A run down of what's going on in the market and the company.

Tuesday, December 13, 2011

Household debt hits new high

Canadian households are still borrowing more than they can afford, despite continued warnings from the Bank of Canada, the latest data from Statistics Canada showed Tuesday.

The ratio of credit market debt to personal disposable income rose to a new record high of 150.8% in the third quarter of 2011, the third straight quarter the figure has gone up.

Credit market debt factors in consumer credit, mortgages and loans but not debts on small businesses and accounts for 99% of liabilities.

The only blip was a slight 15 basis point decline between the third and fourth quarters of 2010.

“The greatest risk to the domestic economy is household debt,” Bank of Canada Governor Mark Carney said in an interview with the CBC on Tuesday morning, again sounding the alarm bell on excess borrowing.

Canadian household net worth also declined 2.1% to $6.2-trillion, the second straight quarterly decline due largely to losses in personal equity holdings and pension assets.

Per capita household net worth dropped to $180,100 from $184,700 the quarter before.

Combined, this marks the sharpest drop in household net worth since the fourth quarter of 2008, StatCan said.

The ratio of credit market debt to asset and debt to net worth both reached record highs of 20.1% and 25.2% respectively in the quarter.

Overall credit market debt is now approaching $1.6-trillion, led by a $25-billion increase in mortgage debt.

Mortgage debts have crossed the $1-trillion threshold while consumer credit has also risen to $448-billion, StatCan said.

“The rising indebtedness of Canadian households has weakened their overall financial position and increased vulnerability to adverse economic shocks such as decline in home prices or a deterioration of labour market conditions,” David Onyett-Jeffries, economist with RBC Capital Markets, said in a note.

However, the pace of credit growth is moderating, growing only 1.6% in the third quarter compared with 1.9% in the previous one.

“We expect credit growth to continue to moderate over the forecast horizon,”Mr. Onyett-Jeffries said. “Our expectation of continued improvement of Canadian labour market conditions, only a modest cooling of real estate markets and the eventual stabilization of the financial markets will go some way to improving household finances and help to ensure that these risks do not materialize.”

At the same time, Canada’s total holdings in net foreign debt are up 10.5% to $237-billion, a $22.6-billion increase blamed largely on declining foreign equity holdings.

In his speech Monday, Mr. Carney warned about the dangers of foreign debt as Canada’s current account has returned to a deficit, funded largely by foreign purchases of Canadian bonds.

“Much of the proceeds of these capital inflows seem to be largely going to fund Canadian household expenditures, rather than to build productive capacity in the real economy,” he said. “If we can take one lesson from the crisis, it is the reminder that channeling cheap and easy capital into unsustainable increases in consumption is at best unwise.”

.Posted in: Economy, Personal Finance Tags: Canada, debt, debt to disposable income, domestic debt, Economy, household debt, mark carney, Statistics Canada
Eric Lam Dec 13, 2011 – 9:25 AM ET | Last Updated: Dec 13, 2011 11:16 AM ET
Article Link: http://business.financialpost.com/2011/12/13/canadian-debt-climbs-to-new-highs-statcan/

Monday, December 5, 2011

Canadian Investors gouged by fees

Canadian investors pay higher fees than those in other countries, but the industry disputes the facts and says there is a cost to getting investment advice

Nobody likes paying fees. Yet those pesky charges seem to be attached to every service - particularly anything related to money management - that Canadians rely on to save and grow their nest eggs.

The Canadian Labour Congress [http://www.canadianlabour.ca/home] has developed an online calculator [http://www.canadianlabour.ca/action-center/retirement-security-everyone/straight-talk-rrsp-and-mutual-fundmanagement-fees] that shows Canadians just how much of their savings can be gobbled up by management fees ranging from a very low 0.5 per cent to a very high 2.5 per cent. The CLC accuses the financial management industry of "gouging" Canadian investors.

"Management fees can have a huge effect on the outcome of savings," said CLC president Ken Georgetti, adding that Canada has among the most costly expenses in the world.

According Chicago-based Morningstar Inc. [http://www2.morningstar.ca/homepage/h_ca.aspx?culture=en-ca], an independent investment research company, Canada had the highest mutual fund costs of 22 countries surveyed, though
the industry here disputes its findings.

Morningstar's report [http://corporate.morningstar.com/us/documents/researchpapers/globalfundinvestorexperience2011.pdf] released earlier this year gave Canada a failing grade on fees and expenses, which ring in at up to 2.31 per cent, compared with 0.94 in the United States.

"Among the 22 countries in this survey, Canada has the highest annual expense ratios for equity funds, the third highest for bond funds, and tied for the highest for money-market funds," the report noted.

The Canadian Foundation for Advancement of Investor Rights or FAIR Canada [http://faircanada.ca] complained that under the current regulatory environment, there's limited price competition and demanded that Ottawa look into the high
cost of investing. Federal Finance Minister Jim Flaherty said he would ask the Senate national finance committee to investigate, and FAIR hopes it will be invited to make its case early next year.

Marian Passmore, FAIR's associate director, noted that economies of scale is not an explanation for the disparity as countries smaller than Canada don't have such high fees.

"Given the low rates of return right now, it's obviously of concern to investors," she said. "People don't understand that over time, it eats into to your investment and savings."

The CLC spells out exactly what various management fees do to an investment. The organization shows what happens to an initial investment of $10,000 at a 5-per-cent annual compounded rate of return once various management fees are attached.

Take the low 0.5 per cent management fee on a $10,000 investment:

After 10 years:

The investor has $15,570.43; the money manager, $718.51

After 45 years:

The investor has $72,066.60; the money manager, $17,783.48

Compare that to a high, 2.5-per-cent management fee on a $10,00 investment at the same rate of return:

After 10 years:

The investor has $12,969.84; the money manager, $3,319.11.

And 45 years:

The investor has $29,493.18; the money manager, $60,356.90.

Mr. Georgetti calls it a "scandal," especially when one considers that only 39.2 per cent of workers were covered by registered pension plans in 2009, according to the latest figures available from Statistics Canada. That leaves many
Canadians on their own to save for when they're not working through Registered Retirement Savings Plans, mutual funds and the like.

The CLC, which represents 3.2 million workers, advocates improving the Canada Pension Plan [http://www.servicecanada.gc.ca/eng/isp/cpp/cpptoc.shtml] as a more efficient way to save for retirement. It argues that
the CPP Investment Board [http://www.cppib.ca] boasts a really low management fee in part because of the size of the fund. (CPPIB doesn't disclose its fee as a percentage, but as of March 31, 2011 its external management fee was $500-
million on the $148.2-billion it managed.) The federal New Democrats lobbied to increase CPP benefits, which could hike premiums, but an overhaul isn't imminent. Ottawa was going to look into it, but instead recently introduced voluntary
Pooled Registered Pension Plans [http://www.fin.gc.ca/n11/11-119-eng.asp] to cover millions of Canadians without workplace pensions. Changes to CPP require two-thirds of provinces representing two-thirds of the population to agree
and not all provinces are on board anyway.

It's too bad, Mr. Georgetti said: "The most efficient way to make sure Canadians have basic, adequate pension is to lift the CPP up."

The Investment Funds Institute of Canada [http://https://www.ific.ca/home/homepage.aspx], which represents the investment funds industry, including fund managers, disputes the Morningstar analysis of management fees as well as
the CLC's position.

Jon Cockerline, the institute's director of policy and research, said the Morningstar report doesn't compare "apples to apples" and pointed out that management fees are disclosed and comparable to products available in other countries.

"There's substantial value embedded in that advice component," Mr. Cockerline added.

The institute issued a report [http://https://www.ific.ca/content/document.aspx?id=6921&langtype=1033]in November which found that the net worth of individuals, taking into account age and income, is almost three times higher for those who receive investment advice ($555,447) than those who don't ($191,743).

Mr. Cockerline also said the average mutual fund rate of return is higher than 5 per cent that the CLC assumes in its online calculator and that's after the management fee has been deducted.

"It would be unfortunate if investors were guided to the view that a government program could be counted on to provide a better retirement outcome than plans that are built individually for an investor through an adviser," Mr. Cockerline said.

Barbara Amsden, a director with the Investment Industry Association of Canada [http://www.iiac.ca/welcome-toiiac/about-us], said while management fees aren't always transparent in Canada, things are moving that way with new
requirements [http://www.osc.gov.on.ca/documents/en/securities-category8/csa_20110224_81-321_early-fund-facts.pdf]from securities regulators.

Ms. Amsden also noted that investing should be balanced to include Retirement Savings Plans to give people flexibility. Canadians just need to be more informed about the fees attached to their investments.

"Absolutely, Canada Pension Plan is the most secure way," she said, "But what are the things that you potentially lose by going all in the Canada Pension Plan and not in the RSP?"

Editor's Note: The seventh paragraph of this blog post has been changed from an earlier version, which contained inaccurate information relating to the Senate national finance committee.

December 5, 2011
Canadian investors 'gouged' by fees
By Dawn Walton
Globe and Mail Blog
Link: http://www.theglobeandmail.com/globe-investor/personal-finance/home-cents/canadian-investors-gouged-by-fees/article2257327/