I thought that Rob Carrick's article in the Saturday Report on Business was excellent. It did a side by side comparison of the Saxon Balanced Fund and the BMO Saxon Balanced Protected Deposit Notes (another new PPN with a brutal name). The only problem with the article was that Rob was way too diplomatic. The comparison screamed out at you ... why would anybody buy the BMO note?
I won't repeat the comparison because it's well covered in the article, but I would like to re-emphasize three points.
First, this is a classic example of clients being sold insurance they don't need. This is a balanced fund from a manager that is value conscious. The fund is 1/3 bonds, so it's designed to not go down very much in periods of weak equity markets. Paying anything for a guarantee that a well-run balanced fund will not be in negative territory 5 1/2 years from now is absurd.
Second, a 2.45% MER plus commissions (let's call it 3%) is a lot to pay for a balanced fund. If we impute zero value for the principal protection, a 0.25% fee for asset allocation and 1% for fixed income management (you should never pay more than that), it implies that the holder is paying a 3.6% MER on the equities. Wow! I think Saxon is terrific, but can Tattersall, Howson and crew beat an ETF by that much per year?
Finally, I'm as cynical as Rob and Dan Hallett (quoted in the article) are on the use of leverage in the note. Leverage is supposed to juice up returns (and offset the cost disadvantage), but there's no free lunch here. As is pointed, the leverage will also magnify negative returns in weak markets. And getting the timing right on 'when' and 'how much' leverage to put on is based on the most unreliable investment strategy there is ... market timing.
In his article, Rob acknowledges that some clients just don't want to lose money at any cost and these notes might be a suitable product for them. I'm sure he's right about the clients, but I do think that advisors that are selling these notes have to arm themselves with the appropriate information and try to talk their clients out of it. As long as the Saxon Balanced Fund is widely available, the BMO notes should never be bought.