The Steadyhand Equity Fund consists of no more than 25 stocks. This is one of the manager’s (CGOV Asset Management) disciplines that we love. It ensures that we’re only getting their best ideas. Nalco is one of these ideas.

The Nalco story is a little different than most of the fund’s other holdings. As we emphasize in our reporting, CGOV favours companies with strong cash flows, proven management teams, clear competitive advantages and little debt. Nalco scores top marks in all of these, except the last one.

First a little background. Nalco (NYSE: NLC) is an Illinois-based water treatment giant. The company also owns a majority stake in a leading emissions control business (Nalco Mobotec). Nalco’s applications are used by mining, paper and petroleum companies, as well as hospitals, schools, and hotels, among others. Its products and services help prevent contamination, increase efficiency, and reduce pollutants. The company is also active in developing new environmentally-friendly technologies that improve efficiencies while reducing pollutants.

There is a lot to like about the company, as illustrated by CGOV’s investment thesis:

• Water is becoming an increasingly scarce resource and Nalco is twice the size of its nearest competitor in the water treatment and water related services market.
  
• The company operates on a service based model where 80% of revenue is recurring, providing better than average predictability in the business.
  
• There are high switching costs, resulting in a very loyal customer base.
  
• The company generates a lot of cash.
  
• With 70,000 customers and a diverse client base, they can offer new services easier than a new entrant.
• The business model is “green” yet also sustainable, as opposed to many solar and wind companies that depend on subsidies and do not have the same competitive advantage as Nalco enjoys.

Yet, Nalco has had a mixed record of delivering strong and consistent earnings and has been saddled with debt – a notable strike against the stock that kept CGOV on the sidelines until recently. In 2008, a new CEO took the reins (J. Erik Frywald) and implemented an aggressive strategy that focused on reducing costs, increasing productivity and trimming debt. His efforts have paid off. Over the past year, cash flows have improved, costs have been reduced, expensive debt has either been paid off or restructured (the balance sheet has been de-levered) and more energy has been focused on higher-growth areas such as advanced technologies and projects in the emerging markets.

Nalco has long been an attractive business, but its improving balance sheet finally made it an attractive investment idea to CGOV. Given there is still more risk associated with the company relative to some of the manager’s holdings with rock solid balance sheets (e.g., Rogers Communications, Cisco Systems, TD Bank), CGOV accumulated the stock in tranches. They initiated a small position last July and purchased additional shares in November and last month, as they became more comfortable with the new management team’s ability to execute.

Investments like Nalco come with higher return expectations. Yet, they also come with greater risk. To compensate for this, the manager typically maintains a smaller position size (e.g., 3%) and purchases the stock at what they believe to be a much greater discount to its true value.

Given the fund’s low turnover (11% in 2009) and the manager’s high level of conviction in their investments, a new holding often generates some discussion and buzz around the proverbial water cooler here at Steadyhand. In Nalco’s case, this seemed particularly fitting.

The notion of “active share” is in the news again. Coined by a pair of Yale professors in 2007, active share is a measure that indicates just how actively managed a fund really is. In other words, it is a gauge of how much a fund looks like, or overlaps, a certain index or benchmark. A fund with an active share of 100% would have no replication of the index, whereas a fund with an active share of 0% would look exactly like the index.

Dan Richards, a faculty member at the University of Toronto’s Rotman School of Management and president of Clientinsights, expanded on the concept in an article in Monday’s Globe and Mail titled Only the Truly Active Fund Managers Lead the Pack.

Richards highlights some of the professors’ key findings on the topic, including:

• only half of actively managed funds are truly active, defined by the professors as those funds with an active share of 80% or higher (based on 2003 U.S.-based data);
  
• there has been significant growth in “closet indexers” – funds that closely track the index;
  
• there is a direct correlation between true active management and performance (i.e., funds with the highest active share outperformed their index);
  
• size matters (smaller funds outperformed larger funds); and
  
• high active share doesn’t mean greater volatility.

He closes his piece by suggesting that Canadians need to be diligent when selecting actively managed funds to ensure they are getting what they are paying for.

We’ve written on the topic in a past blog and article and, not surprisingly, we’re in the same camp as Richards and the Yale researchers. To beat the index, you have to look different than it and focus on your best ideas. Yet, it’s not always easy to determine how closely a fund mirrors its benchmark. To assist investors in this respect, we calculated the active share of our equity funds. Based on year-end data, the ratios were as follows:

• Equity Fund – 77%
  
• Global Equity Fund – 91%
  
• Small-Cap Equity Fund – 97%

Now that’s undexing.

By Scott Ronalds

It’s Day 5 of the Games. As we’re lucky enough to be in the heart of the action here in Vancouver (or unlucky enough depending on your viewpoint), it’s time for a few observations:

• Canadians are bursting with pride and patriotism. Which is a good thing, no matter how you look at it.
  
• There have been a few early disappointments for the home team (Manny Osborne-Paradis, Jeremy Wotherspoon) and some pleasant surprises (Alexandre Bilodeau, Mike Robertson). Like any well diversified portfolio, this is bound to happen. The results will come; it’s important to think long term (i.e. 17 days).
  
• Fans are snapping up Olympic gear at a record pace. The line-up to get into The Bay’s downtown store at 10:30 PM last night was still 50 people deep. Their red sweatshirts, scarves and mittens are as hot as income funds.
  
• Spandex isn’t a good look on men.
  
• The weather has been a distraction (this is Vancouver, after all). Just like short-term market noise, best to ignore it.

We’ll report back in a few days, as there’s sure to be plenty more excitement (and easy analogies) to come.

Seth Godin is a renowned author, marketer and blogger. He has great insights and observations on human behavior and the business world. In a recent blog, Hunters and Farmers, he examines the differences between the two types of individuals.

In Seth’s words, “Farmers [are those who] spend time sweating the details, worrying about the weather, making smart choices about seeds and breeding and working hard to avoid a bad crop. Hunters, on the other hand, have long periods of distracted noticing interrupted by brief moments of frenzied panic.”

He goes on to suggest that both groups have strengths and weaknesses, but they are very different from each other and they should be marketed to (and taught) in different ways. Hunters are impulsive and can change gears instantly; farmers are methodical and absorbed. Mark Cuban is a hunter. Warren Buffett is a farmer.

Godin’s key observation is that marketers often confuse the two groups. Some companies sell products designed for farmers but hope that hunters will buy them.

This is becoming very evident in our business. The key attributes of successful investors, as motherhood as they may be, are patience, discipline and long-term thinking. Investing is a practice that is not designed for hunters. A mutual fund, ETF, or any other investment product should not be an impulse buy. Investors need to do some research and hard thinking to become comfortable with a product and make sure it’s a good fit. And they should be prepared to stick with it for a while before ‘rotating the crop’.

Yet, the industry markets to hunters. Companies sell flashy short-term returns and products that are focused on the hottest trend or fad. Little heed is paid to the investment philosophy or process that is designed to produce the bumper crop over time.

The industry knows that it’s easier to sell to hunters than it is to farmers. And because marketing efforts are targeted towards the former, more farmers are putting down their hoes and taking up spears. The mentality and behavior of investors is changing. We’ve seen this in the average holding period of mutual funds, which has fallen noticeably over the past few decades; and in the increased number of products that investors own in their portfolios (which often include lots of last year’s winners, or perhaps next year’s carcasses).

But investors who take a hunting mentality will often be disappointed with their longer-term returns. There are times to act swiftly on opportunities, but those who jump from product to product and constantly change gears will do their portfolio more harm than good. Investment firms that market to hunters will also see much more volatility in their sales and redemptions, which hurts all their clients at the end of the day.

Marketing to farmers is difficult. It’s a much longer sales cycle and the rewards aren’t as instantaneous. We’re happy, nonetheless, to keep planting the seeds.

Tom was on BNN this morning (Feb 8) with Marty Cej and Frances Horodelski. Topics of discussion included:

• What to do at this stage in the market
  
• How to reflect caution in your portfolio
  
• ETFs

The seven minute piece brings together some key messages from Tom’s recent Globe and Mail articles. And as an added bonus, he’s wearing a cool new Olympic tie.

You can watch the segment on BNN’s website by clicking here.

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.

By Scott Ronalds

Don Cranston, one of the founding partners of CGOV Asset Management (the manager of our Equity Fund) was in town last week enjoying some of our rain. We put Don in front of the microphone and asked him a few of the questions that are at the top of investors’ minds these days:

• How and why does CGOV incorporate foreign holdings into the fund?
  
• What were some of the disappointments in the portfolio last year?
  
• How is the fund currently positioned?

And, as is customary with a visit from one of our managers, we closed with some rapid fire questions to get to know the real Don Cranston. Evidently, he’s not a fan of synchronized swimming.

Listen now, or subscribe to our podcasts via iTunes or RSS.

By Scott Ronalds

If you’re an income investor, T-Bills and GICs aren’t helping you much these days. And the prospects for government bonds are nothing to get excited about. In order to achieve a more desirable return, you may find yourself reaching for yield, or moving up the risk scale.

While this isn’t necessarily a bad thing, it should be done in a conscious and appropriate way. In this podcast, Tom expands on some of the advice he proposed in his latest Globe and Mail article. He also discusses the outlook and opportunities in our Income Fund.

Listen now or subscribe to our podcasts via iTunes or RSS.

Morningstar’s Manager of Fund Analysis, David O’Leary, recently published an article titled Six Changes We Would Like to See in the Canadian Mutual Fund Industry. O’Leary acknowledges that by and large, Canada has an investor-friendly fund industry. Yet, there is still room for improvement in a number of areas. His laundry list includes:

• Fees
  
• Manager co-investment (a call for some form of disclosure)
  
• Management team changes (a call for greater transparency)
  
• Disclosure of regulatory findings
  
• Currency hedging (a call for greater clarity)
  
• Share class naming conventions (a call for standardized terminology)
  

David’s list is pretty complete and we agree with most of his suggestions, but we would add one thing to the list:

• Client statements (few firms/dealers show fees and account performance)

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.

Tom will be on Business News Network (BNN) tomorrow morning (November 27th) from 9-10 AM eastern time. He’ll be sitting in with Marty Cej and Frances Horodelski on Market Morning.

Black Friday just got a whole lot brighter.

Update (November 27): For those who missed the show, click here to watch the rerun.

By Scott Ronalds

Recent data out of the U.S. suggests that American retail (individual) investors have been watching the stock market rally from the sidelines. According to an article by Morningstar USA, investors have pulled an estimated $4.4 billion out of U.S. equity funds so far this year (as of October 31st). While the bleeding pales in comparison to 2008, when nearly $100 billion was redeemed from these funds, investors appear to remain very cautious of equities. International stock funds have fared better, with $16 billion in net sales ($70 billion was redeemed from the category last year). By and large, however, asset flows into equity funds have been anemic, and very little of the retail money that was pulled out in haste last year has returned to stocks.

It’s the opposite story for bond funds, where net sales have reached nearly $300 billion this year (2008 sales totaled $34 billion). All this in an environment where short-term interest rates are at their lowest levels ever, and 10-year U.S. Treasuries are yielding less than 3.5%. Where has the money come from to fund these purchases? Money market funds. As the Morningstar article points out, roughly $400 billion has been redeemed from these funds this year. After reaching a peak in January at $3.6 trillion, the mountain of cash sitting in money market funds has shrunk somewhat. Yet, there is still a significant amount of idle cash that could be re-deployed in the equity markets at some point.

Clearly, retail investors have not shed much of their aversion to risk. The numbers suggest that rather than taking advantage of a beaten up stock market, Americans have been ‘riding the pine’ in 2009, preferring the safety of bonds over the volatility of stocks.

It’s a similar story in Canada. Retail investors at home have pulled $4.8 billion out of equity funds year-to-date, with $9.8 billion flowing into bond funds, according to the Investment Funds Institute of Canada (IFIC).

It’s also evident that professional money managers have been acting in an opposite fashion. Internally, our fund managers have been putting funds to work since last fall and have brought down their cash positions (quite substantially in some cases) from pre-meltdown levels. Anecdotally, we’ve heard and seen much the same from other managers.

At Steadyhand, our clients have benefited from being in the game, as most sat tight through the volatility and many added to equities when the markets were bottoming. We’ve opined that we may be ‘stuck in the middle’ right now in terms of valuations, sentiment and the direction of the economy. Tom also suggested some acts of caution in his last Globe article. If there is more fuel for the rally, however, it may well come from all those investors who are still sitting on the bench.

Related Reading:
A Mountain of Cash in the Waiting
The Risk Today is Not Buying Cheap Equities
Tackling Uncertainty This RRSP Season
Stuck in the Middle

From: jsmith@mega-bank.com
To: NewProductCommittee@mega-bank.com
Date: Mon 11/16/2009 1:08 AM
Subject: This Year’s Meal Ticket

Just woke up with a brilliant idea!! I’m putting it in an email while the juices are flowing. Still working on the name, but I’m thinking something along the lines of the H1N1 Fundamental Vaccine Equity Plus Fund. We could even throw the word ‘yield’ in there somewhere to capitalize on the current demand for income products.

Hear me out. H1N1 is all over the news. An investment product attached to the vaccine would be hot. Real hot. It would simply hold shares of the major vaccine makers – GlaxoSmithKline, Sanofi, Novartis, and AstraZeneca. We could either hold the stocks in equal proportion, or throw a quant overlay over the portfolio to make it sound more sophisticated and intriguing!

If we go with an open-end fund, I figure we could charge a fee of at least 2.5% (in line with other specialty funds). Or, we could add a few features to really get this thing off the ground. I’m talking principal protection. We could call our friends at the derivatives desk and slap a guarantee on this baby. We’ll make the minimum holding period 10 years to make sure the odds of the guarantee kicking in are next to nothing. We should be able to get an extra 0.5% in fees out of this each year.

We’ll offer it in multiple series so that no advisor will be left behind. A healthy trailer fee on the A-Series will get this thing moving.

If the idea doesn’t fly with the mutual fund brass (although I can’t see how it wouldn’t), we’ll take it to the investment bankers. Make it a closed-end fund. They’ll be all over it as long as they can take their usual 7% off the top. And they shouldn’t have any problems raising millions on the Street, given how hot this thing is sure to be!!

Or, if we want to give the bank’s ETF division something to build on, what better product than this?! With only four stocks, the trading costs will be next to nothing, but I figure we could still charge a fee of around 0.7 – 0.8%. Or better yet, we could leverage it up. Leverage, baby!!! Give investors 2X the daily return of the portfolio. Average Joe still can’t figure out how these things work, but the word ‘leverage’ alone would be sure to pique some interest.

Bottom line, we can’t lose on this idea. If we get it to market right away, we can capitalize BIG TIME on this flu thing. What happens when the craze cools down, you may ask? We’ll just merge it with one of our health care funds. Brilliant!!

Let’s set up a meeting first thing in the AM.

Cha-ching!
JS

By Scott Ronalds

Housing stocks make me squeamish. It was painful to watch them fall like a rock over the last couple of years as the U.S. real estate market imploded. A number of companies faced bankruptcy or saw their share prices slashed due to stretched balance sheets, huge unsold inventories and weak consumer demand.

Our global equity manager, Edinburgh Partners Limited (EPL), took their lumps on Pulte Homes, a Florida-based builder, which they sold last year after their worst-case-scenario estimates on the company’s book value and earnings were realized. Although the position was fairly small, Pulte was a clear loser for unitholders of the fund (including yours truly; the fund represents 25% of my portfolio). EPL made some strategic moves when the markets were bottoming and has since regained much lost ground, but Pulte sticks with me for whatever reason.

The U.S. housing market is still a pretty ugly place. Especially in places like Arizona, California and Nevada, where speculative activity was the highest during the days of mad flipping. Yet, as the economy pulls itself out of recession, opportunities are emerging. While there are still plenty of foreclosures, there are signs of a floor being reached in many markets, and unsold inventories are winding down. For those with a very high tolerance for risk, an investment property in Scottsdale, San Diego or Vegas may turn out to be a big winner a few years from now.

For more conservative investors, taking a longer term view on homebuilders could prove to be a good bet. As the economic storm passes, the best of the group will return to profitability in a world with fewer competitors and more end-users (i.e., those looking to buy a home to live in, rather than trying to sell it for a quick buck). Edinburgh Partners feels the risk/reward tradeoff is enticing enough to revisit the sector, and they’ve found what they believe to be a good opportunity in DR Horton, a Texas-based homebuilder. They like Horton because the stock satisfies all of their requirements from a valuation perspective (e.g., it’s cheap on a number of measures). The company is also one of the largest homebuilders in the U.S. and their focus is on the lower end of the market with respect to price point. In other words, their homes are affordable and appealing to first-time buyers.

Pulling the trigger on a housing stock right now may not feel overly comforting. Yet, the best investments are often made when you feel the least comfortable. Tom referenced this notion in a recent Globe column where he quoted the late Peter Bernstein, “If you are comfortable with everything you own, you’re not properly diversified.”

I felt pretty uncomfortable eight to twelve months ago when EPL was buying bank stocks, Chinese internet companies and Hong Kong land developers, but those investments have since proven to be very wise. This is what we pay them for. They take emotion out of the game as best they can and buy undervalued stocks, wherever they may be found. And their experience and longer-term track record speaks for itself.

So go ahead, make me squeam.

We could’ve had some fun with a list of the scariest Halloween costumes this year. Bernie Madoff, Allen Stanford and Jon & Kate come to mind. But we thought it would be more educational, and just as fun, to highlight some of this year’s scariest investments. Queue the Monster Mash.

Leveraged ETFs
These products, which double-up your exposure to the daily performance of an underlying investment (often a commodity, currency or market index), have scared the #*&! out of investors who bought them without doing their homework. This is because they track the daily performance of the underlying investment, not the annual performance. They are designed for short-term speculators and professional money managers, not the average investor. Take the Horizons Beta-Pro NYMEX Crude Oil Bull Plus ETF, and its sister, the Bear Plus ETF. The former is a bet on the price of oil (futures contracts) rising; the latter on oil falling. As of the end of September, the underlying investment that the ETF tracks (the NYMEX Light Sweet Crude Oil Futures Contract) was down roughly 5% on the year. Yet, the Bull Plus ETF was down 36%, and the Bear Plus product was down 42%. Yikes!

Money Market Funds
The Bank of Canada’s key lending rate sits at 0.25%. The good news is that it’s extremely cheap to borrow money if you’ve got a sparkling credit record. The bad news is that you’re looking at earning very little on lending your money to those with sparkling credit records (i.e., the big banks and corporations). After fees, investors can expect next to nothing on money market funds until the central banks raise short-term rates. Spooky prospects indeed.

Maple Leafs Seasons Tickets
1-7-2. Need we say more.

Guaranteed Target Date Funds
Marketing-driven, fee-laden, and deceptively complex is how the boss referred to these products in an earlier blog. Target date funds (also known as life-cycle funds) are managed for a particular demographic (i.e., investors retiring in the year 2010, 2020, or 2030) and the manager adjusts the asset mix as the retirement date approaches. Not a bad idea in concept. But it’s the guarantee that comes with these products that really throws them off the rails (not all target date funds come with guarantees). When the markets turned sour last year, the asset mix on several of these funds was ‘shifted’ to ensure the guarantee could be paid out and the issuer wouldn’t lose any money. The problem is that many of these funds are now invested 100% in bonds but the target end-date is 10 or more years into the future. Investors are thus faced with minimal future growth prospects and may have to hold on to the product for 10 or more years for the guarantee to kick in. Simply terrifying.

The U.S. Dollar
The greenback has had a rough year so far against most major currencies. It’s fallen roughly 15% against the loonie and is down significantly on the euro as well. With parity closer by, however, it may be an opportune time to revisit your asset mix. If it’s off balance, you may want to creep up your U.S. exposure. Or at the least, your dollar should go farther in your cross-border fireworks shopping this year.

In a recent article written about Steadyhand titled Mischievous Strangers and a Steadyhand, Karin Mizgala draws a connection between Tom Bradley and Charles Dickens. Very flattering. Especially when compared to some of the other comparisons thrown around the shop.

Karin, a fee-only financial planner and co-founder of the Women’s Financial Learning Centre, is referring to Tom’s frequent writing on the problem of relying on “mischievous strangers” (i.e., economists and financial analysts) to do our thinking and investing for us. In Dickens’ novel Hard Times, he similarly comes down hard on the bankers and other financial experts of the day and “rages against their dubious use of statistics to confound and befuddle the common man.”

Karin mentions Steadyhand’s commitment to educating the public about the investment industry from an “insiders” perspective and how we (Tom) are not afraid to express controversial views. She also has some kind words about Steadyhand’s investment philosophy and transparency in her article, which of course makes it a must-read.

We couldn’t have said it better ourselves – that’s what this blog is all about. And for those of you ladies who are interested in quality financial education programs which speak to women, check out the WFLC’s website (a little back-scratching, in the interest of transparency).

By Scott Ronalds

Tom recently sat down with Larry Lunn, the Chairman and founder of Connor, Clark & Lunn (CC&L), to talk shop.

At the front end of the podcast, Larry discusses where we are in the economic recovery and his view on [the hot topic of] inflation. He then addresses some of the strategies that CC&L is pursuing in the Income Fund, and where they are seeing the best value in the bond market.

And we’d be remiss if we didn’t close the podcast by asking the veteran money manager where he sees returns headed over the next 5 or so years, given the extraordinary circumstances we’ve been through over the past 12 months.

If you’ve got 20 minutes to spare, there’s a lot of wisdom to take away. If you’d rather tune in by topic, here’s a breakdown of the conversation:

0 – 2:40.  Introduction.
2:40 – 5:12.  Where we are in the economic recovery.
5:12 – 8:35.  Inflation.
8:35 – 11:35.  Strategies in the Income Fund that have paid off recently.
11:35 – 13:10.  Bank bonds and other areas of opportunity.
13:10 – 14:12.  Corporate bond exposure going forward.
14:12 – 15:15.  The U.S. high yield market.
15:15 – 17:25.  Strategy with respect to income-equities.
17:25 – 19:02.  Medium-term outlook for the markets and the Income Fund.

Listen now (the file may take a minute or two to download), or subscribe to our podcasts via iTunes or RSS.

Throughout the interview Tom resists the temptation to make short-term currency or market calls, but near the end he falls off the wagon and makes some comments on the economy. It smacked of market timing. What was he thinking? Looks like we’ll have to make some time for media training this week.

By Scott Ronalds

In this podcast, Tom and I review the third quarter of 2009.

It was another strong period for equities. U.S. stocks posted their best quarter in a decade, while the TSX and many overseas markets turned in double-digit returns. A rising loonie negatively impacted foreign returns (for Canadian investors), but overall, it was a bright summer for equity investors.  Fixed income investors also had much to cheer about, as improving liquidity conditions and sentiment led to further declines in corporate bond yields.

Listen now (the file may take a minute or two to download), or subscribe to our podcasts via iTunes or RSS.

Nokia is an interesting story. To many North Americans, the company is viewed as a has-been. While its cell phones may have been all the rage a decade ago, its star has fallen considerably as Apple and RIM have taken over as the market leaders thanks to their innovative, and very cool, smart phones. In fact, Nokia’s market share of handset sales in the U.S. has fallen to a paltry 7%.

What’s more, the company also recently ventured into the highly-competitive, low margin laptop market with the launch of its first netbook, which will sell for about $800 US. As well, Nokia launched a music and gaming platform earlier in the summer called “Ovi” to try to compete with the grand-daddy of the business (iTunes). To some observers and analysts, Nokia has lost its focus and shine; it’s yesterday’s story. The stock, while reasonably valued at around 13-14 times earnings, has little appeal.

In Europe, Asia and much of the rest of the world, however, it’s a different story. The Nokia brand has much greater appeal and market share. While it may come as a surprise to some, the company is the #1 cell-phone maker in the world, with a market share of nearly 40% and over 1 billion users. In fact, Nokia sells more cell phones worldwide than its next three competitors combined.

In the developing world, Nokia is king. As an article in the September issue of Fast Company Magazine points out (to which the above numbers are attributed), the company’s success in areas such as Asia and Africa is due to the fact that “Nokia has worked hard to develop a deep understanding of all the cultures in which it operates. It runs 10 research labs worldwide, each based on an Open Innovation philosophy and affiliated with a local university.”

The article goes on to illustrate how Nokia’s researchers “immerse themselves in locales that cover the widest spectrum of the human condition...so while Apple, RIM and Palm offer singular products that target an elite, niche market, Nokia builds devices to satisfy every budget and appetite for information, making it indispensable all over Africa and Asia.” While on the topic, an interesting book titled Brand New World (which I read earlier in the summer) highlights some of Nokia’s innovative marketing initiatives in India. For those interested in product branding in the BRIC nations (Brazil, Russia, India and China), it’s a worthy read.

But I digress. The point here is that Nokia is not a dying brand, at least outside of North America. The Fast Company article expands on the company’s initiatives and projects in the entertainment media industry (through the Ovi platform mentioned above) and while the author may paint a rosy picture, it’s hard to deny the attractiveness of the opportunities that exist for a company with a billion users and a strong global brand.

As an investment opportunity, the story gets even more interesting. Nokia’s stock isn’t an “automatic” holding in every global equity portfolio (like it was a decade ago), as say Royal Bank is for every Canadian equity fund. Analysts can crunch the company’s numbers every which way and fuss over its valuation incessantly. But it’s the bigger picture that matters more. Will the company’s research efforts and initiatives in the developing world turn into a multi billion-dollar revenue stream? Can it strengthen its position in North America and challenge Apple and RIM in the smart phone market here? Will its foray into the entertainment world be profitable? It’s the longer term answers to these questions that will prove a portfolio manager right or wrong.

What does our global equity manager think? Edinburgh Partners likes the Nokia story. They’re attracted to the company’s strong market leadership position and its long-term secular growth prospects. As well, they feel the balance sheet is duly strong and the business generates an immense amount of cash. The stock is among the Global Fund’s top 15 holdings.

The article highlighted our Savings Fund as the top performing fund over the first seven months of the year, with a year-to-date return of 1.10%. We would like to point out, however, that this figure is incorrect. The actual year-to-date return of the fund (as of July 31) was 0.5%. While this still places the fund among the best performers, it is not at the top of the heap.

As a reminder, we temporarily reduced the fee on the fund back in April from 0.65% to 0.30% to help maintain a positive yield for investors.

By Scott Ronalds

In this podcast, Tom expands on his latest Globe and Mail column, which focuses on the traits that he looks for in a money manager.  More specifically, he highlights two things that he watches for and studies very intently: 1) the temperament of the manager, and 2) their investment process (is it repeatable and does it stand up in times of stress?).

Listen now or subscribe to our podcasts via iTunes or RSS.

If you look up the term ‘credit crisis’ on Google, you’ll get close to 50 million results. Over the past year or so, you would be hard pressed to find two more commonly used words in the business world (other than the usual expletives that abound in falling markets).

In a nutshell, the phrase refers to an impairment or reduction in the availability of credit (or cash) to businesses and individuals.

We’ve referenced the term often in our reporting and discussions with clients, as it is this constriction in the flow of and access to capital that has been a key factor in the economic and market downturn.

While we have recently seen an improvement in the markets and the ‘crisis’ has subsided, we’re not out of the woods just yet, and the term will likely continue to fill the channels of the business media.

If you’re looking for a detailed, yet plain-English, explanation of the credit crisis, the New York Times has an online feature worth checking out. The site’s Credit Crisis – The Essentials section provides an overview and running commentary (updated periodically) of the current crisis, and has a series of multimedia features for numbers junkies.

In this podcast, Tom and Scott review the second quarter of 2009.

The equity markets rebounded sharply in the quarter, with many stocks posting strong gains.  The corporate bond market also enjoyed a long-awaited recovery, as yields declined and the credit environment improved.  Our funds bounced back to varying degrees, with the Global and Income funds posting notable advances and the Small-Cap fund turning in a more modest gain. 

Listen now (the file many take a minute or two to download), or subscribe to our podcasts via iTunes or RSS.

By Scott Ronalds

Christine Montgomery from Edinburgh Partners, the manager of our Global Equity Fund, has been traveling in North America this week meeting with companies (research) and clients (hand-holding). We dragged her out of the San Francisco fog and welcomed her to our sunny (partly) headquarters yesterday, where we reviewed the portfolio and talked shop.

In the attached podcast, Tom and Christine discuss a number of issues, including:

• The recovery in the global equity markets
  
• The on-going shift in the portfolio from defense to offense – health care, telecom and cash positions have been reduced, while exposure to cyclically exposed growth businesses and emerging market stocks has been increased
  
• The fund’s exposure to Asia and the types of companies that represent compelling investments in the region
  
• The attributes that Edinburgh Partners looks for in technology stocks, which have seen their weight in the portfolio double over the past year, from 13% to 26%
  
• An update on the fund’s holdings in the financial sector

Listen now (the file may take a minute or two to download), or subscribe to our podcasts via iTunes or RSS.

Panic is a compilation of articles that shed light on the most severe upheavals in recent financial history – the crash of ’87, the Russian default and subsequent collapse of Long Term Capital Management, the Asian currency crisis of 1999, the Internet bubble, and the U.S. subprime mortgage crisis.

Although the book is edited by Michael Lewis (the author of Liar’s Poker and Moneyball), the articles were written by various prominent financial journalists/authors including Roger Lowenstein, Paul Krugman, Lester Thurow and Lewis himself. While many of the pieces appeared in publications such as The Wall Street Journal, The Economist, The New York Times, and Fortune, some are excerpts from books written at the time.

As taken from the inside cover, “Some of the pieces paint the mood and market factors leading up to the particular crash, or show what people thought was happening at the time. Others, with the luxury of hindsight, analyze what actually happened.”

I found it particularly interesting, not to mention entertaining, looking back at the articles written in the dot-com era. From the incredible rise and subsequent drubbing of start-ups such as Pets.com, Books-A-Million, and Egghead.com, these pieces do a good job illustrating the euphoria and emotion that can so easily overcome investors.

The last section of the book, which deals with the subprime crisis, also has several well-written articles that help explain how Americans got into the current mortgage mess, where defaults and the phenomenon of ‘negative home equity’ have become all too common. If you’re looking for a plain-English explanation of the emergence and function of complex investment vehicles such as CDOs, SIVs and credit default swaps, the collection of articles that Lewis has chosen are a good place to turn.

Panic is a great read for the patio this summer – assuming that the house connected to that patio isn’t worth less than the mortgage attached to it.

Be it resolved that hedge funds are dead - or at least the model as we know it needs to change.

This is the position that Tom Bradley argued in a debate yesterday at a luncheon held by the Alternative Investment Management Association (Canada’s hedge fund association).

With a tougher environment ahead, increased scrutiny from regulators and clients, and a weaker performance record to sell, Tom opined that the hedge fund model which has earned a reputation of being client unfriendly, under-regulated and exorbitantly expensive is certainly in intensive care, if not dead.

You can read Tom’s full argument in today’s Globe and Mail. Both sides also presented their case on BNN yesterday with Howard Green. Watch the rerun here.

Blogger Canadian Capitalist published a complimentary posting on Steadyhand the other day. He highlighted four aspects of our firm that we emphasize on our website and in our conversations with investors:

• Low cost
• Concentration
• Co-investment
• Low turnover
  

On this last attribute (low turnover), he rightly points out that turnover in our Global Equity Fund and Income Fund were remarkably high last year. The Global Fund’s audited turnover rate in 2008 was 179%. A note of clarification is necessary, however. This figure is misleading, as it includes cash management transactions that were made in a money market product held in the fund. Put simply, every time the manager redeems money from this short-term instrument, it impacts the turnover of the fund. When these transactions are excluded from the calculation, turnover was a much lower 35%.

As for the Income Fund, we expect turnover to be much higher than in our equity funds, as the manager pursues a number of strategies within the fund and bond managers constantly ‘fine tune’ their portfolios when implementing interest rate anticipation, duration, and other strategies.

Canadian Capitalist and others like him are doing a good job of educating investors on some of the industry’s flaws and dirty secrets while also providing useful tips and advice. His blog is worth a visit if you haven’t already seen it.

By Scott Ronalds

Stock markets have rebounded 25-35% since the lows reached in March.  Feeling uneasy about the recent bounce?  In this podcast, Tom expands on his recent Globe and Mail column and provides some advice to investors who are unsure what to do at this point.

Listen now or subscribe to our podcasts via iTunes or RSS.

Morningstar recently published a comprehensive report on the ‘investment climate’ for mutual fund investors titled Global Fund Investor Experience. The report analyzes the fund marketplace in a number of countries around the world, highlighting the strengths and weaknesses of each.

Overall, Canada received a B grade and placed 7th out of the 16 countries surveyed. The topics of analysis, and the grades issued, were as follows (grades in brackets):

Investor Protection (A)
Transparency in Prospectus and Shareholder Reports (A)
Transparency in Sales Practices and Media (A)
Fees and Expenses (F)
Taxation (C)
Distribution/Choice (B+)
Overall (B)

Sure enough, it was our failing grade in the fees and expenses category (where Canada received the lowest grade of any of the surveyed countries) that dragged the overall score down. The following excerpt on the topic is sure to ruffle some feathers in the advisor community:

“Canadian investors do not pay much attention to fees. Canadian investors are comfortable with the high fees because they don’t know how low these fees should actually be. Assets tend to flow into average- or higher-fee funds because Canadian investors use financial advisors to help them make decisions. Advisors direct client assets to funds that pay better trailers. And since the trailer is included in the MER, the result is that assets flow into higher-fee funds.”

Given the heavy regulation in place in our industry, it’s not surprising that Canada scored an A grade in the investor protection and transparency categories. We would argue, however, that a key topic is being overlooked: transparency in client account statements. Few firms disclose any meaningful fee or performance information in their account statements, which are a key element of the ‘investor experience’. Nonetheless, we applaud the goal of the report, which is to begin a dialogue about industry best practices from the perspective of the shareholder.

We’ll take a stab at starting the dialogue. How would you rank the above topics of analysis in terms of importance to you? Do you feel that any other topics are missing? Post your comments below. And don’t hold back.

We’ve been advising clients that safety is expensive these days. In other words, investors are getting paid very little for holding low-risk assets such as money market products and government bonds. The counterpoint is that the latter securities (government bonds) have provided stable income and attractive capital growth over the last several quarters, while the equity markets have been in a tailspin.

Yet, some would argue that the price of safety has become dangerously high. Warren Buffett has even suggested that there’s a bubble in U.S. Treasury bonds. The term bubble may be misleading if viewed as an event that can lead to a permanent loss of capital. You’re going to get your money back from the government, after all, if you hold these bonds to maturity. But portfolios heavy in ‘governments’ could be vulnerable to a price correction.

Consider the facts. The yield on a 5-year Government of Canada bond is roughly 2.0%, while a 10-year bond is at 3.1%. Both are near historic lows. While they may not increase overnight, interest rates will likely rise over the medium-term once the economy gets back on track and inflation starts to re-emerge.

Our back-of-the-envelope calculations tell us that an increase in rates of 1% would lead to a decrease of roughly 4-5% in the market value of the 5-year bond, and 8-9% in the value of the 10-year bond. If rates were to increase by 2%, the 5-year issue would fall 9-10%, while the 10-year bond would drop about 15% in value.

If you buy government bonds with the intention of holding them to maturity, these numbers don’t mean much, as you’ll receive your original investment back at maturity and collect the coupon payments along the way. But those coupon payments are minimal and if you need to sell your bonds prior to maturity, you could be hit with a loss.

There’s also the opportunity cost to consider. High-quality corporate bonds currently offer a significant yield advantage over governments, and have greater upside potential for price appreciation. The point is that with interest rates as low as they are, safety is indeed expensive.

By Scott Ronalds

Many studies on active vs. passive management draw the conclusion that the latter strategy (more commonly known as ‘indexing’) is superior because it generates higher returns. Notwithstanding the ‘sloppiness’ of some of these comparisons, it is true that many active managers underperform their benchmark. But it doesn’t have to be this way. Most active managers aren’t given a fighting chance. They are burdened by impediments such as high fees, tight constraints and a focus on short-term performance. When these issues are addressed, it’s a different ball game.

In this podcast, Tom expands on the active vs. passive debate. In doing so, he sheds some light on his Globe and Mail article from last weekend, and points to a recent piece on the topic published by Morningstar.

Listen now (the file may take a minute or two to download), or subscribe to our podcasts via iTunes or RSS.

By Scott Ronalds

In this podcast, we review the first quarter of 2009 and discuss how our funds have fared in the current market environment.

While it was another ugly quarter for equities in general, there were some bright spots, with some stocks posting strong gains.  On the fixed income side, the bond market continues to provide positive returns for investors, but with government bonds yielding under 3%, the best opportunities remain in the corporate sector.

Listen now (the file may take a minute or two to download), or subscribe to our podcasts via iTunes or RSS. 

Dig out the white towel and put the razor away. It’s playoff time.

Get in on the action by entering the Steadyhand NHL Playoff Pool. Entry is free, and the winner will walk away with a team jersey of their choice. Tom would suggest a Mats Sundin Canucks jersey, of course.

Register online by clicking here. Enter the pool name (Steadyhand) and password (Steadyhand) in the text boxes to the left of the ‘Sign In’ link and click the drop down box to select ‘Playoffs’. Once you’re logged in, click the Entry Form tab and select your team.

All entries must be submitted by Wednesday (April 15) before 4:00 PM (PST).

Feel free to give us a shout at 1-888-888-3147 if you have any questions.

Good luck to all!

Nobody likes looking at their account statement these days. No matter where you’re invested, returns are ugly. But beyond the numbers, there’s often a lot to be desired. We’ve had a number of statements come across our desk lately from investors who are looking for a new home. And in many cases, the foundation is shaky. One portfolio review in particular prompted the case study below.

Meet Pat and Stephanie. They’ve managed to put away a decent sum of money in their RRSP accounts, but they feel left in the dark on a number of fronts.

They don’t know what the performance of their accounts has been over the past 10+ years. They don’t know what they pay in fees every year. They own a long list of funds and have trouble interpreting their account statements. They’re not sure if they’re following a consistent investment philosophy, and they would like to know more about the decisions being made within the funds they own. Pat and Stephanie want to be more involved in the management of their retirement savings and are ready to explore an alternative to their current advisor.

A close look at their combined portfolio reveals that they own 14 mutual funds. Almost all of them fall under the dreaded deferred sales charge (DSC) category, which means their advisor reaped a handsome up-front commission for essentially locking them into these funds. If they sell, they’ll be subject to steep penalties.

While they are embarrassed to say they don’t know what the overall fee on their portfolio is, they can’t be blamed, as it is nowhere to be found on their statement. A little digging and some math reveals that they currently pay a fee of 2.58% a year on their portfolio of $164,000. That’s $4,230 a year based on their portfolio’s current value. Expressed this way, it makes them squeamish.

Of their 14 funds, they own 5 Canadian equity funds (including an oil & gas sector fund), 3 global equity funds, 2 U.S. equity funds, a balanced fund and 3 income funds. Their asset mix is roughly 65% equities and 35% fixed income. Upon closer look, they own over 700 stocks in their portfolio, with a lot of duplication and no direction. It’s a dog’s breakfast. In essence, they own a very expensive index fund.

After they were presented with the facts, Pat and Stephanie turned to their advisor and asked what the fees would be if they decided to transfer their account. They received a vague answer, “somewhere between 3-6%...it varies by fund.” Not much help. But in other words, they could be hit with redemption fees of $5,000-10,000 if they move on from their current relationship.

The couple wants to simplify, cut costs and put their retirement savings with proven money makers. They’ve committed to move to a new manager the 10% of their portfolio that isn’t subject to DSCs (investors can sell 10% of their holdings in a DSC fund each year without a penalty), as well as some of the funds with lower redemption fees. They’ll transition the rest of their portfolio over time to avoid larger redemption fees.

Pat and Stephanie have decided to take action and seek an alternative to the status quo. Steadyhand was designed for investors like them, and the couple will weigh our concentrated, non-index oriented, low fee approach against a list of other managers they have short-listed. They’ve made an important first step, though...they’re not just standing Pat.

In this, our last posting on the topic (we promise), Tom explains what draws him to Buffett and why he commends his calmness, candidness and common sense approach toward investing. He also expands on Buffett's view that the investment world has gone from underpricing risk to overpricing it, among other observations.

Listen now (the file may take a minute or two to download), or subscribe to our podcasts via iTunes or RSS.

We posted a blog in late 2007 (Edicts from Edinburgh) that highlighted a few excerpts from an interview that Dr. Sandy Nairn, the CEO and founder of Edinburgh Partners Limited (EPL), did with a U.K. publication, Independent Investor.

At the time, Sandy had a number of concerns about the markets and the prevailing economic climate.  He felt that risk was being dropped from the investment lexicon and he didn’t buy the ‘de-coupling’ theory – which proposed that Asia’s economic prospects no longer rested on the health of the U.S. economy and the emerging markets would be immune from a downturn in the western world.

EPL’s chief executive felt there were still good companies with strong cash flows and relatively secure earnings, telecoms and pharmaceuticals in particular.  He also felt there were small pockets of undervaluation in the financial sector.  It was these areas in which the Global Equity Fund’s assets were concentrated at the time.  Sandy was also happy to hold a relatively high weighting in cash (which rose to 20% by mid 2008).

While EPL’s caution proved to be warranted, the Global Equity Fund didn’t escape the ravages of the market decline.  The large cash reserve and emphasis on defensive companies served the fund well, but was largely offset by significant declines in the financial sector.  And as we’ve reported before, there were virtually no areas of the market left unscathed.

Since the first interview, a number of things have changed and Sandy and the team in Edinburgh are much more positive about the prospects for equities.  In a follow-up interview with Independent Investor, Sandy discusses the global investment environment and explains why his attitude has undergone a radical change. 

You’ve no doubt heard much talk about the current opportunities in the market and may have grown tired of the topic, but we feel that Sandy’s assessment is particularly thoughtful and rests on a well researched foundation.  While a little lengthy, the 8-page interview is worth the read if you’re looking to round out your opinion on the prospects for the markets.

Here are a few key takeaways:

• My view is that on most historic comparisons, and modeling what happened during previous recessionary periods, it is hard to argue that equities are now in general any worse than fair value.
• Instead of 18 months ago finding small pockets of undervaluation in a large ocean of overvaluation, I would now describe it more as finding pockets of overvaluation in an ocean of fair value or better.  In some cases, shares are simply, unequivocally cheap once more.
• There’s no consistently predictive way to know when something peaks or when it troughs. The only predictive capability we have, if you have a long term view, is that when something gets to fair value, you have to start averaging your way in.
• In our portfolio, which had 20% in healthcare and 20% in telecoms, those proportions have drifted upwards because of their relative performance. We have started reducing them and putting the money into companies whose earnings growth rates are way ahead of what the pharmaceutical industry, for example, could deliver.
• At current valuations companies with strong growth opportunities look the best risk/reward for the long-run and we are increasing our technology and emerging markets exposure.
• China is the other major area where we have gone from almost zero exposure to north of 6% in a very short space of time. Having believed the ‘decoupling’ story to a ridiculous extrapolation of the economic importance of China, we have seen a complete turnaround in sentiment to the extent that some share prices are down 70-80%. That is creating an opportunity for us to invest with what we regard as some of the best risk reward propositions.
• Now you can find companies with excellent earnings potential at cheap valuations. This really is exciting. It is hard to be excited when the world is beset by bad news but that is why such valuations exist. It is absolutely imperative that you take advantage of them which requires you to accept that it may be a while before sentiment changes and prices start to move in the right direction.

And to leave you with Sandy’s answer to the question on everyone’s mind, ‘Is now the right time?’ - You don’t miss the bus by being early, although you might get cold and bored. Being late though is definitely the wrong strategy.

We noted in a blog last August (It’s Getting Lonely) that Saxon Financial was sold to IGM Financial (Investors Group) in what was yet another example of a direct seller that has turned its focus to the advisor channel.

Morningstar’s Rudy Luukko suggested in an article this week that with the amalgamation now complete, it’s “doubtful whether the Saxon no-load operation will survive.”  If the merger follows the same course as similar takeovers (e.g., Bissett and Scudder), it’s only a matter of time before the no-load version of the funds will be a thing of the past.

The Saxon funds will continue to be marketed and sold as part of the Mackenzie family, but the new ‘advisor series’ versions have higher MERs.  Just what investors need in this type of environment.

To repeat the close of our previous blog on the topic, we find ourselves a little lonelier in the direct-to-client segment, with the majority of fund companies firmly focused on the advisor channel. But Steadyhand supporters should rest assured that our resolve and confidence is stronger than ever. For engaged investors, we still think the Steadyhand approach makes perfect sense. With fewer players in the space, it’s now just a little more “mavericky”.

By Scott Ronalds

Gold was up roughly 1.5% in 2008 (as measured by the S&P/TSX Global Gold Index) – a good year relative to most other investments.  If you used a slick new breed of leveraged exchange traded funds (ETFs), you could have doubled your exposure to the commodity through the Horizons BetaPro S&P/TSX Global Gold Bull Plus ETF, and expected a return of 3%.  Or so the thinking goes.

Problem is, you would have lost money – and a lot of it – if you chose to double-up your exposure to the commodity through the BetaPro ETF.  The fund in question dropped 45% in 2008 (the Bear Plus version was down 84%).  Yet, it did what it was supposed to do.  That is, seek daily investment results equal to 200% of the daily performance of the S&P/TSX Global Gold Index, before fees and expenses.  The key word here is daily.  If the fund’s goal was to provide 200% of the annual return of the index, you would have got what you expected.

Because stock and commodity prices can swing so much from day-to-day, these leveraged ETFs can produce returns that are wildly different from what investors might expect, as was the case with the Gold Bull Plus ETF last year.  With these products, a few large downturns in the price of the underlying investment can wipe out any past gains in a hurry while at the same time reducing the positive impact of any future price gains.  The more volatile the daily price movement, the more the return of the ETF may diverge from the investment it tracks.

Leveraged ETFs are not for the average investor.  As a detailed article published by Morningstar (USA) points out, they are best used by short-term speculators, and by large institutional investors who need to manager their liquidity.  The author issues the following warning:

“They are not meant to be held as long-term investments, and very bad things not only can happen whenever you hold these ETFs longer than their indicated compounding period, you are almost mathematically guaranteed to get a return that is not double that of the index.  In fact, the longer you hold one of these funds, the probability that you will get nothing close to double the returns increases.”

Judging by the increasing number of these products on the market, there is clearly a demand for them, and they can be useful tools for some investors.  But they’re misunderstood by many and unless you’re the gambling type or need a short-term (i.e., one or two day) market exposure tool, they’re probably not for you. 

If you like the low cost and simplicity of ETFs, you’re best to stick with the original versions that track a broad market index and charge a fee of around a quarter of a percent (the management fee of the Gold Bull Plus ETF is 1.15%).  As more features are added to these products, fees creep up and the more they move away from their original purpose – low cost market exposure.  Buyer beware.

In this podcast, Tom chats with Wil Wutherich, the manager of the Small-Cap Fund, about the fund's performance in 2008, the current opportunities in the market, and some of the fund's larger holdings.

Listen now (the file may take a minute or two to download), or subscribe to our podcasts via iTunes or RSS. 

We've mentioned in recent blogs and podcasts that there's a lot of money sitting on the sidelines as tired investors have been pulling out of the market. With the year-end numbers now rolling in, here are some figures worth noting:

• Canadian investors redeemed over $14 billion from mutual funds, the largest year ever of net redemptions. It was also the only calendar year that the industry suffered net outlows since figures were first reported in 1995 (source: IFIC).
• U.S. investors withdrew $194 billion from stock and bond funds (source: Bloomberg). $72 billion was redeemed from domestic equity funds in October alone.
• $155 billion was pulled out of hedge funds worldwide in what was only the second time since 1990 that the industry suffered net outflows (source: Yahoo Finance; Hedge Fund Research). The redemptions were equivalent to roughly 10% of the industry's total assets.

While some of this money went to ETFs and other investment products, a good chunk of it is sitting idle in cash (and equivalents). In Canada, for example, money market fund assets grew by 33% in 2008 to over $70 billion.  Total money market mutual fund assets in the U.S. totaled a whopping $3.8 trillion at the end of the year (up 24% from the beginning of the year).

The extent of these redemptions is a good reflection of the level of fear among investors. At some point, however, sentiment will shift and a portion of this money will be re-deployed in the markets. With a mountain of cash in the waiting, one key ingredient for a healthy rebound is well in place.

In this podcast, we review the fourth quarter and provide our thoughts on the markets going forward.

Listen now (the file may take a minute or two to download), or subscribe to our podcasts via iTunes or RSS.

Starting this year, a new savings vehicle will be available to all eligible Canadians who are at least 18 years old.  Tax-Free Savings Accounts (TFSAs) will enable individuals to invest money in a tax-free structure throughout their lifetimes.

Contributions to TFSAs will not be tax deductible (as they are for RRSPs), but any income and capital gains earned within the accounts will be exempt from tax, and withdrawals will be tax-free.

Within a TFSA, investors will be permitted to hold the same types of investments they can hold in other registered accounts (such as RRSPs).  For example, mutual funds, individual stocks and bonds, and GICs are all considered eligible investments.

For 2009, the contribution limit is set at $5,000 per year.  In subsequent years, the limit will be indexed to inflation (rounded to the nearest $500).  Similar to RRSPs, unused contribution room can be carried forward.  For example, if you contribute $1,000 to an account in 2009, you would be eligible to contribute up to $9,000 in 2010 ($4,000 carried forward from 2009 plus the 2010 contribution limit of $5,000).  Further, if you withdraw money from a TFSA, the amount will be added back to your contribution limit the following year.

Importantly, neither income earned nor funds withdrawn from a TFSA will affect government benefits that are based on your income, such as Old Age Security (OAS) or the Guaranteed Income Supplement (GIS).

For more on the basics of TFSAs, we recommend checking out Canada Revenue Agency’s (CRA) information brochure.

This new vehicle is a winning tool for investors.  Indeed, every eligible Canadian should open an account.  They represent a great structure for tax-free saving, and offer greater flexibility than the existing options (e.g., RRSPs, RRIFs, etc.).

However, as we noted in a blog early last year, TFSAs lack the ‘forced’ savings discipline of RRSPs (because of the latter’s up-front tax deduction and early withdrawal penalties), and investors who turn to these vehicles as their primary source of retirement savings must therefore be careful not to tap into the accounts too often.

Steadyhand will offer TFSAs to existing clients starting today.  Investors who do not have an existing relationship with Steadyhand must open an investment or RRSP account that meets our minimum requirements prior to opening a TFSA.  The minimum deposit for a TFSA is $5,000 per fund.  The new accounts will be grouped with existing accounts for fee rebate and reporting purposes.  In other words, you will be able to view your TFSA account details in the secure portion of steadyhand.com, and you will receive fee rebates (if applicable) on assets held within the account. 

The TFSA application form is available on the Forms & Documents page of steadyhand.com.  If you have any questions on how to open an account, or if you want to discuss how to best incorporate a TFSA into your investment plan, feel free to give us a call at 1-888-888-3147.

As 2008 comes to an end (thank god!), we’d like to thank all of the loyal readers of our blog.  We hope you’ve enjoyed our thoughts, opinions, commentaries, criticisms, musings and satires on investing and the industry that we call home.  Below is a list of our most popular postings for the year, as judged by you, the readers (well, actually judged by Google Analytics according to which postings received the most views).

1. RBC Buys PH&N (Feb 21)
2. Top Business Ideas for 2008 (Jan 2)
3. Get a Reality Check Folks: Those Low-risk Big Yields are History (May 6)
4. Put the Investment Guys Back in Charge (Feb 28)
5. The ETF Diaries – Part V: All Dressed Up and Nowhere to Go (May 13)
6. Mixed Emotions: Sadness, Fascination and Excitement Over the PH&N Sale (Feb 25)
7. Steadyhand Wins Coveted Lippy Awards (Apr 16)
8. Things I’d Like to hear – But Probably Won’t – in the World of Business (Jul 14)
9. Tax-Free Savings Accounts – The RRSP for the Facebook Generation? (Feb 28)
10. Retire 40% Slower (Feb 14)

We look forward to keeping you well informed in 2009.

Happy Holidays!

There was an interesting article in the New York Times last week on Wall Street bonuses – a topic that is enough to make many investors sick, given the sad state of the financial industry.  

Putting aside the debate on whether bonuses should be paid at all in a time when many institutions are sinking, it’s interesting to note how Credit Suisse is rewarding its investment bankers.  Just as these financial engineers were cooking up new ways to package and sell sour mortgage investments and other troubled assets to the unsuspecting public, they’re now being told to eat their own cooking.

As part of their bonuses, the Swiss bank is paying its senior executives some of the distressed investments they were responsible for creating, in lieu of company stock that they normally would have been paid.  As the Times article points out, these investments could pay off down the road (they’ve already been written down considerably), or they could fall further in value.

In any event, the I-bankers are getting a taste of their own cooking, something we at Steadyhand believe is crucial in this business.  All too often, investment professionals have far too little (if any) ownership in the products they create, manage and/or sell to their clients.  To paraphrase from an article that we recently published on this topic (Show me the Money: the Importance of Co-investment), if it’s not good enough for them, it shouldn’t be good enough for you.

While no one will be feeling sorry for the brass at Credit Suisse, at least some investors will take comfort in the fact that they’ll be eating leftovers this holiday season.

A little Saturday humour to perk you up in these troubling times.

The market seems to keep dropping and dropping
Because those damn Yankees couldn’t stop shopping

Through their homes they’ve borrowed a ton of dough
Now they’ve got no equity and little else to show

Credit is scarce, and Wall Street is in trouble
Because nothing was done about the housing bubble

Lenders gave mortgages to folks with no jobs, and little money
Then packaged them up with Triple-A ratings...real funny

Wallets are empty, and the mood is bitter
Cause portfolios have taken a hit, and the economy’s in the shitter

Hedge fund players are being forced to sell due to excess leverage
It seems risk controls were drawn on cocktail napkins over a stiff beverage

Ford, GM and Chrysler are standing on the brink, watching their stock drop
Yet they still can’t make a car that doesn’t spend half its life in the shop

Mutual fund investors are heading for the exits, in a mad dash
At exactly the wrong time to move into cash

Sprott is losing millions, and IPOs have slowed to a crawl
And with PH&N paying full trailers, maybe hell has frozen over after all

But Buffett’s been buying and valuations have rarely been cheaper
Both hopeful signs that this nosedive can’t go much deeper!

This posting is for the bond geeks in the crowd.

The manager of our Income Fund, Connor, Clark & Lunn Investment Management, recently did the following analysis on corporate bonds. 

If you passively buy a portfolio of 5-yr U.S. investment grade corporate bonds today and hold them to maturity, over 45% of your portfolio needs to default before you are worse off compared to a similar portfolio of government bonds. In calculating this, it is assumed that half of the defaults happen in the next year and the recoveries are 30% (i.e. the bond holders get back 30 cents on the dollar in dissolution), which is lower than the long-term recovery average of 40%.  The worst 5-year investment grade cumulative default experience over the past 30 years was under 2%.  During the depression (1931-35) the default rate was 3.9%.

It points out the extent of the negativity being factored into the outlook for the corporate market.  It also highlights why we think the reward/risk balance in the Income Fund is very favourable.

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.