The mining sector has been ravaged over the past two years. Commodity prices have softened, financing has dried up and sentiment has tanked. It’s been a minefield for investors.

Nowhere has the pain been more severe than the Canadian small cap market. Stocks in the Materials sector (which includes metals & minerals, gold, and paper & forest companies) comprise nearly 30% of the BMO Small Cap Index. The sector has declined 45% over the last two years (ending May 31st). Energy stocks make up a further 20% of the index (the sector is down 28%), bringing the combined weighting of resource-focused stocks to 50%.

There have been areas of strength, including technology, industrial, financial and consumer stocks, but because of the market’s tilt towards rocks and oil, the index has fallen 15% since the spring of 2011. The average Canadian small/mid cap equity fund fared better, but still declined 5% over the period (source: globefund.com).

The Steadyhand Small-Cap Equity Fund has avoided much of the carnage. In fact, it’s gained over 25%. This has much to do with the fact that the manager, Wil Wutherich, has largely steered clear of the mining sector (the fund only has one direct holding, Primero Mining).

Wil’s investment approach leads him to focus on established companies that generate steady profits and are well-financed, such that they can self-fund their operations and growth. And of course, they have to trade at reasonable valuations. These types of companies are typically not found in the mining sector.

An outcome of Wil’s approach – and all our managers for that matter – is that the fund will often produce returns that are out-of-synch with the market, as illustrated above. They won’t always be on the good side, though. In 2009, for example, the small cap index was up 75% while the fund only gained 14.6%. If the mining sector has a resurgence, the fund will likely lag behind. Since the fund’s inception in 2007, however, Wil’s approach has added considerable value versus the index (with considerably less volatility).

A final note on resources: The manager doesn’t avoid resource stocks altogether. If a company meets his investment criteria, he’ll give it careful consideration. In fact, Wil has a successful record of investing in energy companies and has increased the fund’s exposure to oil & gas producers over the last few quarters (to the point where they make up roughly one-quarter of the fund). As for mining stocks, he’s been kicking around the rocks but still isn’t finding any gems.

Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The annualized rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.

By Scott Ronalds

We’ve had a cautious view on government bonds for several quarters, as yields are unsustainably low. Our current thinking hasn’t changed. We feel bonds are expensive and have been advising clients to keep them to a minimum in relation to their long-term asset mix.

The yield on 10-year Government of Canada bonds has risen over the last six weeks, from under 1.7% in early May to 2.2% yesterday. This is a sharp move in a low interest rate environment and explains why the Canadian bond market is on track for a weak quarter.

It’s anyone’s guess as to which direction bond yields will move over the next day, week or month. We feel that interest rates are likely to rise over the next few years, however, which is why we’ve been advising caution and projecting lower return expectations for this asset class (when interest rates and yields rise, bond prices fall).

Our focus in this area is on corporate bonds, which are typically less sensitive to movements in interest rates and have higher coupon payments. Our Income Fund also has a shorter than normal average term-to-maturity as a defensive measure against rising interest rates.

By Scott Ronalds

It’s spot prawn season on the west coast. The boats are pulling into Granville Island daily (mere blocks from Steadyhand headquarters) and selling their bounty directly to the public. It’s awesome. They’re live, fresh, sweet and local. And you buy them right from the boat. There’s no middlemen. No commissions. No administrative fees. No packaging charges. No transaction costs. For $12-15 a pound, you get a bag of B.C.’s best.

A short walk away in the Granville Island Market, the same product will cost you 30% to 50% more. You’ll get them in a fancier bag and won’t have to take in any pungent dock & diesel fumes, but they’ll hit you harder in the wallet.

Many spot prawn fans love the direct-to-customer option. It’s cheaper, fresher and is a unique experience. Sadly, the season only lasts for 6-8 weeks (a requirement to ensure the crustaceans’ sustainability).

The direct-to-customer movement is taking hold in many other industries as well (think online retailing) but has been slow to catch on in investment management, in Canada at least. That’s what really stinks.

Prepare for extremes. This is an essential element to being a better investor, and is particularly topical on a day when the Japanese market is down 7%.

Tom expanded on the five essential elements to being a better investor on BNN this morning. You can watch the clip here.

We caught up with Gord O'Reilly earlier this month for an update on the Equity Fund. Gord is a founding partner of CGOV (he's the "O"), the firm that manages the fund.

The portfolio has performed well over the last few years and we wanted to provide investors with an update on CGOV's current thinking and the positioning of the fund.

Topics of discussion include the fund's emphasis on high-quality companies, the role of foreign investments, the manager's thoughts on dividends, and their views on valuations.

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

Gord was firing on all cylinders on the day of filming, so we kept the camera rolling and also updated our 'Overview of CGOV' video, which you can watch here.

Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.

We met with Edinburgh Partners Limited’s Craig Armour recently for a thorough review of our Global Equity Fund. Craig is an investment partner at EPL and manages the fund.

EPL’s investment strategy has been out-of-favour with global markets and as such, performance was a key topic of discussion. Specifically, we reviewed the factors that have led to the poor relative returns (versus the overall market) and whether there have been any changes to the firm’s basic philosophy or decision-making process.

It was encouraging to hear that EPL’s philosophy and process hasn’t wavered. The team remains focused on investing in companies they believe are undervalued based on their 5-year earnings potential. As for personnel, the key decision-makers remain in place and have lots of gas left in the tank (the core group of analysts are in their mid 40’s to early 50’s).

In the current market environment, EPL is focused on businesses with more cyclical earnings because they are being overlooked by most investors and are trading at attractive valuations. Examples of the types of companies in which EPL is finding value include industrial goods & services (Mitsubishi, ABB, Maersk, Safran), technology (Samsung, SanDisk, Microsoft, Google) and automotive (Bridgestone, Toyota, Dongfeng Motor, Johnson Controls).

Conversely, EPL has had only modest investments in defensive stocks, particularly in the last two years. This has hurt the fund’s performance as these stocks have been driving the market’s returns. EPL believes that these more predictable companies (in industries such as health care, food & beverage, and other consumer sectors) are trading at expensive valuations and will generate sub-par returns in the long run.

Craig and the team in Edinburgh believe the divergence in valuation between predictable and cyclical stocks is at an extreme based on historic measures (predictability is expensive and cyclical is cheap) and a reversion to the mean is inevitable. They feel risk is being misperceived and the so-called defensive stocks are vulnerable to a re-valuation. Cyclical stocks, on the other hand, will benefit from a more normal investing environment, and will really kick in when the global economy picks up.

While we place little weight on short-term returns, it’s heartening to see the portfolio perform better in recent months, with many of the above-noted cyclical stocks being key contributors. Notably, investments in Japan are bearing fruit as share prices in the region are recovering sharply.

To bring EPL’s thinking to life, we spent a fair amount of time in our meeting talking stocks. In the video below, Tom and Craig revisit some of the questions from our review, and discuss a few notable holdings.

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

Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.

We held our annual strategy session on Wednesday afternoon. Every year we lock ourselves in a room for 4-5 hours (or more), tune out the outside world, review the current state of our business and hash around ideas, thoughts and strategies on the future direction of the company. There’s lots of discussion, debate and of course, caffeine.

Some of the topics and questions on the table this year were:

• Helping our clients become better investors – Bringing the concept of Strategic Asset Mix (SAM) to life; setting realistic return expectations; providing more education sessions & tools
  
• Potential long-term investment opportunities for our clients that we’re not addressing
  
• The performance and positioning of the Global Equity Fund
  
• Assessing the Founders Fund’s first year
  
• Identifying key business risks and vulnerabilities, and strategies to mitigate them
  
• Adapting to a new rate of growth and ensuring that we maintain our quality of service and personal touch
  
• Increasing the “network effect” (word of mouth, referrals, etc.)
  
• Should we publish another book? It’s Still Not Rocket Science
  
• Live chat – should we introduce a ‘live chat’ tool on our website?
• Enhancements to the client portal
  
• How can we further simplify Steadyhand for our clients? (better forms, account statements, access to new tools & resources)

While we didn’t solve all of the world’s problems, we walked away jazzed about the future of Steadyhand. Tom and Neil will spend a few days digesting all the discussion and prioritizing the action items. We have some cool ideas and projects in the works, all aimed at enhancing your experience as a client.

Ultimately, many of the issues we discuss come from feedback we receive from our clients, and on that note, we’d love to hear from you. If there’s something you think we should be strategizing about, post a comment below.

By Scott Ronalds

It was a strong start to the year for stocks around the globe, with the MSCI World Index gaining 10% (in Canadian dollar terms). U.S. and Japanese stocks were among the top performers, while Canada was one of the weaker performing markets (up 3%) as a result of its heavy weighting in gold and mining stocks. Bonds also had a positive quarter, albeit a much more modest one, led by a strengthening in corporate and provincial bond prices.

Our funds fared well in the quarter, with a tilt towards foreign stocks and corporate bonds being key factors. As for asset mix, we continue to recommend a full allocation to stocks (in relation to your long-term asset mix), a below-average position in bonds and a healthy cash weighting. As a reminder, this positioning is best reflected in the Founders Fund.

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

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

From our Quarterly Report:

“The Dow hit a new high. How much further can the market go? … Alcoa is the first major corporation to report quarterly earnings and will set the tone for what’s to come … the technical indicators are telling us … time for a pullback … the next bull market starts in …”

The only time I watch business television is when I’m travelling and unfortunately, I’ve been on the road a lot lately. I listen to this stuff and it drives me crazy (ask Lori). I find myself talking to the screen, even screaming at it sometimes.

What about the Dow? It’s a ridiculous index to begin with and the new high was overdue. The previous one was getting old (6 years). If the market goes up 20% over the next 3 years (a reasonable expectation), the Dow could hit 80 new highs. And are you kidding me? A highly cyclical aluminum producer is going to tell us anything about the ability of Cisco, CN Rail or BMO to generate long-term profits?

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

We’ve had a lot of calls lately from investors looking to purchase our funds through discount brokers. The questions often relate to availability, fees and fund codes. There seems to be some misinformation on the topic, so we felt it was a good time to clear the air.

Our funds are available through a number of providers (see the complete list here), several of which charge no commissions for purchases, including QTrade, BMO Investorline and Scotia iTrade.

Some institutions charge an upfront commission to purchase our funds, which can range from $9.95 up to 2.5% of the purchase price. Questrade, for example, charges a transaction fee of $9.95, while TD Waterhouse charges a purchase commission which ranges from 1% to 2.5% depending on the size of the purchase. To be clear, this is not a fee levied by Steadyhand. We have no control over it and do not receive any portion of it.

It’s understandable for discount brokers to charge a fee (if reasonable), as they make no money by offering our funds. This is also why it may be more cumbersome to purchase our funds through certain providers. For example, trades may have to be placed over the phone, rather than online, and investors may be required to know the fund codes when making transactions (see below).

A few discount brokers, unfortunately, have chosen not to offer our funds because we don’t pay trailer fees, which are ongoing commissions meant to compensate financial advisors for their services (discount brokers by regulation do not provide advice). RBC Direct Investing falls into this camp; they do not offer funds from several other no-load, low-fee companies as well. Their decision has not been a popular one among investors and industry observers (more here).

Many investors choose to purchase and hold our funds through discount brokers so they can have all their investments under one roof, which is perfectly understandable. As a reminder, though, our funds can be held directly with us, and the process of opening an account isn’t that painful. Direct Investors may benefit from: (1) greater fee rebates (we consolidate all household accounts when calculating rebates), (2) clear-cut advice at no charge, and (3) transparent reporting and account statements.

For reference, our fund codes are as follows:

Steadyhand Savings Fund – SIF110
Steadyhand Income Fund – SIF120
Steadyhand Founders Fund – SIF125
Steadyhand Equity Fund – SIF130
Steadyhand Global Equity Fund – SIF140
Steadyhand Small-Cap Equity Fund – SIF150

It’s stingy times for income investors. Government of Canada bonds are yielding less than 2% (5-year maturities are at 1.3% and 10-year maturities at 1.8%) and high quality corporate bonds are only 1-1.5% higher. Dividend-paying stocks are paying relatively attractive yields, but come with greater risk.

All of this to say that income-focused investors should be prepared for lower income payouts on their funds, and in some cases distribution cuts. Products that pay distributions north of 5% are most at risk. In today’s environment, it’s simply not feasible for a fund to pay out such a high distribution without (1) investing primarily in junk bonds or high-yielding stocks (which comes with its own set of risks), or (2) returning a portion of the original investment (known as return of capital, or ROC).

A case in point is the $4.3 billion BMO Monthly Income Fund. The fund, which invests in a combination of bonds and stocks, has been paying a monthly distribution of $0.06/unit, which equates to an annual yield of close to 10%. Industry expert Dan Hallett (HighView Financial) has been writing about the fund for two years (as have we) and has questioned the sustainability of its distribution. Well indeed, in a post last week Dan highlighted that BMO intends to cut the distribution by 60% to $0.024/unit. He noted that this is a good news/bad news story – good because it will improve the sustainability of the distribution; bad because it will hurt investors who have come to rely on the payout.

This brings us to the Steadyhand Income Fund. This fund has historically paid a fixed distribution of $0.10/unit for the first three quarters of the year (March, June, September) and a variable year-end distribution which has ranged between $0.10 and $0.53/unit. In annual terms, the distributions have added up to a yield of between 4% and 8%.

In determining the fixed distribution, we try to anticipate the interest and dividend income that the fund will generate over the year, as well as the amount of capital gains or losses that may be realized. We’re trying to find a balance between conservatism (we don’t want to have to lower the year-end distribution) and not having excessive gains build up in the fund. Picking a distribution rate is more art than science due to the variability of capital gains/losses.

We feel the Income Fund’s current quarterly distribution of $0.10/unit is appropriate for the time being. The fund’s pre-fee yield is running around 3.5%. While there is no guarantee that capital gains will supplement the interest and dividend income, the fund is in a strong position in this regard. As always, we will revisit our estimates throughout the year to determine if the fund is still on track to meet its payout. If the yield on the portfolio drops further and/or we determine that the fund is unlikely to generate any capital gains, we will cut the distribution. (Note: The Founders Fund, which currently pays a fixed quarterly distribution of $0.05/unit plus a variable year-end payment, is in the same boat.)

Investors in our Income Fund and Founders Fund who take their quarterly distributions as cash payments (rather than reinvesting them into additional fund units) should thus be prepared for a potential distribution cut as a reflection of the current low interest rate environment. Again, these are stingy times for income investors.

Quick background: CGOV Asset Management is the manager of our Equity Fund. The firm has a distinct investment process, one facet of which is that they won’t own more than 25 stocks. We love this discipline as it ensures they focus on their best ideas and don’t dilute the fund with ‘filler stocks’. If they are at the upper limit of holdings and see a new investment opportunity they want to add to the portfolio, it has to be more compelling than one of the existing investments in the fund.

This situation recently unfolded with Westshore Terminals (buy) and Rogers Communications (sell). Westshore is the largest coal loading facility on the west coast of North and South America. It generates revenues based on volumes of coal exported through the terminal to 20 countries around the world (with heavy volumes to Asia). It is one of the few ‘pure-play’ infrastructure stocks in North America and has promising growth prospects given the rising levels of resource consumption in Asia. The company has been on CGOV’s watchlist for a while but the stock’s valuation had never been compelling enough to add it to the fund (and displace another holding).

Along came Cape Apricot, a cargo ship that crashed into one of Westshore’s two berths in December and put it out of service for several weeks (sending the stock down too). By mid-February, the company had made sufficient repairs to permit resumption of normal operations, but at this time Westshore announced a $210 million capital expenditure program which will replace some older equipment and enhance operational efficiencies. To fund the program, the company announced that it plans to fix its dividend (at $0.33/quarter) until 2017 and issue short-term debt. This disappointed investors, as Westshore has historically paid a high, rising dividend (albeit volatile at times) and has been a popular holding for income investors. The stock slid on the news and by late February had fallen close to 15% since December.

Around the same time as the Westshore cap-ex announcement, Rogers was reaching a new high. In fact, the stock had risen about 50% over the past two years. It had been a profitable holding in the fund, but was no longer cheap in CGOV’s view. Considering the price decline in Westshore and the fact that the business remains solid and will have a fully modernized facility in a few years’ time, the manager decided that Westshore represented a more attractive investment than Rogers. The former was bought and the latter was sold – an example of the 25 rule in action.

The latest edition of The Economist has a special report on America’s competitiveness, titled Cheer Up. It examines the areas which are the “source of the most hand-wringing” among observers: innovation, energy, education, immigration, infrastructure and regulation. The six-part report argues that America’s growth prospects are brighter than they seem, despite the glaring and well publicized problems the nation faces – namely crippling debt and dysfunctional politics.

Much of the media coverage on the American economy tends to be negative. The Economist report attempts to look beyond the problems in Washington and provides a more balanced assessment, acknowledging both the challenges and opportunities that the U.S. faces. It’s a good read for investors with questions and concerns about our southern neighbour. Some interesting takeaways:

Innovation – The U.S. remains the world’s biggest spender on R&D (research and development), which as a share of GDP remains close to an all-time high.

Energy – New technologies, specifically hydraulic fracking and horizontal drilling, have led to a boom in the oil & gas industry, with key outcomes including new jobs, tax revenues and cheap energy (American factories pay a third of the German natural gas price and a quarter of the South Korean price).

Education – American schools are getting the biggest overhaul in living memory, with the emergence of charter schools, new pay structures and incentives for teachers and principals, and new curriculums.

Infrastructure – With federal and municipal funding squeezed, creative solutions are arising in the area of public-private partnerships to encourage investment in roads, bridges and tunnels.

The report is available in print and on The Economist’s website.

The Canadian clients of Ally Financial got news this week that the sale of the firm to RBC has been completed, the interest rate on their high-interest savings accounts is being reduced from 1.8% to 1.2%, and their accounts will be closed on April 30th, as reported in the Globe and Mail. The notice has caused outrage with many Ally clients and lit up the twittersphere:

• @Greggwfg: RBC buys Ally and lowers the Ally client account interest rates from 1.8% to 1.2%...could it be any more obvious how greedy these banks are?
  
• @jacquiemcnish: There goes competition, again in banking sector. RBC to shut down Ally’s high-interest savings accounts
  
• @GailVazOxlade: Bite me RBC! Check out the options peeps: http://t.co/ItjO7t9KrV

Contrary to Ally’s tag line, it’s clear that many of their clients don’t think this move is “Just the right thing to do.” It’s funny, but I feel like I’ve lived this story before. It reminds me of a clever ad I saw a year or so ago.

We wrapped up our cross-country client presentations this month after visiting five cities.

If you weren’t able to attend one of our sessions, or are looking to revisit some of the themes we touched on, we’ve produced a summary of the event that hits on the key topics of discussion (click here to download).

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

The Asia Pacific is the fastest growing economic region in the world. Not surprisingly, many multinational companies are increasingly focusing on selling their goods and services in countries such as China, Indonesia, Singapore, Vietnam, and the Philippines among others, where populations, consumption and incomes are growing.

A result of this increasing globalization is that a company’s physical headquarters may say little about where it generates its revenues. This is illustrated clearly in our Global Equity Fund. The chart below shows that over 33% of the fund’s revenues are generated in the Asia Pacific (excluding Japan), yet only 20% of the fund’s investments are headquartered in the region. Many U.S., European and Japanese-based holdings, however, generate a large share of their sales in Asia as opposed to their domestic market.

Another takeaway from the chart is that the Global Fund remains heavily focused on Asian and European markets, as opposed to North America. This is a reflection of where the manager (Edinburgh Partners) is finding the best opportunities – i.e. cheap stocks.

Investors have had a real love for income and dividends over the past several years. And for good reason – bonds and high dividend-paying stocks have been stalwart performers. But the quest for yield may be leading to imbalanced portfolios. Investors who have loaded up on ‘dividend darlings’ such as banks, pipelines, utilities and real estate investment trusts (REITs), may be missing great opportunities in other industries. Further, valuations for bonds and many income-equities are not as attractive as they were five years ago, especially in relation to other sectors of the market.

In our view, balanced investors should focus on total return first (income, dividends and capital appreciation) and income second. There are many ways to generate an income stream from a portfolio. What’s important is that the stream is not being fed from a drying source.

Tom expanded on this topic this morning on BNN. You can watch the clip here (approx. 8 minutes).

By Scott Ronalds

It’s that time of year: holiday bills, new diets, bleak weather, and RRSP contributions. Not exactly exciting stuff. Bruce is a little more jazzed than many investors though. He reviewed his account statement last week and found that his portfolio at Steadyhand was up nearly 12% last year (since starting with us two years ago, his portfolio has gained approx. 6.5% per year).

“Grinning ear to ear”, he noted in an email to us. While we love his enthusiasm, we reminded him that he shouldn’t get too excited over one good year. He needs to stay on track with his savings and investment plan and be prepared for some more inevitable bumps down the road. We also reiterated our cautious views on the bond market and stressed that the Small-Cap Fund isn’t going to return 17% every year. Probably not what he wanted to hear, but again, it’s that time of year.

Bruce and his wife Courtney plan to contribute $20,000 to their RRSPs this week ($12,000 Bruce; $8,000 Courtney) and they asked us for our advice. We reviewed their fund mix and noted that while their portfolio is still in-line with their strategic asset mix (SAM), there are a few minor adjustments they could make. Strong performance from the Equity Fund has meant that it has crept higher in their mix, and their weighting in fixed income has declined modestly (due in part to a redemption from the Savings Fund last year). They can use the contributions to bring their mix closer to its target.

Bruce has a few biases that he wanted us to consider in our recommendation: (1) He’s weary of bonds, (2) he’s been disappointed with the Global Fund, and (3) he loves the Small-Cap Fund. We took this into consideration, while also stressing the importance of diversification.

We felt it would be appropriate to hold some more cash (Savings Fund) in lieu of bonds (Income Fund), but also recommended that the couple not shy away from global stocks. We suggested they allocate their contributions as follows:

$6,000 – Savings Fund
$4,000 – Income Fund
$6,000 – Global Equity Fund
$4,000 – Small-Cap Equity Fund

This would bring their fund mix to:

Savings Fund: 7%
Income Fund: 29%
Equity Fund: 26%
Global Equity Fund: 25%
Small-Cap Equity Fund: 13%

Bruce and Courtney agreed with our recommendation (even the Global Fund, reluctantly) and plan to make their contribution later this week. They’re also looking forward to our upcoming client presentation on February 6th. Bruce, in particular, hopes to score some more Steadyhand swag this year.

More on Bruce:
Meet Bruce
Trimming Bonds with Bruce
RRSP & TFSA Contributions 2012
California Dreaming

Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.

By Scott Ronalds

My wife dragged me to a spinning class last weekend. It was a humbling event for my quads, hamstrings and calves. They’re still cursing me.

Nevertheless, it was an inspiring experience. The lights were low and the music high. Everyone in the room was focused intensely on the instructor’s cues and was content to turn the tension dial to self-inflict a higher level of pain (and gain). I quickly learned their ways. A wave of the hand brought more water. A grunt of pain brought more satisfaction. A swipe of the towel brought more sweat. It was an impressive bunch. This was a small group of people hugely dedicated and passionate about an idea (punishing a stationary bike). It was a tribe.

Tribes are everywhere, and they’re growing rapidly. Think about the yoga movement, Apple users (iEverything), and as hard as it is to believe from a Vancouverite’s perspective, Leafs Nation (the devoted fans of the Toronto Maple Leafs). Author and entrepreneur Seth Godin has written a book on the explosion of tribes (aptly titled Tribes), in which he suggests that the internet has removed many barriers (geography, cost, time) to like-minded people getting together to share ideas and experiences, make a difference, or support a cause.

There are even investing tribes. Warren Buffett draws tens of thousands of value investors to Omaha, Nebraska every year to hear him speak at his company’s annual meeting. ETF investors (exchange traded funds) are a fast growing group who are passionate about indexing. And Vanguard, the largest U.S. fund company, has a dedicated client base who love the idea that the company is owned by its investors.

And then there’s the Steadyhand tribe – a zealous lot of individuals committed to a unique investing experience. They own no more than five funds. They want a portfolio that looks different than the market. They wear T-shirts that say things like “concentrate dammit!” They know to the penny how much they’re paying in fees. They adore simplicity. They like the fact they’re not dealing with a bank or gigantic fund company. And they have the reporting tools and advice to keep their portfolio in good shape – no stationary bike required.

By Scott Ronalds

We’ve said it many times, but 2012 was another reminder that market returns don’t often match up with what we’re seeing in the headlines. In many respects, the economic news in 2012 was ugly. The U.S. grappled with the fiscal cliff, mounting debt and political bickering. The sovereign debt and unemployment issues is Europe lingered, China was dealing with slowing growth, and weak commodity prices were front and center in Canada. Yet, most stock markets had a strong year.

The U.S. (S&P 500 Index) was up 16%, many European markets gained more than 20%, and Japan and other Asian markets also turned in double-digit returns. Canada (S&P/TSX Composite Index) was among the weakest, but still gained 7%.

Bond returns weren’t as strong, but the Canadian bond market (DEX Universe Bond Index) nonetheless returned 3.6% in an environment where 10-year government yields are less than 2%.

All said, it was a good year for investors, and especially Steadyhand investors. In this podcast, we review the performance of our funds and highlight some of the key messages from our Quarterly Report.

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

From our Quarterly Report:

In the Q4 brief last year, my goal for our clients was “another unremarkable year”. We had come through a tough period in the markets in good shape, but with interest rates even lower and the economic and political outlook looking scary, ‘unremarkable’ seemed like a reasonable target. Fortunately, my aim was low. Portfolio returns in 2012 were much better.

The factors that fueled 2011’s modest returns were the same ones behind 2012’s healthier numbers. It was a good year for corporate bonds, high quality companies (strong cash flow, little or no debt, growing dividends) and yes, foreign stocks. All of these types of securities were prominently featured in our funds. While my big picture views have been ‘approximately right’, our fund managers have been ‘right on’ with their allocations and security selections. All in all, our balanced clients again achieved returns well in excess of the indexes in 2012.

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

Turns out the world didn’t end in 2012. A good thing, really, as Tom and I had a lot to write about. With over 120 posts, our updates, explanations, advice, observations, opinions, musings, rants and ramblings were well received, despite the odd scathing comment (thanks Mom).

Below is a list of our most popular posts in 2012, as judged by you, the readers (well, actually judged by Google Analytics according to which postings received the most views).

1. Canadian Real Estate – More Reasons for Caution (April 25th)
2. Introducing the Founders Fund (February 21st)
3. Real Estate as an Investment? Look Elsewhere (March 17th)
4. Uh-Oh Canada (November 28th)
5. My Toughest Five Months (April 10th)
6. Asset Mix Update (June 11th)
7. Equities: The Most Despised Asset is Poised to Surprise (June 9th)
8. First Rant of 2012: RRSP Transfers (January 10th)
9. Market Support (June 15th)
10. Introducing Emmylou (March 6th)

Thanks to all our loyal readers! We look forward to keeping you well informed in 2013.

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

The Investor Education Fund (a non-profit organization funded by the Ontario Securities Commission) has a cool interactive chart on their website that shows the historical returns – from 1935 to 2012 – of various stock markets, bonds and T-Bills, along with inflation and the prices of gold, oil and housing.

The chart also has historical data on interest rates and exchange rates (between the Canadian and U.S. dollar), along with features that illustrate the best and worst 5-year returns for various asset classes, and the dangers of market timing.

Investors today are slammed with short-term economic news, short-range market predictions, and an ever-increasing array of products trying to capitalize on the latest trend. Stepping back to look at the long-term big picture helps put things in perspective. Give it a try.

By Scott Ronalds

It’s been another year of troubling economic headlines, slow growth and political stalemate. Yet, unless Santa gets run over by a reindeer, many global stock markets will finish the year with nice gains. Even the bond market, with its naughty yields, has gained ground in 2012.

As the year comes to a close, we’re gratified with the strides we’ve made and the returns our clients have achieved. It’s been a productive year around the shop. In this year’s Holiday Letter, we reflect back on some of the highlights.

Happy Holidays!

The year-end distributions for all our funds (with the exception of the Savings Fund) will be declared on December 14th and paid on December 17th. 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: $0.24/unit
  
• Founders Fund: $0.18/unit
  
• Equity Fund: $0.40/unit
  
• Global Equity Fund: $0.05/unit
  
• Small-Cap Equity Fund: $0.22/unit

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

Important: Investors considering purchasing units in the funds in non-registered accounts may wish to delay any purchases until after the distributions have been declared on December 14th.

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

At the annual Morningstar Canadian Investment Awards last night in Toronto, the Steadyhand Income Fund was recognized as the Best Canadian Balanced Fund.

We’re a modest bunch at Steadyhand when it comes to awards and recognition, most of the time at least. We have trumpeted our leading Morningstar Stewardship Grade, however, and have been known to brag occasionally about our website. But we feel the Stewardship Grade measures important attributes about our company while the website … well … we’re just bragging.

We’ve always been uneasy about performance-based awards, as they are backward looking and can be based on short measurement periods. That said, we’re pleased with the recognition received last night. Morningstar is a leading fund research company and we respect their analysts and qualitative judgment. The award says our clients have done well.

The Income Fund is a key component in most of our clients’ portfolios. We think it’s well positioned to be a leader going forward, yet we don’t kid ourselves or our clients. The fund is not going to produce high single-digit returns in an environment of 2% interest rates, a message we’ve repeatedly communicated to investors. We feel a realistic annual return assumption over the medium term is more like 3-5%.

With the award may come more attention from new investors to whom this message will not be very enticing. But it’s an example of candid communication that helps make our clients better investors. Maybe even the best investors. There’s that modesty thing again.

Connor, Clark & Lunn, the manager of our Savings Fund and Income Fund, produces an outlook every month on the economy and capital markets. Their recent commentary on Canada is particularly clear, candid, and sobering. CC&L’s views on the US and China, on the other hand, are more optimistic. Below are a few excerpts from the report that, although lengthy, investors may find informative.

Canada

“Oh Canada” — one of the best places on the planet to live. Besides our civil society, Canada is a bastion of fiscal prudence and sound economic planning ... A lot of our good fortune has come from previous sound fiscal practices and we’ve been a big beneficiary of rising commodity prices which has shown up in our national accounts, employment trends and terms of trade. However, a closer look shows some cracks in this fiscal facade. Take for instance Canada’s debt picture. It is true that net federal debt as a percentage of GDP is only 33%, compared to an average of nearly 80% for the G7 countries, but when provincial liabilities are added into the equation the gross consolidated figure jumps to 103%. This puts Canada ahead of the UK, Germany, France and Spain and just behind the US at 105%.

Unfortunately, it appears that the fiscal situation is not going to get better any time soon … A weakening in commodity prices, a struggling manufacturing sector, and structural revenue issues related to previous cuts in the GST are largely to blame. Also, provincial governments are increasingly between a rock and a hard place because the vast majority of Canada’s social programs, such as health care, social assistance and education, fall under their jurisdiction. Rising costs in these sectors continue to run ahead of revenue gains at a time when the public has no appetite for tax increases.

Another crack in the fiscal facade is the state of the Canadian consumer who is increasingly becoming overleveraged (too much debt). This has largely come about because of the housing market. House prices have been on a rampage for over a decade, increasing by over 100% thanks to cheap and easily available financing. It has now got to the point that household debt to income ratios in Canada are well in excess of the levels reached in the US prior to the burst in their housing bubble … Of course any rise in interest rates will only exacerbate the situation and the virtuous circle of falling interest rates, rising home prices and increased economic activity will come undone.

The third crack in the fiscal facade is on the revenue line. From a historical perspective the secular move in commodity prices is extended in terms of its magnitude and duration and it increasingly appears that the secular bull market is coming to an end. The supply/demand equation is deteriorating and it appears that the financial demand for commodities as a hedge against depreciating currencies has largely run its course. Over the long term, relative pricing power has not resided with commodity producers but with those entities that bring the highest value added to the supply chain. These factors point to the eventual regression of prices back to the long-term declining trend that has occurred in real commodity prices over the past 200 years.

The bottom line is that the state of Canada’s fiscal house is not as rock solid as one might think. Longer term this could have some negative ramifications if things continue on their current track. As such, we need to be vigilant in monitoring the housing market, commodity prices, productivity gains and the level of the Canadian dollar. All of these factors will impact the country’s fiscal position and in turn our future rate of economic growth and financial market returns.

The US and China

In terms of the US, while the looming fiscal cliff has the potential to push the economy into recession, we are still of the opinion that saner heads will prevail even if negotiations drag out to the very last minute. In the meantime, the underlying fundamentals for the US economy are relatively good. The Federal Reserve is in an accommodative mode and will remain so because there are no impending capacity constraints. Pent-up demand is huge, the housing market has turned, the employment picture is improving and consumer confidence is rising. In addition, American manufacturers are very competitive because of strong productivity gains, a weak dollar and low energy costs relative to the rest of the world. Finally, even the fiscal cliff may turn out to be a net positive (psychologically) if its resolution leads to the US budget being put on a sustainable path without unduly impeding economic growth.

A pickup in US growth will also be of benefit to China where there are now some early signs that the country will experience a soft landing. Money supply and credit growth have improved, monetary policy remains accommodative, investment in fixed assets is picking up, trade numbers are firming thanks to strength in both domestic demand and exports and the political leadership transition appears to have gone relatively smoothly.

While CC&L’s views on Canada’s fiscal house are temperate, the manager nonetheless has a positive outlook for stocks at home, and more so, abroad. They feel that valuations are attractive and the outlook for global growth is improving. The Canadian market outpaced many global markets over the past decade, but the tide always turns at some point, which is why geographic diversification is key. This is a message we have repeatedly been emphasizing and is reflected in the make-up of our funds.

The federal government announced today that the annual contribution limit for the TFSA is being increased from $5,000 to $5,500, starting in 2013. A feature of the TFSA is that the annual contribution limit is indexed to inflation, in $500 increments. 2013 will be the first year in which the increment takes effect. The full release is available here.

The TFSA is a great savings vehicle and all eligible Canadian investors should have an account. For a refresher on their attributes and benefits, click here.

Related reading:
My TFSA Strategy
TFSA Overcontribution Nightmares
Tax-Free Savings Accounts – The RRSP for the Facebook Generation?

By Scott Ronalds

I saw the new Bond flick, Skyfall, the other day and walked away with a smile on my face, knowing that the British Secret Intelligence Service (also known as MI6) is still well positioned to save the world from evil villains and vixens.

Being immersed in this industry for the past decade and a half, I’ve developed a bad habit of relating all things to investing, including 007. When Bond was sipping his famous vodka martini in the movie, I was wondering if shares of Diageo (Smirnoff, Ketel One) were shaken last week. When a psychotic ex-agent was hacking into Britain’s mainframe, I thought of the challenges and opportunities that lie ahead for software and computer security companies. When 007 discovered that his parents’ estate in Scotland was up for sale, I got thinking about the U.K. property market. You get the picture. It’s a real problem.

Taking it one step further, I started considering what kind of investor James Bond would be. Surely he would have a high tolerance for risk and an appreciation for global diversification. He’s got ice water in his veins and has been schooled by MI6 in discipline and patience, so emotion shouldn’t get in the way of good investing behaviour. As for his personal situation, he’s single, reasonably young, doesn’t have any dependents and earns a good salary (with some nice perks). And it’s reasonable to assume that he has a healthy government pension from his years of service to the crown. All of this means he can take on more risk in his portfolio.

So what kind of asset mix and Steadyhand portfolio would be suitable for the secret agent? I’d recommend a heavy equity weighting, with a bias towards foreign and small-cap stocks. A dash of corporate bonds would provide some income and credit exposure. And perhaps a bit of cash for a buying opportunity in the market or an unexpected emergency. You never know when you’re going to need a new jetpack or submersible Aston Martin.

I’d steer Bond towards the following fund mix:

5% Savings Fund
15% Income Fund
20% Equity Fund
35% Global Equity Fund
25% Small-Cap Equity Fund

The estimated long-term asset mix of this portfolio is 16% fixed income, 48% foreign equities, and 36% Canadian equities. It wouldn’t be appropriate for many investors. But we’re talking about Bond here. James Bond.

You’ve likely heard the term fiscal cliff lately. A catchy, if not chilling phrase, but what does it mean?

Put simply, it refers to the combination of (1) billions of dollars of tax increases and (2) widespread spending cuts to government programs, all set to take effect in the U.S. on January 1st. The worry is that the sudden impact of these measures would be too much of a shock for the economy, and may lead to a recession. The so-called cliff can be avoided if the President and Republicans can agree to extend current tax cuts and spending programs, and work together on alternative solutions for reducing the deficit.

The New York Times published a Q&A piece yesterday that provides some excellent background and seeks to demystify the fiscal impasse. It’s a good resource on this craggy dilemma.

It just got a little greener in Seattle. Bloomberg reported last week that Microsoft recently raised $2.25 billion by issuing 5, 10 and 30-year bonds. And they did it on the cheap. The 5-year notes were issued at 0.875%, the 10-year bonds at 2.125%, and the 30-year notes at 3.5%.

A recent article in The Economist (Desperately Seeking Yield) reported that large firms are raising money in the bond markets at the lowest cost in living memory and at a near record pace.

Many of these companies, including Microsoft, don’t need the cash. They’re raising it because it’s there for the taking at an exceptionally low cost.

We’ve written several times about the “strong getting stronger” in the current economic environment. This is another case of a market leader taking advantage of current conditions to strengthen its business.

By Scott Ronalds

We introduced Emmylou back in March. As a reminder, she’s a fifty-something Winnipegger with a love for yoga, travel and the occasional pale ale.

Emmylou has been a Steadyhand client for eight months now. She holds the Founders Fund across her three accounts (RRSP, Tax-Free Savings Account and Investment Account) and her portfolio has gained about 3.5% since she signed on at the end of February.

With autumn briskly announcing itself in the Peg, Emmylou recently got more serious about planning a long desired excursion to Europe next spring/summer (a trip she thought would wait until retirement). She spoke with her boss and cleared three months for an unpaid ‘sabbatical’. Emmylou has a keen interest in history and has been researching archaeological projects that are looking for volunteers. She’s found sites in Scotland, Spain and Greece that have piqued her interest. Although she hasn’t finalized any details yet, she plans to volunteer at two digs and spend the rest of her time exploring Europe (making her own history).

It all sounds great, except the cost. Emmylou figures the trip will set her back roughly $25,000. She invests most of her savings so will need to tap into her investments to fund the adventure. Two questions jumped to mind: (1) When to redeem the funds? (now, or right before she leaves?) and (2) Which account to redeem from? (Investment Account or TFSA?) She called us for advice.

We recommended that Emmylou set aside the funds now, rather than wait until next spring or when the bills come due, to avoid selling at a potentially inopportune time. We suggested that she switch $25,000 from the Founders Fund (her only holding) to the Savings Fund, and redeem the money from the Savings Fund when required next year. This way, she will still earn some interest on the money (albeit modest) and it will not be exposed to market fluctuations. We noted that Emmylou may earn a slightly higher rate of interest if she were to redeem $25,000 and invest it in a high interest savings account at an online bank (e.g. ING or Ally). She prefers the simplicity, however, of holding all her investments at one firm.

As for which account to redeem from, we recommended she withdraw from her Investment Account rather than her TFSA, as it’s a less tax efficient account and she should aim to keep the maximum amount possible invested in her TFSA. Further, she has a healthy balance in her Investment Account. The redemption will trigger a small capital gain, which prompted Emmylou to question whether it makes more sense to redeem the money from her TFSA. If she did this, her intention would be to replenish her TFSA next year with funds from her Investment Account. We noted that she could trigger a potentially larger capital gain at that point, and a wise option is to therefore redeem from the Investment Account and keep the tax-free account (TFSA) fully invested.

Emmylou digged the advice and is now busy brushing up on her Spanish.

Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

“It’s been a long, hard slog for [global] value stocks lately. I’d say we’re long overdue for a value recovery ...”

These words from AllianceBernstein (a global asset management firm) echo the sentiment of our global manager, Edinburgh Partners. In a recent article – A Recovery in Value Stocks is Long Overdue – Bernstein points out that the cheapest global stocks have logged some of their worst relative performances in 40 years.

In our last few Quarterly Reports, we’ve outlined some of the reasons why our Global Equity Fund has underperformed. A key explanation is the fund’s distinct value tilt, or focus on stocks with low price-to-book value ratios (P/BV) and low price-to-earnings multiples (P/E). In other words, companies that have some warts, or are more cyclical, and are trading at cheap valuations. These stocks have been out-of-favour, as global investors have been focused instead on companies with safe, predictable earnings. We expanded on this in a blog posting last month.

The current valuation spreads (discrepancies) between cheap and expensive stocks are significantly wider than normal, and Bernstein illustrates this in two convincing charts. They suggest that a value comeback is close at hand: “This disregard for valuation is atypical. Value stocks have been hands-down winners over the long term ... At some point, valuations relative to earnings power become too enticing to pass up.”

We’ve been communicating the same message for several quarters and understandably, it may be getting tiresome. Yet, the opportunity in global value stocks is compelling and we want to make sure our clients are aware of it. The Bernstein piece provides some further background on what they describe as an “enormous” value opportunity.

I had lunch last week at the Fairmont with Nassim Taleb, prominent financial author and professor at the Polytechnic Institute of New York University (there were a few hundred other people there too; it was an event put on by the Vancouver CFA Society).

Taleb’s work focuses on problems of randomness and uncertainty. He believes that investment risk cannot be measured, and the industry wastes a lot of time and energy trying to do so through sophisticated modeling and computer programs (which failed miserably during the financial crisis of 2008/09). In his New York Times best-seller The Black Swan, he suggests that investors should not be concerned about trying to predict rare and improbable events (Black Swans). Rather, the focus should be on developing strategies or systems to protect against such occurrences.

I found the presentation, titled Antifragile: Things That Gain From Disorder, disappointing. It started late and was cut short, had plenty of technical glitches, and jumped back and forth between slides. I also found Taleb’s advice relating to the topic and portfolio construction quite vague. Lastly, the main dish was salmon (not a fan).

Nonetheless, I took away a great history lesson. Taleb is a big proponent of co-investment or having ‘skin in the game’. He referred to it as “the best risk management tool ever” and suggested that if you invest with someone, you want them to be hurt as much as you if the investment fails. He related the concept to Hammurabi’s Code, an ancient Babylonian law that called for an “eye for an eye” punishment if the law was broken. Taleb cited an example whereby if a house collapsed and killed the owner, the architect would be sentenced to death, as he could be the only one who truly knew of any weaknesses (risks) in the structure.

While harsh (and unjust) in many respects, the Code makes good sense in investing. Although I’m glad I don’t live in ancient Babylonia.

This post should've been published two weeks ago, but I neglected to add it to my 'To Do List' this quarter. My bad. Without further ado, here's an excerpt from Bradley's Brief:

The third quarter was another good one. Stock markets were up and our clients continued to do well. When we meet with clients in this positive context, or see them on the street, we hear words like, “Just keep doing what you’re doing … I love the Income Fund … that Wil guy is awesome.”

While it’s gratifying to hear, I do worry about the expectations that are embedded in these compliments. After a period of strong returns, there is a tendency to accept it as a trend. But as we know, investors should never project anything that’s happened in the past as the trend for the future. Good long-term performance encompasses strong and weak periods.

I’m most uneasy with expectations around the Income Fund, which has had a particularly good run over the last 4 years. No one will be surprised to hear that I love the design of the fund and have great confidence in our manager, Connor, Clark & Lunn. Indeed, I expect them to continue using corporate bonds, high-yield securities and dividend-paying companies to generate returns well above government bond yields and GIC rates.

But … we have to keep in mind that the starting point for the next 5 years is quite different than it was in 2009, or even 2007. Interest rates are 2% lower, which means the expected return for bonds (currently 70% of the fund) is 2% lower. Real estate investment trusts (REITs) and dividend-paying stocks are more popular now and don’t offer the same recovery potential they did in 2009. So instead of the 7% per annum that the fund has achieved over the last 5 years, a reasonable expectation for the next five should be 3-5%. And with a good portion of the return coming from stocks, we should also expect bumps along the way (some quarters with negative returns).

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

Another timeless sketch from Carl Richards.

Richards is an American fee-based financial planner and author. His sketches appear in the New York Times Bucks Blog and he writes a column for Morningstar (USA). Through simple drawings, he makes complex financial concepts easy to understand. We admire that.

“Small Caps will Outperform Soon.” I read this headline yesterday and it reminded me how different our approach to investing is than most other managers. The accompanying article suggested that investors’ appetite for risk is coming back and commodity prices are rebounding, which should drive up resource stocks. This in turn should benefit small-cap investors because these stocks are an area of heavy concentration in the small-cap market.

This is an interesting statement. It suggests that (1) all small-cap stocks have underperformed, (2) small-cap investors are heavily concentrated in resource stocks, and (3) rising commodity prices will benefit all small-cap investors.

Our Small-Cap Equity Fund has outperformed and is not heavily concentrated in resources. Indeed, while it owns some commodity-related stocks, it looks nothing like the market, and accordingly performs nothing like it. We’re the first to acknowledge that the fund’s performance will lag at times. If the article is correct in its prediction that commodity stocks are set to take off, it will likely trail its peers during the ascent.

Our funds look much different than the market. Our managers don’t feel obligated or compelled to build portfolios that look like an index. Rather, they focus on owning companies they feel are best positioned to grow shareholder wealth over the long term. The opening caption may excite index-oriented investors. To undexers, it’s just herd-speak.

This week Morningstar Canada, a leading provider of independent investment research, updated its Stewardship Grades for 2012. The grades were first introduced in Canada in 2010 (they’ve been published in the U.S. since 2004) as a means of capturing some of the intangibles associated with making an investment decision.

Stewardship Grades measure how closely the interests of fund companies are aligned with the interests of clients. Rather than look at past performance, they focus on qualitative measures including corporate culture and manager incentives. In Morningstar’s words, “The grades can help determine the difference between a great investment and one to avoid.”

We’re pleased to be one of only two companies (out of 26) to receive an overall ‘A’ grade this year (Capital International was the other). The full report and grades are available on Morningstar’s website.

By Scott Ronalds

Markets had a good quarter, with resource stocks rebounding. The Canadian market (S&P/TSX Composite Index) gained 7%, while the MSCI World Index rose 3% (in Canadian dollar terms). Japan was the laggard, as the market declined slightly. There were some positive developments in Europe regarding the region's debt problems, with the European Central Bank (ECB) stepping up efforts to tackle fiscal issues. Bonds also had a positive quarter, led by a strengthening in corporate and high yield bond prices.

Our funds performed well in the quarter and have provided strong returns year-to-date. As for asset mix, which is reflected in the Founders Fund, we are maintaining a full allocation to stocks and a minimum weighting in government bonds. We also have a meaningful cash reserve in anticipation of more volatile markets ahead.

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

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

Forbes magazine came up with a list of the 15 most outrageous ETFs last year. The winners included the Market Vectors Mongolia ETF, the PowerShares Lux Nano Tech ETF and the HealthShares Dermatology and Wound Care ETF.

We thought we’d seen it all. Recently, however, we came across a number of candidates that should be added to the list. They include:

• FocusShares ISE-Reverse Wal-Mart Supplier ETF
  
• Global X Fishing ETF
  
• VelocityShares 2X Inverse Palladium ETN
  
• Global X Brazil Financials ETF
  
• AdvisorShares TrimTabs Float Shrink ETF

This is obscurity at its best, which is why it comes as no surprise that the first two on the list are being shut down this year and the other three may not be far behind. Indeed, ETF closures are a growing trend, as noted in a recent Globe and Mail article (The Trendy Term in ETFs: We’re Closed).

In the Globe piece, Shirley Won references a website (www.investwithanedge.com) which identifies ETFs that are on “Deathwatch”, defined as those that have been trading for more than six months but have had less than $5 million in assets for three consecutive months. The site currently identifies over 400 products in the U.S. that are in danger of closing.

You can learn a lot from the name and mandate of an investment product. ETFs with abstruse names and narrow mandates tend to have little investment merit and often don’t last long. Industry expert Dan Hallett (HighView Financial) suggested in an article yesterday that investors are worse off for having access to highly specialized products because they are largely speculative plays which tend to be highly volatile and in turn lure investors into poor timing decisions and frequent trading (ETFs are the New Mutual Funds (and Not in a Good Way))

If it looks like a duck, swims like a duck, and quacks like a duck … it’s probably a duck.

Related reading:
Say It Ain't So
ETF Providers Have Cluttered a Pristine Landscape
Buyer Beware: Leveraged ETFs
The ETF Diaries - Part V: All Dressed Up and Nowhere to Go

By Scott Ronalds

Hard to believe, but we’ve been blogging for 6 years now. Time flies when you’re having fun.

We use our blog as an outlet for our opinions, advice to investors, stance on industry issues, and the odd piece of wit (depending on your definition). One of the key objectives of our firm is to help make our clients better investors, and the blog is one of the tools we use in this pursuit.

We’re encouraged that more and more firms and knowledgeable investors have joined us in the blogosphere over the years. The more educated and objective dialogue on investing, the better.

Recently, our friends at Mawer Investment Management and Burgundy Asset Management started their own blogs which we enjoy reading, and there are several others worthy of checking out, including:

The Wealth Steward (from the folks at HighView Financial)

Canadian Capitalist (an Ottawa-based software developer with a passion for investing)

Michael James on Money (makes his living as a “math guy in high tech”)

David Christianson (a Winnipeg-based fee-for-service financial advisor)

Where Does All My Money Go (written by Preet Banerjee, a former investment adviser and current Globe and Mail columnist)

Financial Independence (written by Jonathan Chevreau, former personal finance columnist for the National Post and current editor of MoneySense magazine)

You can find a little bit of everything in the investing blogosphere, from indexing extremists to staunch technical analysts. It’s also a highly unregulated world, so just like structured products and principal-protected notes, it’s best to proceed with caution.

By Scott Ronalds

My wife and I love wine. While we try to support local Okanagan producers as much as possible, we’ve found that our neighbors in Washington also make some great juice, and at good prices. We hit the road last month to explore Washington wine country with Walla Walla as our base camp. Here are a few random observations from our trip.

Wind Farms

Driving through the Columbia Valley, we had our first up-close experience with wind farms. It felt a little like we took a wrong turn and were in some weird military zone; yet, it was eerily majestic. These huge turbines were a reminder that sources of clean, alternative energy are growing and technology will play an increasing role in a more energy efficient world going forward. Cool stuff.

Walmart

East of the mountains (Cascades), we could drive several kilometers without seeing another car. But Walmart trucks seemed to be everywhere, and the stores were a fixture in every mid-sized town. Sam Walton’s company is one powerful retailer (Disclosure: I own the stock through my holding in the Global Equity Fund).

Real Estate

Real estate is still a big topic of discussion. At the B&B we stayed at, it was a frequent point of conversation over bacon and eggs. As other guests from Seattle and Portland opined that the U.S. market has bottomed and swapped stories about housing prices and conditions in their fair cities, my wife and I were reminded that Vancouver is a different beast altogether. When we threw out some numbers on lotusland prices, jaws dropped. “Wow, that’s crazy!” was the common response. Hmmm.

Climate Change

In my opinion, Washington makes fabulous red wines. The cabernets, merlots, and syrahs are big and bold. Southeastern Washington gets plenty of sunshine and days where the mercury hovers around 100°F, with cooler nights to balance the fruit. Many winemakers told us it’s become the ideal climate for growing these grapes. In fact, climate change came up as one reason why Walla Walla is being touted the “new Napa” and some vintners opine that California’s famous wine region will eventually become too hot to produce good grapes (do they have an axe to grind or are they on to something?). Washington (and B.C.) will flourish, we were told. Stay tuned.

Free Trade

Tasting the wine was a lot of fun. Bringing it home, not so much. Canadians visiting the U.S. are only allowed to bring back two bottles of wine each (without penalty). Anything beyond is subject to duty, taxes and a “liquor mark up fee”. We brought back a case and were hit with a nasty bill. Whatever happened to free trade?

I’ll spare the clichés about wine and investing, but suffice to say you can learn a lot on a wine trip. Turns out that I wasn’t completely lost in the vocabulary either. Value hunting, technical analysis, verticals, and corkscrews are common to both industries.

We’ve had a few questions lately on the fee for the Founders Fund. The all-in fee for the fund is 1.34% (or less if your consolidated assets with Steadyhand exceed $100,000). The fee includes all of the fund’s operating expenses and taxes, as well as all management fees paid to Steadyhand and the managers of the underlying funds.

The Founders Fund is a fund-of-funds, meaning it holds our other five funds in varying proportions. Some investors have asked us whether they will be charged the fees on the underlying funds plus the 1.34% stated fee. The answer is No. The Founders Fund holds “Series O” units of our other funds, which are identical in composition but have no fees attached to them. In other words, there is no double-dipping on fees. The maximum fee you will pay to own the Founders Fund is 1.34%, which is meant to reflect the long-term fund mix of the portfolio (there are no additional fees for asset mix and rebalancing decisions).

We’ve also been asked if investors would pay a cheaper fee if they simply owned the underlying funds separately. The answer is it depends on the mix of funds at any given time. Consider the composition of the Founders Fund as of June 30th:

38% - Steadyhand Income Fund
25% - Steadyhand Global Equity Fund
25% - Steadyhand Equity Fund
7% - Steadyhand Savings Fund
5% - Steadyhand Small-Cap Equity Fund

If you were to own the funds in the above proportions, your portfolio’s overall fee would be 1.30% (before any discounts), so in this instance, it would be cheaper to own the underlying funds rather than the Founders Fund. This will not always be the case, however. If the Founders Fund held less of the Savings Fund and more of the equity funds, you would be paying a lower fee to own the Founders Fund than you would to own the funds separately.

Most balanced funds charge a premium fee for monitoring asset mix and rebalancing. This is not our intention with the Founders Fund. Tom Bradley’s oversight and fund allocation are part of the package. It’s all in the name of better investing.

Scotiabank announced yesterday that it has reached an agreement to buy ING Bank of Canada for $3.1 billion. ING (Canada) put itself up for sale earlier this summer because its parent, Dutch-based ING Groep NV, is looking for funds to repay government aid it received during the financial crisis.

The ING assets fetched top dollar, but a key question is how many clients will take their business elsewhere as a result of the sale. The Globe and Mail published an interesting article the other week on the topic - Fee Averse Clients Pose Hurdle to ING Sale.

ING has always been an alternative to the Big Banks, and it positioned and marketed itself well in this respect. It developed and fostered an “anti-bank” personality and was innovative and unique in a conservative industry. Its clients loved being part of something different. Now that it’s poised to be owned by a bank, it will be interesting to watch the transition.

There’s no denying that ING has a passionate client base. Many customers have already voiced displeasure with the transaction through comments posted to various online articles on the takeover, including the above-mentioned Globe article and a CBC piece published yesterday. Below are a few examples:

First thing I am doing next week is closing my ING account.

I will be one of the clients leaving if one of the big six take it over...

Dear Big Banks, The moment I hear you buy ING, I will be withdrawing my money and be gone...

Oftentimes when a takeover of this nature in the investment industry is announced, the initial reaction of clients tends to be heated and emotional. Fewer assets tend to leave the door, however, than the public's reaction may suggest.

Time will tell how “sticky” ING’s assets are.

Bacon is everywhere these days. It’s in chocolate, ice cream, jam, scented candles and even toothpaste. Fast food chains, while no strangers to bacon, are jumping on the bandwagon by introducing such items as bacon sundaes (Burger King) and milkshakes (Jack in the Box). A few blocks from Steadyhand world headquarters, there’s even a new takeout window on Granville Island that has an all-bacon menu, including fish & bacon tacos and a ‘Box O Bacon’ (with rye chocolate ganache dipping sauce). You can find Neil there on Mondays, Wednesdays and Fridays.

Income has become the bacon of the investment industry. Products touting income have been the hottest sellers over the past few years. Whether bond income, dividend income, preferred share income or call-writing income, investors have an insatiable thirst for anything that kicks out a stream of income. And investment providers are more than willing to quench this thirst. Look at any list of new product launches or sales figures and income-oriented funds dominate. We’ve written about the top selling BMO Covered Call Canadian Banks ETF and iShares growing fixed income lineup. Just last week, in fact, BlackRock launched the iShares U.S. High Dividend Equity Index Fund (CAD-Hedged), which is “geared to generate income and meet investors needs.”

There’s no denying that income strategies can serve a valuable role in investors’ portfolios, especially those in or nearing retirement. Like the bacon movement, however, the income craze has gone too far. Investors overloading on income at the expense of other assets (e.g. stocks) may be disappointed with their future returns. In the stampede for income, valuation seems to be lost in many investment decisions. Consider that valuations for government bonds are as unattractive as they’ve been in decades, with the benchmark 10-year Government of Canada bond yield sitting around 1.9%, which is below the rate of inflation. Yet, the bonds are still in high demand.

Investors are advised to look carefully under the hood of income-focused products to find out how the income is being generated. It’s “total return” that’s important (interest, dividends and capital appreciation), not just an attractive yield. Indeed, in certain instances, income payments simply represent a return of capital (a portion of your original investment returned to you). It’s also important to remember that income doesn’t necessarily equate to stable cash payments and lower volatility. Securities that cut or suspend income payments tend to be heavily penalized by the market.

There are clear hazards to adding too much bacon to your diet. The same can be said for income in your portfolio.

I went for pizza the other week at a small restaurant in a seedy, though gentrifying part of town. The menu was written on a chalkboard and consisted of only 5 or 6 options. The wine was served in jars. The seating was communal. Nothing on the menu cost more than $15. And the place was packed. This was no Pizza Hut. The tomatoes were imported from San Marzano, the basil picked earlier in the day, the olive oil from the old country, the dough made in front of you, and it was baked with love in a wood-fired oven (which was probably imported from Naples). It was outstanding. It was craft.

Craft is making a comeback, in the food business at least. The concept of fine ingredients, limited selection (and production), attention to detail, time-honoured techniques, good value, and a simple atmosphere is winning over consumers big time. There’s a lot to be said for less overhead and more passion. From pizza to beer to gelato to donuts to fish & chips, artisanal products are being noticed. The rejuvenation of food trucks, farmers’ markets and word-of-mouth advertising are testament to the craft movement. It’s a good time to be a foodie.

We could use more craft in our industry. There are enough large scale, mass market, faceless products with excessive, questionable ingredients. We could use more simplicity and authenticity. We could use more margherita and less pepperoni.

A great, timeless sketch from Carl Richards.

Richards is an American fee-based financial planner and author. His sketches appear in the New York Times Bucks Blog and he writes a column for Morningstar (USA). Through simple drawings, he makes complex financial concepts easy to understand. We admire that.

We’ve been vocal about our aversion towards federal government bonds. We noted in our Q2 Report that the Government of Canada 10-year benchmark bond yield dropped below 1.6% in June, and 10-year U.S. Treasury yields sit below 1.5%. Both Canadian and U.S. government bond yields are at or near all-time lows. Further, the German government issued 2-year bonds at auction last week which produced a negative yield for the first time ever. In other words, investors are willing to pay the government to park their money for two years.

These record low yields are an indication that investors much prefer the safety of bonds over stocks. We feel this safety is misplaced. Government bond yields have little room to fall further, thereby limiting their capital appreciation potential (when yields fall, prices rise), and the interest they are paying is paltry. Further, a rise in interest rates would be detrimental to government bond prices. We feel there are better opportunities elsewhere, notably corporate bonds. And in particular, U.S. banks.

The manager of our Income Fund, Connor, Clark & Lunn, believes that select bonds issued by large U.S. financial institutions offer compelling value. This is a contrarian view as negative sentiment still overhangs the U.S. financial sector, but many banks are in much better financial shape than they were a few years ago. They have recapitalized their balance sheets and restructured their housing exposures. Further, CC&L has a more positive outlook for the U.S. housing market as there are increasing indications that the sector has bottomed. While the manager doesn’t expect a rapid recovery, they feel the downside is limited and certain companies are well positioned to benefit from stabilization in the housing market. More specifically, they have increased the portfolio’s holdings in bonds issued by Citigroup and Bank of America (all foreign currency exposure is hedged).

Higher interest payments and yields are one attractive aspect of these bonds – they offer yields that are currently 2½ - 3% higher than 10-year U.S. Treasuries. Another benefit is that the manager believes their prices will be correlated (positively) to interest rate movements, which will help protect the portfolio in a rising rate environment, yet still provide a higher income stream until such an occurrence materializes.

The high yield sector is another area where CC&L is seeing value. The manager is finding opportunities in bonds issued by financial and consumer-related businesses as well as real estate investment trusts (REITs). Their focus is on businesses that are in a sound financial position and are producing strong operating results and growing their earnings. Examples include Great West Life, Hertz and Norbord (a producer of engineered wood-based panels used in the construction industry).

We’ve been advising clients for a while to be light on bonds in relation to their strategic asset mix, as we feel stocks are more attractively valued. That said, we don’t dislike all bonds. Corporate and high yield securities are our friends. This is reflected in the positioning of our Income Fund.

By Scott Ronalds

It’s been a few months since we last checked in with Bruce. Things are good on the work and home fronts, and his portfolio is holding steady in a bumpy market (as of June 30th, he’s up about 3.5% year-to-date).

The family took a two week holiday to California in the spring, which included stops at Disneyland for the kids and a few wineries in Santa Barbara for the adults, before settling in Palm Springs. The sun and cheap merlot had a lasting impact. Bruce has long wanted a vacation home and stepped up his search after getting back from holiday. The relentless rain in Vancouver was a trigger. He flew back down to Palm Springs with his wife last month to look at a few properties and is now in the process of closing on a 2 bedroom townhouse for a price of $225,000. It gives him comfort that the same home sold for close to $400,000 in 2006.

Bruce carefully considered a few issues before deciding to buy in the U.S.:

• Taxes (if he rents the property, he will have to claim the income and file a return with the IRS. He will also have to pay taxes on any capital gains that may be realized when the property is sold).
  
• Financing.
  
• Ongoing costs (monthly maintenance fees, property tax, improvements, etc.).

Wisely, he consulted with a tax lawyer in Canada to get a full understanding of the responsibilities and liabilities of owning a home in the U.S. Bruce also quickly learned that he couldn’t obtain a mortgage from a Canadian lender to buy the property, and would require a 30% down payment to secure a mortgage with a U.S. bank. His other option was to pay cash for the property by selling some of his investments (he has been holding some cash for this purpose) and using a line of credit in Canada. He opted for this option, as the complexity and exchange rate risk (monthly payments in U.S. dollars for 20-30 years) of a U.S. mortgage was a deterrent.

Bruce decided to redeem $50,000 from his investment portfolio ($30,000 from his Steadyhand account and $20,000 from his discount brokerage account) and use a home equity line of credit on his home in North Vancouver to come up with the proceeds for the purchase. He made this decision, rather than liquidating all his non-registered investments, because he wants to keep money in the market as he feels there is good upside potential over the next several years.

He obtained a $200,000 line of credit at a current rate of 3.5% (prime plus 0.5%). Bruce realizes the leverage and interest rate risks of his situation: if rates rise, his monthly payments will rise. Further, there’s the possibility that the value of his home in North Vancouver could fall, thereby reducing the equity against which his line of credit is secured. The California property could also fall in value. He knows the risks and is comfortable with his situation.

Bruce’s $30,000 redemption presented an opportunity to rebalance his portfolio. Strong performance from the Small-Cap Fund and a weak stretch from the Global Fund meant that his asset mix had drifted modestly. To re-align his portfolio closer to its strategic target, he took the redemption from the Savings Fund and Small-Cap Fund, and made a few other minor switches including adding to the Global Fund. His fund mix is now as follows:

Savings Fund – 6%
Income Fund – 30%
Equity Fund – 27%
Global Equity Fund – 24%
Small-Cap Equity Fund – 13%

By Scott Ronalds

Stock markets around the globe declined in the second quarter as investors focused on the ongoing debt saga in Europe. Bonds fared well as the yield on the Government of Canada benchmark 10-year bond dropped by roughly 0.4% and fell below 1.65% in early June to reach a new low (when yields fall, bond prices rise).

Our funds held their ground for the most part and have provided strong downside protection during the heightened volatility of the past 18 months. As for asset mix (which is reflected in the Founders Fund), we modestly added to stocks (foreign in particular) and trimmed bonds in the quarter. Our managers feel there is good value in a number of stocks, particularly those that have growing exposure to the emerging markets.

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

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