fixed income. Bruce has been discouraged by U.S. and overseas stocks and has developed a ‘home country bias’ due to the stronger returns that Canadian stocks have delivered over the past decade. We suggested that he shouldn’t ignore global equities, however, as they should be an important part of any balanced portfolio and currently offer compelling value. The couple took our advice and executed it as follows:

• Savings Fund – 10%
  
• Income Fund – 30%
  
• Equity Fund – 24%
  
• Global Equity Fund – 24%
  
• Small-Cap Equity Fund – 12%

This is a slight variation of our hypothetical Balanced Equity Portfolio (a position in the Savings Fund was added to the mix). The resulting asset mix is roughly 33% fixed income, 32% Canadian equities, and 35% foreign equities. For tax efficiency reasons, the Income Fund and Savings Fund are held in the registered accounts (RRSPs and TFSAs).

The cash position (Savings Fund) was recommended as a source of dry powder and liquidity in the event that: (1) bonds experience a rise in yields (and drop in prices) or stocks pull back following a period of strong gains; or (2) Bruce requires an early down payment for a vacation property.

The couple’s investments with Steadyhand totaled $340,000 at the beginning of the year ($270,000 RRSPs, $25,000 TFSAs, $45,000 joint investment account). At this level of household assets, their annual all-in fee is roughly 1.10%.

Bruce and Courtney have their financial house in good order. There are sure to be bumps in the road and decisions to make, however, as life plays out. We’ll keep you posted on their progress.

I was reviewing a new client’s portfolio last week and I stumbled across the Manulife Simplicity Balanced Portfolio. It’s a fund-of-funds product, meaning it holds a basket of mutual funds. In this case, the Portfolio holds 18 funds (as of December 31, 2010), which are managed by 13 different firms (manager in parentheses):

• Manulife Canadian Large Cap Value Equity Fund (MFC Global)
  
• Manulife Canadian Bond Fund (MFC Global)
  
• Manulife Canadian Universe Bond Fund (CIBC Global)
  
• Manulife Canadian Fixed Income Fund (Addenda Capital)
  
• Manulife International Equity Fund (Templeton)
  
• Manulife Mawer World Investment Class (Mawer Investment Mgmt.)
  
• Manulife Mortgage Backed Fund (MFC Global)
  
• Manulife Canadian Large Cap Equity Growth Fund (McLean Budden)
  
• Manulife Fixed Income Plus Fund (Alliance Bernstein)
  
• Manulife U.S. Equity Fund (Alliance Bernstein)
  
• Manulife Small Cap Value Fund (Foyston, Gordon & Payne)
  
• Manulife Global Equity Fund (Capital Guardian)
  
• Manulife Growth Opportunities Fund (MFC Global)
  
• Manulife U.S. Small Mid-Cap Equity Fund (Goldman Sachs)
  
• Manulife U.S. Diversified Growth Fund (Wellington)
  
• Manulife Canadian Equity Value Fund (Scheer Rowlett & Assoc.)
  
• Manulife Canadian Equity Fund (MFC Global)
  
• Manulife Canadian Large Cap Growth Fund (Greystone)

The fee on the product is 2.59% (3.13% for the segregated version). While the managers are reputable and experienced, there are nonetheless 13 cooks in the kitchen. I haven’t done the math, but I’m guessing there are well over a thousand stocks in the Portfolio, likely with a fair degree of overlap between managers. Over-diversification is a real danger here. No matter how much statistical analysis is done, with seven Canadian equity funds, six foreign equity funds and five fixed income funds, it’s difficult for products like this to not just be very expensive index funds.

This doesn’t look like a simple dish to me. Maybe that’s why it comes at a premium price.

By Scott Ronalds

At Steadyhand, we think we’ve got the best business model and investment philosophy around. We offer investors access to talented and experienced investment managers (who are typically only available to the ultra-wealthy) and straight advice. We invest alongside our clients, charge low fees and provide timely & transparent reporting. Further, simplicity is a pillar of our company.

But ... we’re also biased in our assessment, and there are certain things about our business that we can improve upon. Here’s where we’d love to hear from you. In the comment box below, let us know what aspect(s) of our business we can enhance. Is our service/advice offering unclear? Is our fund lineup too limited? Do our reports and blogs put you to sleep? Do you want to hear more from our managers? Would you like to see more tools on our website? Is there too much paperwork in getting started? Does Tom need a new pair of glasses? You get the point. Don’t hold back.

By Scott Ronalds

It was a skittish quarter for stocks. The Canadian market had a rough spring, as commodity-related stocks gave back some of their gains from earlier in the year. The U.S. and Japanese markets were largely unchanged, while Europe was mixed. Bonds, on the other hand, had a strong quarter, as investors embraced safety and yields declined further.

Our funds held up relatively well, given our managers' focus on high-quality companies and lack of exposure to the mining sector.

In this podcast, we review the quarter in further detail and highlight some of the key takeaways from our Quarterly Report.

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