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Flaherty’s Flip Flops and Other Recent Events: Issue 33

flip-flops

Heading reluctantly (at least me) into autumn let’s reflect on this past summer’s more noteworthy happenings.

Earlier this year one family I advise went to the bank and turned down the tempting offer of a lower monthly payment when they consolidated their debt.

They knew better. Resisting the bank’s overtures, they realized they would be further ahead in the long run by choosing a higher monthly payment, concentrating on prepayments thus saving on interest costs, which incidentally is the bank’s main source of profit. Their actions demonstrate one of the greatest rewards of my financial planning practice: when clients learn from me and apply their new knowledge with other financial service providers.

In late June Finance Minister Jim Flaherty instituted a change in mortgage rules lowering the maximum amortization period to 25 years and capping accessible equity at 80%, among other changes. Keep in mind this was a reversal of his position in 2006. In response to a request from CBC news radio for a professional opinion on the new rules, I experienced first hand the speed at which media operates. Less than half an hour after my offer I was contacted by two reporters and a producer by cell phone and email. Less than three hours later the mortgage interest clip was broadcast at noon and for three successive hours after that. Such speed and brevity of conveying information leaves little time for proper reflection or discussion of important financial news. Events that impact many Canadians simply become blips on the e horizon.

I relay this event because of the crossroad this e space has arrived at. Over the last little while the natural evolution of this newsletter has me reflecting on the merits of a blog, in part because of the aforementioned breakneck speed of events. I have hesitated for two reasons: 1 When I started this newsletter I promised to keep it as a private service to my clients. 2. More importantly, feedback from all of you my readers indicates that most of you are too busy to check in on a blog. However please feel free to change your mind.

Therefore I have devised a temporary compromise of sorts. Those clients who want to know my ‘take’ in a timely manner of breaking financial news can check me out on LinkedIn. I post there a couple times a week, and it is there I will comment on financial news I deem worthy of a response. You need to connect with me to read my updates.

So for now this e space will remain private for clients only, hidden from Google search.

There is a growing awareness of the role of social responsibility in investing.

social

More and more citizens in every society are understanding that planet earth is indeed a small place, where corporate and government action or inaction have global effects. Citizens can vote with their dollars or join programs that promote social responsibility. Environmental, social, and governance (ESG) standards and research are at the forefront of socially responsible investing.

So what does ESG look like in real life? Although the 3 categories overlap and they are interrelated let‘s look at an example we can all relate to.

Do you know how your smartphone operates? Within that small case are many components that require the mining of minerals such as tin, tungsten, and coltan. Most of these minerals are found in Africa. In the United States the Securities and Exchange Commission (the financial regulatory body) is introducing new regulations that mandate technology companies to investigate the supply chain of these minerals used in many electronics. The reason for the new laws is that mines are often controlled by armed rebel groups that terrorize the local population with brutal acts. The profits from the mining of these minerals go directly to further armed conflict. Hence the term conflict minerals(remember blood diamonds?). Mining also adversely affects the gorilla habitat. If habitat destruction is not addressed some species of gorillas could become extinct in the near future.

I am sure you are taking a second look at your electronics and wondering what you as one citizen can do to avoid contributing to the conflict mineral issue. First and most importantly, you can recycle your old electronics. Recycling reduces the demand for new mining of these minerals. Second, you can acquire knowledge to help you make informed decisions on which electronic companies to support with your dollars.

Investment companies that are committed to socially responsible investing evaluate their potential investments, such as the aforementioned technology companies, based on the ESG acronym, considering such factors as impact on the environment, fair treatment of workers and balanced corporate management There are also investment companies that have socially responsible investments that apply the ESG screens and are activist shareholders in the companies whose stocks they own.

The investment industry is taking the initiative on several fronts. There has been much discussion on how sustainability, a long term perspective, ESG and social responsibility mitigate an investment’s risk and therefore positively impact returns.

In 2007 the United Nations spearheaded a program called the Principles for Responsible Investment(PRI). Investment companies and corporations are able to become signatories if they promise to adhere to principles of ESG investing. They report on their results. PRI is also a forum for sharing of best practices, new knowledge and networking. About a dozen Canadian investors are signatories including a major bank, the Canadian Pension Plan Investment Board, and several provincial and municipal pension funds.

I have been asked what it costs to own your mutual fund investment. Mutual fund companies hire expert managers. In a typical day these managers supervise teams of analysts, travel to inspect companies and meet with their executives among other tasks, all to assist them in deciding which stocks should be in a given portfolio. If the fund is a global or sector fund these expenses are often higher than Canadian funds. The assets of investors held by mutual fund companies are held with a 3rd party custodian for investor protection. The company also must meet many regulatory requirements, pays taxes(think the hated HST), and compensates dealers. These costs are all contained in the Management Expense Ratio.

The current popular talk is to find a ‘no fee’ investment. Rest assured the only way a person can avoid fees is to stick their money in the mattress. And there is opportunity costs associated with mattress hoarding! I sometimes also get asked the question: Do fund managers still get paid if the fund’s value decreases in a particular time period? I usually ask a question in reply: Do you get paid if your performance is not considered up to par because of circumstances you cannot control? Fund managers have their own money invested in the funds they manage, and they have a fiduciary duty to their unitholders. They have a vested interest in doing their very best each and every day. As well, to reiterate my last newsletter, the Management Expense Ratio covers many expenses involved with compliance. The chatter these days is to promote the MER as straight profit and salary to the fund managers. Nothing could be further from the truth.

Many investors have been duped because of the double promise of a safe investment with high returns. Strangely enough the people that are attracted to these schemes do not consider fees associated with these questionable ideas. Such is the case with the ongoing saga of Alberta based Concrete Equities and Platinum Equities. After being sanctioned by the Alberta Securities Commission, the founders of Concrete Equities went on to sell real estate investments through Platinum Equities without disclosing in their offering memorandum the ASC sanction and ban. They are again in the news as a class action lawsuit has been brought against Platinum Equities on behalf of hundreds of investors who cashed in their RRSPs and life savings and now have nothing to show for it.