Tuesday, October 16, 2007

Mutual Fund Mania

Canadians love their mutual funds. Perhaps it's because we're pretty unsophisticated investors and fairly risk adverse? Regardless, there are more than enough funds to appeal to all types of investors, from conservative to aggressive. There are even funds of funds to further diversify your risk.

Let's look at some of what we feel at HHV are the benefits to investing using mutual funds:
  1. cheap access to diversification
  2. cheap access to equities, many funds have $25 minimum investments
  3. very liquid, in some cases 24 hours to get your money back
  4. RRSP eligible (unlike a second or third house)
  5. professional management, sometimes even relatively cheap
  6. dollar cost averaging
  7. sometimes less volatile than individual stocks
How about the draw backs:
  1. Canadian mutual funds rate poorly on expense related to management (MERs) compared to their international peers
  2. the sales game, many mutual fund (financial) advisors try to sell you funds of funds, which usually end up costing you more and making you less
  3. capital gains tax paid from within the fund year-to-year AND when you sell your shares outside a registered plan
  4. crazy commission structures that can be punishing at times and hard to understand
Again, I'm NOT A FINANCIAL ADVISOR and this post is not advice. Rather it's just an airing out of my thoughts on an investment product. I own mutual funds. I don't trade them though. They're a five-plus year investment for me (with an almost immediate payback as dividends usually get reinvested). My favourite family of funds right now come from Front Street Capital and have done me pretty good over the past couple of years.

I'm a value investor before anything else. What this means is I look for good deals. I like the price to sales ratio the best (not to be confused with price to earnings). There is a great performing fund family from investment guru James O'Shaughnessy sold through RBC securities. This is where I learned the price to sales ratio. James suggests that companies that you can buy $1 of their sales for less than $1 of your money, and that are over $250 Million in market cap, chances are pretty good you'll beat the market. His funds almost always beat the market. And he charges well below the average MER to do that.

For all the benefits of mutual funds, I strongly believe that when you get over the $10,000 net assets invested mark you are better off investing directly into companies (10 plus). You have to pay more attention to your investments, but isn't that part of the fun? Since I've been doing this (paying attention), I've not only learned more, but had more fun saving and investing than in reading mandatory mutual fund prospectus statements.

I'm not sure if this will spark the kind of discussion we enjoyed earlier today, but we'd like to hear your thoughts on mutual funds. Are you in or are you out?


Anonymous said...

Don't agree with your $10,000 / 10 stocks comment.

The trading fees on such small volume will eat up your profits much faster than the mutual fund MER.

If you want to play the market yourself, you need to invest at least as much as necessary to hit the flat trading fee plateau (Waterhouse is now $250K as an example) before you strike out on your own.

Anonymous said...

For low MER, the best accounts are TD- E Series, and RBC D-Series.

Village said...

I own them in my RRSP. Don't like them though, limited to RBC's for now. =)

Anonymous said...

Not hijacking this topic, but it's getting desperate out there! This morning's TC has this ad:

"FREE 50 " FLAT SCREEN NEXT 10 BUYERS!! 1880 Laval Ave from $529,900 SELLING REALTOR BONUS $2,500 for FIRM DEALS by November 18, 2007. FREE 50" FLAT SCREEN TV w' YOUR PURCHASE, GET IN NOW, FOR THE NEXT 10 BUYERS!! WALK to UVIC! Interiors have Large Picture Windows, 9' ceilings, Dark Oak Cabinets, dark Oak Hardwood Flrs, 2" Granite Countertops, tiled backsplashes, Ceramic tile in Entry & Baths. 3 Bed + 3 Baths. 6 appliances, Everything at your doorstep. Price includes GST. Hurry for best selection! "

NICE way to show in VREB's records that prices are going UP, ay?

Anonymous said...

Incentives are a hidden form of a price reduction.

I wonder how long it will be before the incentives are out the window and the real prices reductions start showing up.


Anonymous said...

I love the 9' ceilings as though this is something spectacular. My grandpa would laugh his azz off at that.

Back to mutual funds, I own some Canadian funds as I have a contribution from my employer that can only go in their crappy container. But where I have a choice, I would avoid Canadian mutual funds like the plague. Just like Canadian banks, they're just not competitive worldwide. I feel quite strongly that our whole financial sector is woefully inferior to the US and UK. Witness the laughable Canadian approach to ABCP, and the Montreal Accord or whatever our doomed bailout is called.

Run a comparison of the leading Canadian mutual funds, in terms of cost and performance, against the leading UK and US funds, and my view should be borne out.

I invest as a result in US-based ETFs and stocks (since we are restricted from buying US funds - see above as regards our blinkered and protectionist financial system). I am also fortunate enough to retain my savings and pensions from the UK from working over there, and so am able to keep my UK pension in UK funds, and my GBP cash in UK banks and funds.

I believe that the refusal to allow Canadians the freedom to invest in whatever funds they choose is driven by the same mentality that these people from Socan or whatever it's called tell buskers in Canada that they have to strum 20% Canadian tunes on the street, and kick back money for royalties to Celine Dion. The same mentality that makes Canadians think it's OK to prop up our kleptocracy of uncompetitive banking and telecoms cartels, because "hey - they're Canadian". Never mind that Ted Rogers and his filthy rich family don't give a rip about where they spend their money after they've ripped you off with full government support. And then we wonder why everything costs more in Canada, even with the par+ dollar.

Sorry for the rant, but it really gets me that Canadians are so insistent that we are better-run than the US and immune to their problems, when we have such a sickly and nepotistic economy that is only afloat because of sheer luck and a tiny population atop a mountain of resources.

Aleks said...

I invest most of my money in Phillips Hager North mutual funds because I know enough to know I don't know enough to pick individual stocks. I like that they have a long-term, conservative outlook and focus on keeping their MER low relative to the average. Plus they were recommended by a rich friend of the family.

vg said...

off topic but a $20,000 reduction as predicted a couple weeks back and in a nice area too and only on the market a few weeks, now $459,000.

MLS®: 236240