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.

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.

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.

We painfully announced last week that we’re raising the fee on four of our funds (see Press Release). This post provides some background.

As our clients know, we have a unique and attractive fee structure. Our ‘One Simple Fee’ captures everything that we charge, including taxes - there are no additional administration fees or commissions. This structure means, however, that when there are changes to our operating costs, the firm either benefits when costs decline or is hurt when costs rise. In 2008, Steadyhand’s profit margins improved due to the decrease in GST, but during our 4½ year history it has mostly been a one-way street in the other direction. We were prepared for the ever increasing regulatory burden and other unforeseen costs, but the introduction of HST truly hammered us.

HST

The harmonized sales tax, which was introduced in Ontario and B.C. on July 1st, 2010, applies to mutual fund fees, just as GST does. The tax was easily passed on to the investors by most firms, because virtually all mutual funds are priced on a ‘plus taxes’ basis (When the audited numbers for 2011 come out, we’ll see the full impact of HST on fund MERs).

We decided not to adjust our fee scale in 2010 because there was too much uncertainty at the time. Because the tax is patently unfair to managed investment products (see HST Will Hurt Investors and Their Nest Eggs), we were hoping the government might provide some relief (NOT). Also, the always volatile political scene in B.C. was thrown for a loop when Premier Campbell and the opposition leader both resigned and former Premier Vander Zalm started a vigorous campaign against HST. From a bottom line point of view, it was expensive to wait and watch, but we felt it was prudent.

Since then, the political landscape in B.C. hasn’t cleared up much, but the citizens did vote to get rid of HST. The government is currently working on a plan to phase it out.

Options

At the end of the day, sticking to our existing fee scale was not an option. Steadyhand is designed to be a low margin firm, but not a ‘no margin’ firm. So in weighing our options, we considered four key factors – fairness, long-term cost effectiveness, simplicity and flexibility.

After working through all the issues, it essentially boiled down to two alternatives. One was to raise the fees (as we’ve announced) and the other was to create a new class of fund units to be used only by clients in HST provinces (in our five-province world, that means Ontario).

The fee increase option scored high on simplicity and costs. We wouldn’t have to make our fee schedule more complicated or incur additional costs related to custody, record keeping, communications and client service. The downside, however, is that while the impact is small, this option is not as equitable – clients in the non-HST provinces are helping pay for Ontario’s additional tax.

Setting up an additional class of units is something that is done all the time in the mutual fund industry. Most funds have multiple classes, each designed for a different distribution channel. Most funds also have much higher fees. For us, this would have been the fairest way to deal with HST. We would have shifted our Ontario clients into an ‘HST’ class, while our other clients stayed in the existing ‘A’ class. This option would have also given us more flexibility in the event that any of the other provinces went the HST route.

Tradeoffs

We agonized over this decision (many meetings over two years), but decided on the first option. The desire to keep our offering simple and the overall costs down carried the day. Obviously, the fairness issue weighs heavily on us, although it is hard to know where to draw the line. Every client has a different cost structure depending on their needs, complexity and location.

I should note that we will continue to absorb part of the HST impact. If we were to fully flow it through, the fee increases would have been higher.

It should also be noted that we’re not alone in going this way. There are only four firms that created an HST class of units, and in recognition of the added costs, only one firm did it for all their funds.

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.

‘skin in the game’ … ‘eating our own cooking’ … ‘co-investment’ … ‘manager-client alignment’ …

These are all phrases we use to describe our commitment to clients and the desire to have our interests closely aligned to theirs. This alignment takes many forms, but we demonstrate it in two very concrete ways.

The first is to have the Steadyhand team’s compensation and net worth closely linked to how our clients do over the long term. We do this by sharing the ownership of the firm with the employees. At Steadyhand, we have 6 shareholders – Lori Lothian (my life and business partner), Neil, Elaine, Scott, Chris and me. Suffice to say, we’re all highly motivated to see our clients do well.

The second way is even more directly linked to our clients’ interests. Everyone at Steadyhand has a significant chunk of their financial assets invested in the funds. As is our discipline, we update this percentage every year and publish it in a document called Showing you the Money. As of June 30th, the Steadyhand team has $18 million invested, which represents 80% of our financial assets on average. Again, the team wants to see the funds do well as much as our clients do.

However it’s described, we think having a tangible linkage between our interests and those of our clients is important. Really important.

Tom was on BNN earlier today discussing how Steadyhand’s funds are positioned to tap into the global recovery and growth in the emerging markets.

Unlike some managers, our approach isn’t focused on loading up on mining stocks and direct plays on China. Rather, we want exposure to profitable, growing businesses with a broad global reach at the best prices we can find.

In our view, this means concentrating on energy (oil), technology and consumer-related stocks, among others. We also believe it’s wise to have healthy exposure to companies outside Canada. In particular, our managers are finding value in European and Japanese companies that have a leg in the emerging markets.

Some call it a contrarian approach. We call it balanced.

Click here to watch the clip.

By Scott Ronalds

If you drive by 3rd & Burrard in Vancouver, you’ll sometimes hear a loud reverberating sound coming from a stand-alone building nestled between the car dealerships and art galleries. Don’t be alarmed. It’s just us screaming our investment philosophy and industry observations from the rooftop. Some of our neighbours (and competitors) find it annoying, while other observers find it refreshing. We simply find it necessary, if not a little therapeutic, in this crowded landscape.

Today the bullhorn is pitching the virtues of concentration – a key tenet of our philosophy. We believe that by focusing on a limited number of stocks (20-30), portfolio managers have a much greater understanding of the businesses in which they invest and a higher level of conviction in their best ideas. A fund with a vast number of holdings stands little chance of outperforming the market, as it runs the risk of simply mimicking it. Perhaps Warren Buffett said it best, "Wide diversification is only required when investors do not understand what they are doing."

Concentrated investing isn’t for everybody. There will be periods when our funds move in cycles of their own and will be out-of-synch with the index. This can feel lonely at times, but if you are seeking to beat the index over the long run, you need to ignore it over the short term. You need to be concentrated.

Morningstar (USA) published an interesting piece the other week on the topic (Focused Foreign Funds Are in an Exclusive Club). They report that most funds don’t follow a concentrated approach: “Just over one third of actively managed domestic [U.S.] core funds held fewer than 50 stocks recently.” Further, they found that only 6% of foreign (large-cap) funds held fewer than 50 stocks.

How have those concentrated foreign funds fared? Quite well. According to the author, a much higher proportion of ‘focused’ funds produced top quartile returns than their less-focused counterparts over the past 10 years.

Our equity funds are among the most concentrated of their kind. Our Small-Cap Equity Fund currently holds 17 stocks, our Equity Fund holds 25, and our Global Equity Fund holds 39. One thing you’re assured of at Steadyhand is concentration.

We asked our managers and select employees why they’re optimistic about the stock market in 2011. Let’s just say they had some unique perspectives...

(YouTube source (dj): http://www.youtube.com/watch?v=_ZrEWwbjMK4)

By Scott Ronalds

Although 2010 is coming to an end, we’re left with a lot to remember (and forget), including the Vancouver Olympics, the European debt problems, the vuvuzela, the iPad, the HST controversy in B.C., and the gloomy economic forecasts.

While it was an eventful year in business, politics and sports, it was another busy and productive year in the shop as well. In this year’s Holiday Letter, we reflect back on some of the highlights.

We've compiled four years of Tom's articles and blogs into a new book titled It's Not Rocket Science: Plain-English Advice for Managing Your Investments. The pieces are short narratives that reinforce some of the basic, yet most important, principles of investing. Below is a description of the process we went through in self-publishing.

One of the goals of Steadyhand is to change the investment landscape in Canada. To that end we intertwine our marketing and investor education objectives by providing educational content on our website, blogging frequently, and by Tom’s bi-weekly column in the Globe & Mail.

We’ve long toyed with the idea of publishing a book of Tom’s writing, and this summer spent some time investigating the process. We were initially dismayed as we were told that to go the traditional route of conceiving an idea for the book, writing it, and then working with a publisher would take us about a year and a half before the book was available to the public. While there is tremendous value in what a publisher brings to the table (editing, marketing, design, etc.), the process seemed onerous and we didn’t want to wait that long.

Being self-starters, we decided to self-publish, and treat it as a learning exercise (which is how we treat many of our marketing initiatives).

We shifted our focus to creating a book that was a compilation of Tom’s best writings over the past four years, including many of his Globe & Mail columns (which he owns the rights to). The columns have been edited by the G&M, so we decided to forgo hiring an external editor to work with us. We spent a lot of time selecting the best articles (we have over 600 blog postings) and grouping them together into chapters focused on specific investment themes. The result was 34 articles grouped into 8 sections, for approximately 140 pages.

After some research, we chose lulu.com to print and publish the books. Lulu is an open publishing platform that allows users to upload content and self-publish books in a variety of formats. While we could have used Microsoft Word to create the book contents for Lulu, we ended up using the LaTeX system for its superior typesetting. This involved downloading the blog articles from our website, converting them to LaTeX files and then generating a PDF of the book’s contents. While we were very happy with the results, LaTeX is not for the faint of heart and requires a high geek-quotient to master. We designed our own book front and back cover using Apple Pages.

We test-published a version of It’s Not Rocket Science and then took the plunge and ordered 1,000 soft cover books (for a cost of roughly $2 per book). We announced the book on our website in late November and provided PDF and ePub versions, and a follower of the company created a Kindle version for us as well.

We decided initially not to charge for the book – our goal was to spread the word about Steadyhand while educating investors, and we consider this a powerful form of marketing.

The results so far have exceeded our expectations. We’ve distributed over 600 books, and the electronic versions have been downloaded over 800 times. There have been a number of positive reviews on the web, and the feedback from readers has been extremely positive. On the marketing front, the book has been referenced in a number of venues in which we don’t normally appear, so we feel that we’re introducing Steadyhand to possible new clients. We’ll be monitoring the results of this closely over the coming months to determine how it helps build our business.

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.

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, 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: $0.50/unit
  
• Equity Fund: $0.08/unit
  
• Global Equity Fund: $0.05/unit
  
• Small-Cap Equity Fund: $0.08/unit

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

Important: The estimated distribution for the Income Fund is higher than normal, as the fund generated more capital gains than in previous years. 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 in order to avoid any tax liabilities.

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

As I outlined in an earlier post, we feel that our fee reduction program is unique in rewarding clients who entrust more of their money with us, and who keep it with us for an extended time. In this posting, I’ll delve in to some of the gory details of how we calculate and pay out management fee rebates (MFR’s).

Background: How the Funds Pay Fees

As with other mutual funds, unitholders in our funds do not pay managements fees directly. Instead, the fund itself is charged the management fee on a daily basis - the fee is an expense of the fund and therefore reduces the returns that the fund generates.

As a simple example, a $100 million fund with a 1.00% MER would be charged the following management fee expense each day:

$100mm x MER/365 = $100mm x (1.00%/100) x (1/365 days) = $2,739.73/day

If the fund’s assets remained unchanged over the year, the total management fee expense to the fund would be:

365 days x $2,739.73/day = $1mm (or 1% of total assets, as expected).

Of course, the total value of the fund changes daily due to inflows/outflows and the fluctuations in the values of the securities held, so the management fee charged each day also changes.

While the management fees accrue daily, they are actually paid to the fund manager on a monthly basis. This is how Steadyhand generates revenue.

The fund itself does not track the portion of the fee that each unitholder pays each day, it only accrues the total management fee expense of the fund.

Reducing Fees Through Rebate Distributions

While the fund doesn’t directly track the allocation of the management fees to each unitholder, it is possible to calculate it, using the same math as above.

The management fee that each unitholder in a fund “pays” each day is:

(unitholder assets) x (fund fee %)/100 * (1/365) = daily fee

For example, an investor who held $10,000 in our Income Fund (which has a simple fee of 1.0%) would “pay” the following fee each day:

$10,000 x (1.0/100) x (1/365 days) = $0.27

Because unitholders don’t pay management fees directly, we aren’t able to individually reduce the fees. However, we are able to rebate the management fees individually by paying unitholders management fee rebate distributions (i.e. additional units given to the unitholder at no cost to them). This reduces the effective fee for the unitholder.

Steadyhand pays for the MFRs distributed to unitholders, thereby reducing the effective management fee that we receive from the funds.

When direct clients (i.e. those who do not purchase our funds through a broker or third party) open more than one account and indicate that they wish to consolidate their accounts, we create a “portfolio” for them. This is simply a portfolio ID that is assigned to all of the accounts they hold with us. Rebates are paid on each fund held in each account in a portfolio. The same rebate rate is applied to all of the holdings in the portfolio.

The key to all of this, of course, is calculating and tracking the amount of the fee rebate distributions due to each unitholder.

Calculating Rebate Distributions

In the same way that the funds calculate and accrue the management fees each day, we calculate and accrue the unitholder rebates daily as well. The calculation and accrual is done in our recordkeeping system, which tracks the units held by each unitholder in the funds.

The first step in determining the daily rebate accrual amount is determining the overall portfolio discount rate for that day. Discounts are based on the total assets under management in the portfolio as described here, and are applied in tiers (i.e. the first $100k is at the full fee, the next $150k is at 80%, etc.). As shown in the fee calculator tool, if a unitholder had $150k in her portfolio of accounts, her rebate amount would be 6.67% of her fees paid that day.

Once we have the overall discount rate for the portfolio, we apply it to each holding in each account in the portfolio and calculate the fee rebate in dollar terms for the day. This is determined by using the formula:

daily rebate amount per holding = (fund holding $) x (fund fee)/100 x (1/365days) x (discount rate/100)

For example, if a couple held $250,000 in their portfolio on a given day, the rebate percentage for that day would be 12.0%. If one of the holdings in one of the accounts was $20,000 in the Income Fund (with a 1.0% fee), the rebate amount for that day would be:

$20,000 x (1.0/100) x (1/365) x (12/100) = $0.06575

As a simple check, the annual fee that would normally be paid on an investment of $20k in the Income Fund would be $200 (1% of $20k), while the total rebate amount would be 365 x $0.06576 = $24, which is 12% of $200. When we pay out the $12 of MFRs to that holding, we are effectively reducing the fee paid by the unitholder by 12%.

The daily rebate amount is added to the accrued rebates for each holding. In other words, for each fund that an investor holds in their portfolio, we calculate the day’s rebate amount and add it to the current accrued amount for that holding.

Paying Out Distributions

Each month the accrued rebate amounts for each holding are paid out to unitholders in the form of distributions (MFR’s), thereby increasing the number of units the client owns. The accrual ‘buckets‘ are reset to zero to begin accruing again the next day.

If a client redeems a fund entirely, the rebate distributions are first paid out and then the redemption is processed so that he does not lose the accrued MFR’s.

Rebates generally begin accruing on purchase trade settlement dates (when the money is received by Steadyhand), and stop accruing on redemption trade dates (when the order is received/processed).

Rebates are taxable in non-registered accounts and show up on client T3’s. They also increase the cost base of the holdings.

Finally, rebates lead to higher performance, as they increase the market value of a position without requiring a corresponding cash outlay from the unitholder.

Last week I published our deliberations on whether to launch a client referral program.

We had good response via the blog’s comments, email, and in person. In part this was because we asked for feedback, and in part it was because our clients were passionate about the issue.

While there were a few who favoured the idea of being directly rewarded for referring new clients, the majority felt that it tarnished our reputation of integrity, and made us look too much like the banks. Most of our clients have indicated that they are already referring us to others because they’re happy with our offering.

We’ve decided that the reputational risk isn’t worth any potential upside, so we won’t be proceeding with the referral program.

As an aside, we found the exercise of sharing an interesting business issue with our readers to be very helpful, and will be doing more in the future.

Everyone in the investment industry knows that summer is a slow time for opening new accounts. It's a given that we should accept that investors go on holiday and the last thing they want to think about is retirement planning, let alone the perceived headache of transferring accounts to another firm.

I don't think we should accept that line of thinking.

I think that summer is when many of our clients have more time to reflect on their future, and that we should make a push to be part of that future.

One of the marketing ideas that we've had since the beginning of the firm, yet never acted on, is a client referral program. The idea is certainly not a new one, yet it is not commonly used in the mutual fund industry (at least in Canada).

I'm proposing that we pilot a two-month project this summer to see if a customer referral program would work at Steadyhand. The hope is that by rewarding clients to open new accounts or refer new clients to Steadyhand, we can turn the summer into a busier period than it generally is.

Here's how it would work:

• The program would run July 1 - Aug 31st.
• We create a referral code or "key" for each client, and email the key along with an announcement of the program to clients.
• The client can use the key when they open new accounts, or provide the key to others to use when they open new accounts.
• Each new account that is opened with the referral key will result in a "reward" to the client that referred the new client/account.

Some of the issues that we are are grappling with are:

• Does this cheapen the Steadyhand brand? There is the perception that spending $25 or $50 for a client referral is different than spending $25/50 per new client on advertising. I think we can get around this by being clear and transparent in our communications around the program - and let's be honest, we are trying to build a business and are willing to experiment with different means of acquiring customers. There is also some concern that we will look too much like the banks ("open an account and receive a free toaster"). 
• Will it actually work? Is a reward enough to change client behaviour? It wouldn't be a lot of money for our clients, but I'm OK with that. The intention isn't to give a large reward for referrals, but just to nudge people to take some action. We have a number of ideas for rewarding clients:
  • a $25 or $50 management fee rebate
  • waive fees for a quarter (3 months) or longer
  • donate to a charity on the client's behalf
  • entry into a draw for one year's fee rebate
  • 10 tickets to the third round of the Toronto Maple Leafs 2010-11 playoffs run!
  At the moment we make a point of sending a note of thanks to clients who refer new business - perhaps that is sufficient.
• Do we alienate clients who open up accounts outside of the program window? Will existing clients feel like they were somehow ripped off because they didn't get the fee reduction? I think our answer to this simply has to be that we are experimenting with all avenues to continue to grow our business.
• Are there any privacy or regulatory issues? Securities regulations would seem to require us to notify both the prospect and the client of the reward. We currently don't tell anyone, including the referror, when a new client signs up. We would have to obtain permission from both parties to allow this exchange of information.

As you can tell, this has generated a lot of internal debate, and I'm not sure that we will actually ever try it out; however, I thought the discussion would make for an interesting blog post.

We'd love to hear your feedback on whether we should proceed with this pilot program (post your comments below). 

I was having dinner with my dad the other night and we got on the topic of credit cards. We both have cards that reward us with air miles (in one form or another) for all our purchases. And importantly, we both pay our cards off each month.

Somewhat proudly, he stated that one of his oldest cards is his gas card. I asked him what kind of rewards he got with the card. “None”, he replied. I then asked, “So why do you use it when you could be getting air miles if you use your credit card?” No response. After thinking about it for a while, he replied, “Bad habit, I guess; I’m just so used to it.” He felt shame, I topped up his wine and we got onto another topic.

Bad habits are hard to break, especially when they’ve become engrained in our behavior. Some companies have done a masterful job of developing products/services that change our behavior and deliver a superior experience. Think of Apple. The iPod has changed the way we purchase, store, transport and listen to music. Creating change isn’t easy, however, as we’re creatures of habit and tend to stick to what we’re familiar with.

At Steadyhand, we’re out to change behavior by breaking bad industry habits. The habit of paying a middleman to sell our funds. The habit of communicating in a manner that nobody can understand. The habit of wasting paper, money and time by mailing (rather than e-mailing) reporting materials. The habit of index-hugging. And the habit of poor transparency.

It’s a tough battle, but it’s a worthy one. I was reminded of this when I was leaving dinner and saw an iPod on my dad’s kitchen counter and a Steadyhand ball cap on the coat rack. This from a guy who not long ago was buying Kenny Rogers Live on cassette and whose favorite head gear had an RBC logo on it. Nothing wrong with that, of course. Kenny can rock a crowd.

In his latest Wealthy Boomer video segment, National Post columnist Jonathan Chevreau sat down with Tom Bradley to discuss the concept of “undexing”. The term, creatively coined by our brash marketing team, refers to an investment philosophy that is based on beating the index by looking nothing like it.

Rather than constructing a portfolio that has a lot of the same constituents as the index (or benchmark), undexing involves running non-benchmark oriented portfolios that are concentrated in the manager’s best ideas.

Readers who know Steadyhand will be familiar with the concept. The video, nevertheless, is a great refresher. You can watch it here.

It’s been a busy year at Steadyhand, and in the capital markets. In this year’s Holiday Letter, we reflect back on some of the accomplishments, highlights and lowlights that the team endured over the course of the year.

Happy Festivus!
The Steadyhand Team

A quick reminder that with the exception of the Savings Fund, the year-end distributions of all our funds will be calculated on December 15th and paid on December 16th. The distribution for the Savings Fund will be calculated on December 31st.

Distributions represent the mechanism whereby mutual funds transfer to unitholders any interest and dividend income, along with any return of capital (ROC) and realized capital gains they have accrued over the course of the year.

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, 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: $0.12/unit
  
• Equity Fund: $0.05/unit
  
• Global Equity Fund: $0.04/unit
  
• Small-Cap Equity Fund: $0.08/unit

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

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

A Steadyhand advertising campaign is starting today. It’s pretty extensive, but not all of you will see it. That’s because the magazine, newspaper, television and on-line ads are targeted at Southern Ontario (more on that later).

I never thought we’d be advertising in the conventional sense, and many of our clients and readers didn’t either, so some background is in order.

The reasoning goes like this:

• We are passionate about what we are doing and want to be successful enough to change the landscape in the industry...for the better.
  
• After two and a half years, we have enough experience and feedback to know that what we’re doing is of value to investors.
  
• Despite the great support from our clients and fans, only 0.0001% of the Canadian population know we exist. We want that to be higher.

As you’d expect from us, the campaign is a little cheeky (see preview) and hits hard on the issues we care about, namely over-diversification, closet indexing, transparency and fees. Along with the ads, you’ll see that our home page has been updated, incorporating the creative from the campaign. While some of you will miss Koda and my fidgeting, it was time to move on.

Because we don’t have a ‘Big 5 bank’ budget, we had to focus our efforts. We chose to start with Toronto and the surrounding area because (1) it’s the biggest market in Canada, (2) we’ve had success there already, (3) my Globe & Mail articles give us added profile there and (4) it’s where we get the biggest bang for our buck with the media. Depending on how successful the campaign is, it is our hope that we can roll it out to our other targeted markets – our home town (where we’re not well enough known yet), Calgary and Winnipeg.

This is an important step for us and we haven’t taken it lightly. Our business plan always called for a more active promotional effort, but we’ve advanced it by a year or two in light of the market volatility, the industry’s continued excesses (read: opportunity) and investors’ need for a steady hand.

For those of you who see the ads, we’d love to hear your feedback...good and bad. It will help shape how and where we go from here.

In the Globe column we posted on Saturday, I referred to building an investment firm on three pillars – investment philosophy, people and business practices. If you have a consistent investment approach and a stable, high-quality team, you have something clients can latch on to. If they come to the firm for those three reasons, and they receive good long-term returns, the firm will be successful.

The one pillar I didn’t elaborate on was ‘business philosophy’. While it wasn’t relevant to the piece, it is very important.

In the column, I referenced my time as an institutional portfolio manager at PH&N. We became one of the largest pension fund managers because of our investment approach and people, but we also won a ton of business, and retained it, because of how we ran our business. Clients appreciated the way we worked with them and were attracted by the fact that the firm was employee-owned.

At Steadyhand, our business practices are also at the core of what we’re all about. The way we operate is significantly different from what our clients can get elsewhere.

In a nutshell, it all comes down to a few self-centered questions. Is this the way we want our money managed? Is this who we want doing it? Is this the way we want to be serviced, charged and communicated to?

Call us selfish, but the answers to those questions shape how we run our business.

• A significant percentage of our wealth (80%) is invested in the funds and the firm.
  
• We offer a simple, streamlined line-up of funds.
  
• We charge low fees, which we reduce based on loyalty and portfolio size.
  
• We report clearly on performance and fees, and communicate candidly about all aspects of our business.
• And the most important thing we do is offer our clients a steady hand by way of our advice, fund management and communications.

Our business practices are a little old school, and yet surprisingly, they’re unique in the wealth management industry. That’s because we’re independent, empathetic and most importantly, we’re investors.

One of the recent themes of this blog has been the notion that this economic crisis will cause the ‘strong to get stronger’.  Well-financed companies will have unprecedented opportunities to buy assets and attract talent through this period, and will come out of it with fewer and/or weaker competitors.  We recently wrote about Cisco (Thank You Mr. Market) to illustrate our point.

As you read Warren Buffett’s 2008 Letter to the Shareholders of Berkshire Hathaway that was published last Saturday, it is obvious that his company will be one of those players.  The company has already jumped on some new opportunities – entering the business of insuring tax-exempt bonds, buying high yielding securities from Wrigley, Goldman Sachs and General Electric – and there will be more to come.

Interestingly, financial strength has proven to be a negative in some aspects of Berkshire’s business, specifically in areas where it is competing directly with the government-subsidized (owned?) banks.  Warren explains:

"Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to Treasury rates, are at record levels.  Moreover, funds are abundant for the government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be.  This unprecedented "spread" in the cost of money makes it unprofitable for any lender who doesn’t enjoy government-guaranteed funds to go up against those with a favored status.  Government is determining the "haves" and "have-nots." That is why companies are rushing to convert to bank holding companies, not a course feasible for Berkshire.  Though Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one."

In defense of my ‘strong get stronger’ thesis, I don’t think this disadvantage will be a factor in most other businesses – the cost of funding is important for all companies, but is the dominant variable in financial services.  If we again use Cisco as an example, it is unlikely that the government is going to bail out or subsidize a competitor like Nortel.  And if it does, I like Cisco’s chances even more.

In the financial sector, government-backed banks will be able to write some great business in competition with the ‘unsubsidized’ players (let’s hope they do, otherwise they’ll never dig themselves out), but their hands will be tied in so many other ways.  They won’t be able to do acquisitions and take advantage of other opportunities the way the stronger players will (think RBC, BNS and TD).

A quick reminder that with the exception of the Savings Fund, the year-end distributions of all our funds will be calculated on December 15th and paid on December 16th .  The distribution for the Savings Fund will be calculated on December 31st.

Distributions represent the mechanism whereby mutual funds transfer to unitholders any interest and dividend income, along with any return of capital (ROC) and realized capital gains they have accrued over the course of the year.

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, 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).

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

How can you tell whether your fund manager invests alongside you?  Unfortunately, it’s not that easy to determine.  While some managers proudly trumpet that they “eat their own cooking”, by and large there is little reporting on the practice of co-investment.

In an effort to improve transparency on the issue, we have written an article titled Show me the Money: The Importance of Co-investment, which examines the importance of co-investment and challenges the industry’s lack of focus on the topic.

We have also published a supplementary document titled Showing You the Money: Co-investment at Steadyhand, which provides details of the level of co-investment among our employees and fund managers.

Both articles are available in the Library section of steadyhand.com.

Savings Fund - There are no concerns about the securities in this fund.  It is meant to be a secure place to park money and has not stretched needlessly for additional yield, nor will it.  With short-term interest rates dropping, the fund yields a modest 2.6% (pre-fee).

Income Fund - The credit crisis has impacted the Income Fund.  Half of the fund is invested in corporate bonds, with an emphasis on financial companies.  Across all sectors, corporates have performed poorly (the yields have not declined in line with Government of Canada bonds), but the financials have been the worst.   Most of the fund’s exposure is in the Canadian banks, but it has small holdings in a number of Wall Street firms (including Merrill Lynch, Goldman Sachs and Morgan Stanley).   Our manager, Connor Clark & Lunn, believes this is a unique opportunity in the credit market and is sticking to their guns on corporates.  Overall, the high yield on the fund (roughly 7% pre-fee) is reflective of a higher risk profile than government bonds (the Government of Canada benchmark 10 year bond is yielding approx. 3.5%), but CC&L thinks the tradeoff is heavily in our favour.  The fund holds a diversified mix of income securities, which suggests that it will continue to pay out healthy quarterly distributions and will not stay down for too long.

Equity Fund – CGOV continues to hold 25 high quality stocks and 7-8% in cash.  The portfolio is focused on companies that will not only survive the slowdown (60% have increased their dividend this year), but will enhance their competitive position in the process.  They haven’t made many changes to the names, but have started to add modestly to select stocks.  Financial strength and strong cash flow continue to be the watch words.

Global Equity Fund – Since we started, this fund has been the hardest hit by the financial crisis and weak European and Asian markets in general.  Recently Edinburgh Partners brought the cash level down below 10% by adding two new holdings (Unilever and Deutsche Telekom) and increasing the fund’s technology exposure (Cisco, Dell).  They reduced the financials just prior to the recent sell-off by swallowing hard and eliminating AIG and HBOS, two of the ugly ducklings.

Small-Cap Equity Fund – Wil Wutherich keeps doing what he always does.  He holds concentrated positions in a limited number of small to mid-sized companies that he believes are underappreciated.  His type of stocks have been very volatile over the last few weeks and he hasn’t been afraid to add or reduce positions accordingly.  The fund holds 16 stocks, including two new names – Canadian Helicopters Income Fund and Gennum.   He still has cash (10% of the fund) available to invest when he sees opportunities.

Overall, we are staying the course.  We would have liked to preserve more capital on the downside, but the sell off has been broad-based and there hasn’t been a lot of places to hide.  In that context, we would encourage our clients to sit steady and stay positioned for the inevitable recovery.  For those who have the stomach, we would recommend further purchases of equities and/or some re-balancing towards those funds.

Our equity funds were down, but the declines were reasonable in light of the sell off.  Needless to say, there haven’t been any safe havens where our managers could retreat to. 

Where the hits weren’t as obvious to many investors was in the fixed income markets.  The ‘credit market’ (corporate bonds) basically closed for business today in face of Wall Street uncertainties.  With rumours swirling around about another big institution going down, the banks stopped trading with each other, which crippled the market. 

The Steadyhand Income Fund, which holds a combination of bonds and income equities, had the worst day in its short history.  It was down 1.23%.  While bonds were generally up, led by secure government issues, the financials were hit hard, which is a sector where our fund has significant exposure.  Most of that exposure comes from the stronger Canadian banks, TD being the most important, but the fund also has small positions in Goldman Sachs, Morgan Stanley and Royal Bank of Scotland, all of which were hit hard. 

Looking forward, the quality of the portfolio is still excellent (despite the noted outliers) and the yield (pre-fee) is in the neighbourhood of 6.5%.  As we are recommending with equity funds in general, investors are well advised to hang in there with the Income Fund, and other fixed income holdings like it.  There is no denying that there has been deterioration in the portfolio (some bonds or equities will not recover completely), but we are confident that the overall value and income-generation is still there and is not fully reflected in the unit price.

A quick note on our Savings Fund.  The fund is in good shape and does not own any paper that is in danger of being in default.  It is designed to be a secure place to park short-term money, not reach for extra yield.

As I’ve noted numerous times, changes of strategy at extreme times like this, whether it be by our clients or fund managers, invariably causes irreparable damage to long-term returns. 

Trades must be placed over the phone with a representative from TD, and their transaction fee varies based on the size of your purchase.

Inspired by a recent Dos Equis commercial, I'm toiling with the idea of a new Steadyhand advertising campaign - The Most Interesting Man in the Mutual Fund Business. It would go something like this:

Tom is out of town so I haven't run it by him yet and there's a chance we could get sued, but I thought I'd throw it out there anyway.  What do you think?

The lack of words in the Diaries devoted to marketing was deceptive, because Neil, Scott and I have spent a ton of time on it over the last two years.  While our biggest and most important challenge is to deliver above-average returns to our clients, we’ve also got to have clients to deliver those returns to.  We need to build awareness with our target client, the ‘engaged investor’ and separate ourselves from the rest of the pack.

There are lots of disadvantages to being a new investment company – no publishable track record, limited budget, no brand awareness – but we focused on the advantages we have.  A fresh sheet of paper is a wonderful thing.

• In the investment business, size is death, so being a small firm with ‘right-sized’ managers is a good thing.
• Our independence and employee ownership is an asset.
• Our investment approach is unique and can’t be replicated by the large institutions (i.e. concentrated, all-cap portfolios).
• We have partnered ourselves with seasoned managers who aren’t available to most investors.
• We have a great website, which Scott, Neil and Burnkit put together.
• We are decent communicators and like to write and speak, which is not the case with most investment professionals.
• And a biggie, Steadyhand is run by an investment professional, not a marketing executive.  We think like investors and our key decision-making criteria is – Is this the way we want our money invested...our account serviced...our results reported?

So that’s all good, but we had to find a balance between being taken seriously – a firm people will trust with their money – and being edgy and different.  The ‘Don’t Fear the Bear’ campaign was our initial attempt at defining that balance, but we went through all kinds of wacky ideas to get there. 

We live in a city littered with 1-800-GOT-JUNK trucks, so we talked about parking and driving ‘environmentally friendly’ vehicles around town.  We thought of planting Steadyhand golf balls in the bush at high-end courses.  Scott floated the idea of hiring a student to walk around the downtown in a few cities with a bear suit and a Steadyhand briefcase.  And we explored the idea of a YouTube commercial, although we couldn’t get Neil to do a spot on transparency while naked.

So what is our marketing strategy?  I was afraid you’d ask that.

I’m not sure you can call it a strategy, but there are two keys elements to what we do – our core philosophy and the website.

Everything we do should reinforce our investment and business philosophy, whether we’re being serious, funny, edgy, objective, subjective or hopefully thoughtful.  We invest and run our business differently than other firms.  We have a view; we’re not just asset gatherers.  We want all our contact with people, in whatever form it takes, to be guided by that.

The second key: All roads lead to www.steadyhand.com.  It is our hub.  For our clients and interested investors, the website is the door into Steadyhand.  How are we managing your money?  What are you invested in?  How is your account doing?  What you should care about? 

Despite being a new firm, we are investing significant dollars, time and thought in the site.  It is a large part of Scott’s life.    

How do we get more people on those roads to the website?  The research, writing and public appearances help.  We have worked hard to connect to different players on the web (bloggers, planners, journalists, and other websites) and support their efforts.  We think straight talk on industry and investment issues builds awareness.  There are some journalists doing it, but the industry is so dominated by the big institutions that on controversial products and/or industry practices the silence is deafening. 

At the end of the day, a big part of our marketing strategy has to be patience.  We know it takes time to build trust and accumulate an investment record.  In the meantime, we are going to pound the pavement, across Canada and on the web, to build a network of people that know who we are and what we do.  From there, we hope our approach, client returns and sterling personalities will bring the right clients to us.

• forms (both internal and external)
• company wiki and Intranet
• internal spreadsheets and tools
• tacit knowledge (the worst way to store business rules - in people's heads)

Before I do that, however, I should provide some background information for readers less familiar with Steadyhand.  Each of our funds charges ‘One Simple Fee’ (our brilliant and innovative name) which is a fixed fee that includes the cost of our services as manager and all of the fund's operating expenses.  It is the equivalent of a ‘Management Expense Ratio’ or MER, although we have fixed the level so it won’t change from year to year like some MERs do.

The first question that arises is: “Given that you enlist outside experts to manage your funds, do I also pay a second fee for their services?”

The answer is no.  The revenue we generate from the ‘One Simple Fee’ goes to covering all the costs of running the funds, including paying the managers, auditors, regulators, lawyers, custodian, record-keeper and tax department (GST).

The second question requires a longer explanation.  “Does the fee cover trading commissions when the manager buys and sells stocks?”  Again, the answer is no.  The fund pays the commissions, so it is an additional cost over and above the MER.  This is standard practice in the industry.

But in reality, trading commissions are not a significant cost to our funds due to the fact that (1) commission rates are very low for professional investors (2-5 cents per share), (2) our managers are not active traders and (3) they are not managing large asset bases relative to the industry.

The latter point is important because the big cost of trading is the market impact of buying or selling, not the commission charge.  For example, if the fund manager goes into the market to buy a stock, they have to pay a certain price to get their order filled.  If it is a small order, the price may be in line with where the stock is trading at the time.  But if the order is for a few millions shares, they may have to bid up the stock to find enough supply.  Paying up may mean a few cents or a few dollars per share depending on the stock price, order size, trading volume and urgency of the manager. 

For a large manager, commission costs may be lower due to their bargaining power, but the total cost of the transaction, which is what investors care about, is going to be higher.

So to summarize:

• Our ‘One Simple Fee’ covers the costs of running the Steadyhand funds, including the fee charged by the portfolio manager.
• Trading commissions are paid by the fund, however, and are not covered by the ‘One Simple Fee’
• There are no other charges or fees involved in being a Steadyhand client – i.e. purchase, redemption, switch or administrative fees. 

Despite being exposed as a less-than-clear communicator, I’m delighted that people are asking these types of questions.  Keeping the cost of investing down is critically important.

I recently received the following note from an investor:

Mr. Bradley – your individual fund financial objectives, the managers, marketing approach, desire to make clarity vs. fund chaos/greed/conformity an objective, and an eMail approach to quarterly/annual data, as so clearly explained on your website, are great, REALLY great.  My bride of 47 years young will shortly be investing in your Equity and Small Cap funds.  This is essentially just all trivia in the grand scheme of things: FOR PETE'S SAKE, GET A NEW TAILOR!!!!!!...Jack

Thanks for the note Jack.  I’m on it.

One of the areas of the piece that was seriously reduced was the valuable input we got from people along the way.  A few were noted - Chuck Winograd (hard ass mentor), Bob Hager (nice ass mentor) and Bernie Hadley-Beauregard (wine guru) - but others got edited out.  I want to correct those omissions.

Tony Hamblin was a key influence.  Tony has always operated under the radar, but he had a huge investment career.  He was the Chief Investment Officer at Confederation Life, where he trained many of Canada’s great investors, and he subsequently co-founded Hamblin Watsa Investment Counsel.  Since he left the business, he’s taken on the task of turning around an aircraft manufacturer, Found Air, in Parry Sound, Ontario (you heard right...an aircraft manufacturer).  His spirit and energy was an inspiration to me as we contemplated Steadyhand.  Over numerous coffees and breakfasts he urged me to (1) finance the business well, so money issues don’t distract us [done], (2) focus the sales pitch on our business and investment philosophy rather than performance [agreed] and (3) hire good, energetic people [so far so good].  

A number of people were just flat out excited about what we were planning and gave us the appropriate push when we needed it.  Warren Stoddart at Connor, Clark & Lunn Financial Group said one time, “you’ll never know if the phone will ring until you try” and another time, “you know it’s going to grow, it’s just a matter of how fast.”

My friends at Burgundy Asset Management – Tony Arrell, Brad Badeau and Rob Barbara – were also very encouraging.  Jim Hunter, the former CEO of Mackenzie Financial, was about a year ahead of us starting up his own firm, NexGen Financial.  While he operates in another segment of the market, he recognized our value proposition and was a stabilizing influence.  Both firms were generous in offering their time and resources. 

Bob Krembil, the now retired founder of Trimark Financial, was a great sounding board.  Steadyhand’s investment philosophy is closely aligned with his, but he reminded me that even if you build a better mouse trap, “you still have to get out and sell it.”

One of the missing persons was someone I have never met, but his book is the Steadyhand bible.  David Swensen, the hugely successful Chief Investment Officer of Yale University, wrote a book called Unconventional Success: A Fundamental Approach to Personal Investment.   The book takes a critical view of the U.S. mutual fund industry.  Rather than discount his concerns (we couldn’t...we agreed with them), Neil and I decided early on to use them as a touchstone.  Steadyhand would address his complaints by either eliminating or reducing them.  As a result, our fees are at the low end of the industry range, our managers are experienced and stable, the funds are concentrated on fewer stocks and look different than the indexes they are trying to beat, and everyone here has the same interests as our clients (we own the same funds). 

Finally, I should acknowledge Kathleen Edwards, a Canadian and one of my favourite singer/songwriters.  Watching her build her following and grow as an artist reminds me of what we’re trying to do.  Her music and lyrics have real substance.  Her fans in small venues (Richards on Richards this week) are just as important as those in arenas.  And her energy and smile on stage scream out that she loves what she is doing.

It’s early days in Steadyhand’s development, but we’ve already had lots of help and inspiration.  We appreciate every word of it.

The summer edition of Globe Investor Magazine comes out this Thursday (May 22) as a supplement in the Globe and Mail. Watch for The Steadyhand Diaries, a piece written by Tom Bradley that takes readers through the company's first year in business and gives an inside view of the creation and ‘raison d’etre’ of Steadyhand.

The firm is particularly proud of the first award – Best Mutual Fund Performance for the Week of July 23rd. Steadyhand is also honored for being recognized as the 7th Runner-up in the Best New Mutual Fund Name category, for which they took home some beautiful hardware.

Steadyhand joins a select group of 97 other firms receiving the sought-after recognition. The company’s President and founder, Tom Bradley, commented on the achievement: "Winning these awards has given our marketing department a real boost. For a while it felt like we were the only fund company in the country without an award. Now we can market from a position of strength."

For a description of the lesser-known Lipper Awards, see Jonathan Chevreau’s blog on the Wealthy Boomer.

You may remember that until we renewed our prospectus, we weren’t allowed to provide fund returns to non-clients.  With that behind us and the first quarter of 2008 in the books, we’re now able to post our funds’ performance.

Below I have provided some color on the numbers, but as you’d expect, I must warn you that one-year returns (both good and bad) have very little interpretive value.  A one-year number in the context of a longer period, however, is informative and on that note, we can provide longer-term returns for our equity managers for those who are interested.   

With that warning label firmly attached, here are some comments on the Steadyhand funds’ first year.

Income Fund

The fund returned 1.2% for the year ending March 31st.  Over the period, the fund paid quarterly distributions totaling $0.47 (4.7% of the March 31, 2007 unit value). 

The fund is designed with a bias towards corporate bonds and also holds income equities (business & utility trusts, and real estate investment trusts).  As a result, the fund was impacted by the weak U.S. economy and worldwide credit crisis.  The prices for corporate bonds were pushed down (and the yields up) due to their higher perceived risk in relation to risk-free government bonds.  Bonds from companies in the financial sector were particularly hard hit. 

The other side of the market dislocation is the fact that the Income Fund is now yielding 6.4% (pre-fee) and is well positioned to benefit from a stabilization in the credit markets.  While the manager of the fund, Connor, Clark & Lunn, was too early in adding to the fund’s corporate bond holdings, they remain confident that these securities represent great value and will reward patient investors. 

Equity Fund

The Equity Fund was down 1.7% for the year.  This performance came in the context of the S&P/TSX Composite Index gaining 4% and the MSCI World Index losing 14%.  The latter return was strongly influenced by the weak U.S. dollar.

Roughly 40% of the fund’s assets are invested outside of Canada, and it was this foreign exposure that hurt the fund’s performance the most. 

Many of the fund’s ‘franchise’ companies fared well over the period, and the portfolio’s mix of growth and value stocks served as a good balance in a market that had little direction.  While we don’t like to see negative returns, the fund certainly held its ground considering its notable foreign content.

Global Equity Fund

It was a tough year for equity investors to venture outside of Canada and the Global Equity Fund’s return reflects that.  It was down 18.1% over the year.  Not pretty, but not out of line with the significant declines in European, Asian and the U.S. markets. 

The greatest negative impact on the fund was its exposure to housing-related and financial stocks.  The fund’s manager, Edinburgh Partners Limited (EPL), has been cautiously adding to its holdings in the financial sector, as they feel that there’s now so much bad news built into the share prices of many of these stocks that the reward/risk trade-off is looking very compelling. 

The fund’s positioning in sectors that are typically defensive stalwarts, notably health care and telecom, didn’t help it over the year.  Many stocks in these sectors were beaten up, particularly in recent months.  Yet, EPL is seeing a lot of value in these industries and has maintained the fund’s exposure to leading companies such as Novartis, Sanofi, SK Telecom and Vodafone.

Small-Cap Equity Fund

The Small-Cap fund got off to a great start.  It gained 10.5% over the past year in a rough environment for small caps. 

As can be expected, the fund was noticeably out of synch with the overall market.  There were plenty of days when the market was down and the fund was up, and vice versa.  All said, the manager, Wil Wutherich, owned a lot more winners than losers.  Wil’s unconstrained, style-agnostic approach allows him to take large positions in the businesses that he most wants to own and this approach served the fund well.

While we expect this fund to deliver market-beating returns over the long-term, investors should be prepared for periods of greater volatility than the one just passed, given the nature of the small-cap market. 

The problem is that each of our mutual funds is a separate trust, so they issue their own T3's. In addition, each account has its own registered address, and for privacy reasons we often cannot combine all T3's for a household (i.e. spouses) in a single mailing. As a result, our recordkeeping provider issues a separate T3 in a separate envelope for each fund in each client account. This has resulted in some clients receiving as many as 13 separate mail pieces, something we're obviously not thrilled with.

While we don't know the exact solution yet, we can promise that next year we'll do better. We're working with our provider to find a solution that meets our regulatory requirements while also meeting our commitment to reducing mailings.

1. Taxable income in a mutual fund consists of:
   1. net income: Canadian and foreign dividends, plus interest, less management fees and administrative expenses.
   2. net taxable capital gains: taxable capital gains, less capital losses and taxable capital gains that remain untaxed due to the capital gains refund.

2. The management fees that we charge to the fund are partially offset by the management fee rebate that we distribute to the unitholders quarterly. The fee rebates are paid out of the income and capital gains of the funds, and in turn, Steadyhand reduces the management fee that is charged to the fund. Unitholders receive the rebates in the form of distributions.
3. Taxable capital gains/losses occur when the fund managers sell securities at a gain/loss. Some of the taxable capital gains do not have to be distributed and can remain in the fund on a non-taxable basis, as they have been distributed already on redemptions of fund units throughout the year (i.e. they have already been taxed). This is the capital gain refund.
4. Mutual fund trusts (i.e. the Steadyhand funds) are flow through entities. The taxable income earned inside the funds flows through to the unitholders as if they held the securities directly. The income/gains are taxed in the hands of the unitholder at his/her marginal tax rate.
5. Income and capital gains are earned by the fund throughout the year and reflected in the net asset value per unit (NAVPU). When the distribution is made, the income and capital gains realized are divided by the number of units in the fund to arrive at the distribution factor (i.e. the distribution per unit). Distributions are allocated to unitholders based on the number of units they own.
6. Reinvested distributions are deemed to have been received by the investor in cash and reinvested back in additional units of the fund. This increases the unitholder's total adjusted cost base (ACB), which results in a lower capital gain when the units are redeemed. This also means you are not taxed twice on the capital gain distribution amount.
7. Capital losses do not flow through to the unitholder or offset income distribution amounts. If a fund has positive income distributions and a capital loss, they do not offset each other; the fund pays out the full income distribution amount and the capital loss is carried forward.
8. Distributions are reported to Canadian residents on a T3 slip issued by March 31 of the following year.
9. When units of a fund are redeemed, the unitholder may realize a capital gain/loss.
10. A return of capital (ROC) from a trust is essentially a repayment of the investor's capital, and can happen when a trust pays out more in distributions than it earned in income (i.e. there is not enough income to cover the distribution, so some of the original investment is returned to the investor).
11. ROC reduces the ACB of an investment, thereby increasing it's capital gain when sold. The ROC is shown on the T3, but is not actually taxed.
12. ROC from income trusts in the funds flows through to the unitholders of the Steadyhand fund.
13. While the total distribution amount is known at year-end, the allocation of income and capital gains for a fund are not known until the mutual fund trust itself receives T3's from the trusts it holds. Steadyhand is not able to issue T3's for the funds until after this happens.
14. At year-end we initially classify the distributions entirely as income, however, when the T3 is issued it shows the correct allocation between income and capital gains.

Frankly at this stage it is an experiment, but we're inspired in part by this article.

If you're a Facebook user, give us a poke and feel free to add suggestions and comments and let us know how we should evolve our presence there.

What did I learn as I wandered through the streets and office towers of downtown Toronto?

• It’s not raining everywhere in Canada.
• Good times keep rolling. Despite it being late October, planes, hotels and restaurants are full. The strong dollar may ultimately impact Eastern Canada, but it still feels like boom times to me.
• Who likes the U.S. dollar? Nobody. Which is interesting in itself. Typically, memorable investment opportunities come out of times when there is a perfect consensus in the market (i.e. no dissenters). Certainly Toronto is wall to wall bears on the U.S. buck.
• Another dealer. When I went in to see Peter Loach, the Managing Director in charge of mutual fund research at BMO, we got the good news that the bank is going to add the Steadyhand Funds to their brokerage platform. When the two of us get the paperwork completed, investors will be able to buy our funds through BMO InvestorLine and BMO Nesbitt Burns. Yeah!
• Another yeah. How about this. An introverted, ex-steel analyst from Winnipeg was appointed Chairman of RBC Capital Markets. My friend Chuck Winograd gets the nod when Tony Fell retires. It's well deserved. He tells me he doesn't work as hard as Tony, but I'm sure he's close.
• Benchmark blues. Chats with a few portfolio manager friends affirmed the thesis of my Saturday Globe column. In the halls of the big asset managers, the focus on relative performance is as intense as ever. Success is being measured (and bonuses being paid) by how portfolios perform versus the index, not what their absolute returns are. As I said in the column, I can’t help but feel this fixation on the index is breeding mediocrity.
• Passionate supporters. I had the chance to meet a couple of our clients and a few prospective clients while I was in Toronto. It was gratifying to know that these investors are passionate about what we’re doing – our investment philosophy, fees and straight-ahead approach. I’ll be back in a few weeks and would love to meet more, whether they be supporters or skeptics.
• Walking past the Skydome. I’m pulling for a Lions versus Bombers Grey Cup. Unfortunately, my Bombers are fading these days.
• The PPN saga. The Business News Network gave me a chance on Thursday to rant once more on PPNs (Please, don’t buy these things!). I subsequently heard that the volatile markets of the summer have put a few PPNs in a pickle – they are already assured of providing no return when the term of the product is completed. I repeat: Don’t buy these things.
• Credit crisis breeds opportunity. Our Income Fund has performed well in a tough environment for bonds, but it wasn’t immune to the credit crisis. Given the fund’s structural bias towards corporate bonds, the widening credit spreads impacted its short-term returns. Having said that, I’ve been delighted to report that Connor, Clark & Lunn hasn’t got bashful. They have been using the dislocation in the market to add to corporates and increase the running yield on the fund.

That’s it. Nothing too profound. I’m back home. My wife still loves me and my doctors aren’t mad at me.

While the rest of the team will likely have to say goodbye to Margarita Mondays and Heavy Metal Thursdays, we're all nonetheless excited to have him back as we head into fall and RSP season.

Tom is recovering well and on-track from his surgery and expects to be back in the office in the second half of October. He's dusted off a few of his favorite books on investing, and hasn't missed a beat on his bi-weekly Globe and Mail column.

He appreciates everyone's support and well wishes and is looking forward to getting back to the helm next month.

Q: I recall reading in one of Tom's columns about his search for investment managers to manage his and his wife's personal money, which also described the criteria he was looking for in a money manager. Tom, does a meaningful portion of your personal wealth now reside with the managers of the Steadyhand funds? Certainly, having your interests aligned with mine in this respect would provide great comfort.

A: I'm speaking on behalf of Tom here, but I can confidently say that a notable portion of his wealth is invested in the Steadyhand funds. I can also tell you that everyone on our management team has a notable portion of their wealth invested in our funds as well.

Q: Tom has written about investment managers who are "asset gatherers" and "index huggers" rather than true stock pickers. I think this problem/issue is endemic in the money management industry...I would be interested in your views on a reasonable amount of assets for your funds. What do you see as the optimum size for the small-cap fund and the North American fund?...And while you may be able to limit the size of your funds, will Cranston, Gaskin and Wutherich continue to gather assets from other avenues? If Wutherich is successful, how do I know that 5 or 8 years from now his assets under management will not have grown to an "unwieldy" size?

A: Your question on asset size is a good one, and this is an issue that tends to be overlooked by a lot of investors. We feel that the optimum size for the Small-Cap Equity Fund is around $125-150 million, and we have been transparent in out intent to close the fund to new investors when it approaches this level. While our other funds have much more capacity, we intend to carefully review them periodically to ensure that "asset bloat" does not impact their managers' investment approach.

We have an ongoing dialogue with our managers, and they have been clear that they will let us konw if capacity becomes a problem with the funds. While we do not have an optimal size in mind for our other two equity funds, we intend to undertake an extensive capacity review when they hit $500 million.

If and when we cap our funds, there is no guarantee that our managers will not continue to gather assets from other avenues. However, as previously mentioned, they have been clear with us that they will not jeopardize their investment approach by taking on excessive assets. All three of our equity managers have chosen to be "investment boutiques." All of their principals worked for larger firms in their "past lives" and started their own firms because they didn't like the bureaucracy and constraints that come with managing large amounts of money. Tom specifically poses the question of capacity to Dr. Sandy Nairn, the CEO of Edinburgh Partners (the manager of the Global Equity Fund), in a podcast that he recorded with him in July.

If you have any unanswered questions about Steadyhand, feel free to drop us a line.

As a start-up, we have the luxury of starting with a fresh piece of paper and blazing our own path. We’re not confined by legacy issues, dated technology platforms, archaic policies and procedures, etc. We’ve set up a business that isn’t for everyone, but we think makes a lot of sense for a select group of investors.

In the early planning days (last summer), we spent a fair bit of time defining the key principles and objectives of our business. At the top of our list was conviction. This meant designing fund mandates that made the most sense for our target clients, selecting managers who concentrate only on their best ideas, and not settling for industry “norms.” We’re not in this to please everyone, and we certainly didn’t want to take the middle road and try to be all things to all people. We’ve seen companies and organizations do this before, and the outcome is often disappointing.

Case in point, the Vancouver Canucks’ new jerseys (you weren’t expecting that one, were you?). The organization did a good job of creating hype around the unveiling of the club’s new jerseys yesterday. They sold out the lower bowl of GM Place and broadcast the event live on their website and the local news. For a late August day, there was a fair bit of hockey excitement around the city. Would they make a bold move and go back to the original crest with the blue and green colors? Or would they unveil a fresh, new logo?

Neither. They took the middle road. They went back to the blue and green colors that the fans seem to adore, but they stuck with the whale logo, and added the word VANCOUVER above it (in case other teams forget who they’re playing?). They tried to please everyone by trying to merge the old with the new. Based on fan forums and radio talk shows following the release, they failed. Fans don’t like it. It’s a compromise.

We hope that we don’t make a similar mistake with our fans. So if you see us taking the middle road and trying to please everyone by introducing products that chase trends, adding principal protection features to our funds, or sliding toward the index, call us on it.

Dan Richards is a name you may be familiar with. He has been in the wealth management industry for years and currently operates his own consulting firm called Strategic Imperatives Ltd. He has actively written and been quoted in the media. My posting today relates to the regular column he writes for the Investment Executive.

Late last year Dan did a two-part series on ‘baby boomer’ clients. As he says, “Boomers will be very different retirees.” These columns were aimed at advisors and what they need to do to effectively service the boomers. From extensive research he conducted, he identifies 5 traits that these clients will have:

1. They want it all.
2. They are inclined to question authority and are unwilling to accept what they are told at face value.
3. They are reluctant to give up control.
4. They want to keep their options open.
5. They actively seek out good value.

I don’t know if Dan has got it all right or not, but his traits are consistent with what I observe. Given how impactful the boomers have been on all aspects of our society (housing, entertainment, travel, Mick Jagger’s career), it’s a topic all investment executives have to pay attention to.

At Steadyhand, we feel we’re pretty well positioned for the boomer retirees. I’ll even be bold enough to score ourselves against the traits mentioned above.

They want it all

This is where Steadyhand doesn’t hold up. We have a limited product line (5 funds) and a distinct investment philosophy.

We also don’t promise anything with regard to short-term performance or provide guarantees that investors won’t lose money in a particular quarter or year.

Steadyhand: 1 out of 5

Questioning authority

Steadyhand is all about challenging conventional wisdom and entrenched industry practices. As we’ve said repeatedly, we don’t think the Canadian wealth management industry is a good enough standard to compare ourselves to.

Steadyhand: 5

Reluctance to give up control

Dan provides lots of examples of what he means here, including:

• Boomers are more involved in the decision making;
• They are less likely to defer to an advisor than previous retirees;
• They want more frequent and open communication;
• They are more inclined to go on-line and see how their investments have done;
• They want a streamlined financial plan that clearly lays out the options … not a 60 page document; and,
• They want open and transparent communication of compensation and other details.

Steadyhand scores well here. We require that investors make their own decisions, with our help when required. Our communication is frequent and as transparent as we can make it. We’ve got an active website that has been designed to be informative and simple. And finally, on each account statement, we show our clients what they paid us last quarter in dollars and cents.

It’s interesting to note that the hottest sellers in the market today are the pre-packaged products such as target date balanced funds, WRAPs and structured notes. To me, these products cede control to the provider. They generally require the investor, with the help of an advisor, to make a choice at time of purchase, but after that the product is on autopilot (regular rebalancing, adjustments for aging, monitoring managers).

Steadyhand: 5

Keep options open

There is nothing mutual fund investors hate more than deferred sales charges (DSC) that prevent them from making changes when they want to. While DSCs have been on the decline in recent years, lots of the new investment and insurance products still have a DSC element to the commissions, which makes it difficult for investors to extradite themselves before the product matures.

At Steadyhand, we want our clients to have a long-term plan and stick to it. If they do want to make changes, however, there is no fee or commission to switch between funds or make a redemption. Nothing...ever.

Steadyhand: 5

Quest for value

I’m glad to hear that the boomer retirees are going to be more conscious of value. Investors in their 40’s and 50’s today are so busy with life that they’re happy to turn their affairs over to an advisor that they are comfortable with. When I ask them what they’re invested in and what they’re paying, they often don’t know. They are just relieved that they’ve found someone that can take care of it for them.

Dan forecasts, however, that for the boomer retirees, traditional relationships will be less important than ever before. The boomers won’t necessarily be disloyal, but they will speak with their feet if they don’t feel they’re being treated well or returns aren’t there.

Providing top-notch money management at a reasonable price is what Steadyhand is all about. And our fee structure rewards clients that stick with us and grow their assets here. As their account grows, the fee is reduced and if they’re with us more than 5 years, it is reduced further.

I haven’t given us the top score on this trait only because I acknowledge that there are lower priced options out there, namely exchange-traded funds. But for truly active management, Steadyhand has few peers.

Steadyhand: 4

We know Steadyhand is not for everyone, but we designed our firm around some of the trends that Dan identifies. Specifically, increased client involvement and a more acute awareness of value are both in our sweet spot.