Wednesday, March 24, 2010

Evaluate This Portfolio

A reader I’ll call Jim is looking for feedback on his portfolio. Jim is 50 years old and has no company pension plan. Here is the breakdown Jim sent:

RRSPs

$10,000 S&P/TSX 60 (purchased this year, due 2015) at BMO
$7000 term deposit 1.75% at BMO
$81,000 mutual funds at National Bank Financial, including
– Fidelity Northstar Class B (FID210)
– Vengrowth Investment D (VEN662)
– BMOG Asian Growth and Income M FL (GGF620)
– Sentry Select Canadian Income Class FL (NCE517)
– Vengrowth II Investment D (VEN679)
– MacKenzie Cundill Recovery FL (MFC742)
– Manulife Growth Opportunities FL (EPL588)
– Vengrowth I Investment D (VEN669)
– Sprott Canadian Equity Fund SR A FL (SPR001)
– Synergy Canadian CC FL (CIG6103)
$2000 GIC at 4.5% due 2011 at Bank of N.S.
$13,000 Bonds averaging 4.9% at Great West Life (60% company match)
$18,000 stocks at National Bank Financial
$28,000 term deposits (mutual funds) due 2013 (4000) and 2024 (24000) bonds at National Bank Financial

TFSA

$5000 cash at BMO

Taxable Accounts

$53,000 8 Drip stocks
$1600 Other stocks

Total: $218,600

The good news is that Jim has more savings than most people. However, this portfolio reminds me a little of mine before I finally fired the financial advisors I had worked with. Jim has assets all over the place.

The biggest chunk of money is in mutual funds at National Bank Financial. I only looked up a few of them, but the MERs were high (between 2% and 3%). The first Vengrowth Fund seemed to have a 10% up front commission! The primary purpose of these mutual funds seems to be to generate fees.

This portfolio has a lot of duplication. The various funds no doubt cover many of the same stocks. It can feel like diversification to own many mutual funds, but this can just obscure what you really have.

My personal preference is to own low-cost index ETFs or funds rather than actively-managed mutual funds. I’m actually getting out of the business of picking individual stocks, but it is possible for knowledgeable investors to create an appropriately-diversified portfolio of individual stocks. I just think it’s easier to use index ETFs.

I’d be interested in hearing what readers think of Jim’s portfolio.

11 comments:

  1. I think your comments are right on. There are too many expensive mutual funds and too much duplication. I didn't calculate his equity allocation, but he seems to own a high percentage of stocks for someone his age. Even if he's comfortable with that much in stocks, I would prefer to use ETFs as you suggested.

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  2. I think he should find a financial guru like this guy http://blog.canadianbusiness.com/another-investment-guru-may-have-duped-unsuspecting-canadians/ , but if he can't find a can't lose deal like that, maybe just consolidating into one self directed account and then set up one of the many "Lazy Portfolio" investment models and go from there?

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  3. What's the point of a cash TFSA?

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  4. The mutual funds are the main problem area as you say. He could think of getting some real return bonds in the RRSP. Also doesn't seem to be a lot of non-Canadian equity content. Given the lack of company pension, the fixed income proportion - about a quarter of total assets - seems on the low side to me - maybe 30 - 40%.

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  5. We have some good thoughts so far. Patrick -- maybe the cash TFSA is an emergency reserve?

    Overall, the portfolio seems unfocused. What seems needed is an overall plan and a way to execute it for low cost. Avoiding hidden costs requires knowledge, particularly if an advisor is deliberately obscuring them. I have my own thoughts on a sensible overall plan that works for me, but investors need to pick something that works for them and they can stick with.

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  6. @Michael - correct me if I'm wrong, but putting cash in a TFSA offers no financial advantage and just adds paperwork. (I guess there's the benefit of a named beneficiary in case of his death.)

    I'd think he should move that cash into an ordinary savings account, and put $10k of his bonds in there instead. ($20k if he's married!)

    Granted, I'm picking on a minor flaw in a portfolio in need of some major reworking.

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  7. Patrick: Good point. I was guessing at Jim's motivation, but you're right regardless of his motivation.

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  8. A bit of a mish mash (and you can tell he was sold several favors of the month). However, what does he actually want out of life?

    It is not a well constructed portfolio but asset allocation should match life stage, expectations, tax brackets etc. (probably all the stuff a bad advisor would not ask first before pushing product).

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  9. I hope this guy took full advantage of the tax relief associated with the LSIF Vengrowth funds because they are now frozen and no redemptions can be made from them. Instead, investors will receive their investment returns in the form of annual distribution payments from the Funds. In future years, the Board of Directors for each Fund will begin to determine the surplus cash (see Q&A) available to be distributed as a dividend to all shareholders at the end of each fiscal year. The final determination amount will be decided after the annual audit is complete, which is expected to occur within three months of each year-end, or November. The Board of Directors will have the discretion to make dividend distributions more than once a year, if warranted.

    The dividend will be paid to each shareholder’s account on a pro rata basis. This means that the total amount received is related to the number of shares owned, regardless of the purchase date. There are no forms to complete to participate in the distribution. There will be no tax credit clawback on this dividend, regardless of the length of time a shareholder has held their investment.

    These funds also have had dismal performance records. Anyone I know who has them has lost money (even before the market collapse!) Very risky! We don't know how much of his RRSP portfolio is in the various Vengrowth funds he owns. Why were they in the RRSP account anyway? There's no opportunity to take advantage of capital losses within the RRSP.

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  10. Higkland Jen: Thanks for the information. I suspect that Jim had no idea what he was getting into with these funds. As for why they are in his RRSP, my guess is that some advisor either wasn't thinking at all or was assuming that they would make lots of money which would be good to shelter. Either that or these funds paid big commissions.

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  11. Vengrowth will end up worthless like all their other funds. These guys are crooks. When they feel you may get out, they prevent you from selling then take the price to zero and I mean ZERO.

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