REIT Fund IGR - 2014 Outlook

Seeking alpha reports on an attractive REIT fund:

"Looking through areas of the market that have underperformed this year for opportunities, one theme sticks out -- stocks that are perceived to be negatively impacted by higher interest rates. This trade has been particularly hard on real estate investment trusts (REITs). Raising interest rates could negatively impact REITs, particularly in a scenario where interest rates rise while the underlying economy stays weak. However, economic improvement can drive better underlying REIT fundamentals. If demand for office or retail space improves, it allows the owners of that space to raise their rents. The REIT sell-off this year may be a market overreaction that can be taken advantage of to generate excess returns in 2014.

The CBRE Clarion Global Real Estate Income Fund (IGR) is an option worth considering. This is a closed-end fund that invests in global real estate. IGR has a solid track record, offers an attractive distribution, and is trading at a discount wider than its historical averages. This article looks to offer a deep dive review of IGR to evaluate its attractiveness as an investment for 2014 and beyond.

Rising interest rates have been a concern for REIT investors this year. IGR's semiannual report ... show(s) returns for REITs in periods of rising interest rates. While this time may be different, the strong returns for REITs after initial sell-offs could bode well for IGR in 2014.


The negative view of REITs has driven underperformance YTD. Discounts on closed-end funds have also increased as investors sell to allocate capital to better performing areas of the market. At year-end, this has also generated one of the few opportunities in investors equity portfolios to harvest losses. This has opened up some opportunities in CEFs that may be worth taking advantage of.


Using an ETF with a similar investment objective gives a good comparison to allow for evaluation of the management's performance. The SPDR Dow Jones Global Real Estate ETF (RWO) appears to offer a relatively similar investment objective to IGR and should allow a good comparison to evaluate performance. ... based on NAV performance IGR has trailed RWO on a year-to-date basis, but it has outperformed on a trailing three-year basis. On a trailing five-year basis it has outperformed by more than 3% annualized.


The fund closed Dec. 26, 2013, at a 12.25% discount to the NAV or underlying value of the portfolio. This is below the 52-week average discount of 7.75%. The average discount since inception is 8.44%, so there is some room for the discount to contract. During the past 12 months the fund has traded with a discount as low as 0.10%, showing there is the potential for volatility of the discount to NAV. The current discount offers an attractive entry point for this fund. The discount is likely due in part to the weak recent performance of REITs because of concern about the effect of higher interest rates on REIT business models. REITs have sold off hard since the potential of tapering quantitative easing was put on the table by Ben Bernanke, and the fund's market discount to NAV has increased since May as well. As long as interest rates don't move too quickly and the economy is strong enough to support rent increases, REITs should be able to perform well, which should drive the discount to narrow."

Best Foreign ETFs for 2014 asked several investment strategists to share their one best ETF that investors should consider buying for 2014.  This is what they gathered:

1. Alan Rosenfield, managing director at Harmony Asset Management in Scottsdale, Ariz. with $75 million in assets under management.

Most of the Street, from Pimco toJPMorgan ( JPM ) is projecting growth next year in the range of 3.25% and a stock market return between 10% and 15%. The surprise will be looking where most others are not. We have been buyingiShares MSCI Mexico ( EWW ).

While most U.S. newspapers carry stories about gangland murders, what is really going on in Mexico is very different. For the past year, Mexican politicians have been showing up our own Congress by actually working together to strengthen their economy.

Just recently, both houses approved allowing foreign investment in their oil industry -- an industry that has been closed to outsiders for more than 70 years. Mexico is one of the largest producers of oil in the Americas, and adding capital and know-how could improve their output dramatically.
Mexico has also started changing banking, education, labor and telecommunication regulations to free up its economy. There is even talk about allowing noncitizens to own real estate.

That is a lot in a single year, and don't kid yourself, this is just the beginning of what will be a struggle to reduce the power of many special interests that benefit from the status quo. But such moves will ultimately provide powerful stimulus to the Mexican economy.

Mexico now produces products more cheaply than China, and it costs far less to ship from Mexico to the U.S. than from China. In addition, the economic and political friction between China, the U.S. and our allies will provide further interest in having production operations somewhere besides Asia.
Finally, if the Street is correct and Europe starts to grow next year and the U.S. increases its growth, Mexico will have added wind at their economic back.

2. Stephen Blumenthal, CEO of CMG Capital Management Group in King of Prussia, Pa., with $500 million in AUM.

The ETF with the most upside potential over the next several years isProShares Ultra Short Yen ( YCS ).

Japan is one of the most heavily indebted developed countries on the planet. Its total debt to gross domestic product is over 500%, compared with the U.S.'s 365%. Japanese gross sovereign debt is around 240% of GDP -- numbers that are substantially higher than most of the developed countries. They are borrowing to finance over 50% of their government spending. Japan's public debt breached 1 quadrillion yen this past summer.

Japan is at a significant disadvantage with too much debt, not enough revenue, and disproportionally poor demographics to grow the revenue Japan needs to increase growth, increase revenue (taxes) and do it in the face of an aging population. Not only does an elderly population consume less, they earn less and thus pay less tax. Japan's population is shrinking.

The reality is that Japan is completely insolvent. The U.S., E.U., U.K. and China are all in some form of debt-related crisis and are all printing at the same time. It is doubtful that South Korea and Singapore sit idle and say "sure, take our sales." They too will devalue to maintain global positioning.

We are in a global currency war, and such wars have a history of lasting a long time. The common problem is unmanageable debt. There will be points of crisis, and I believe Japan is next to step on stage. The Japanese yen sits in the least competitive position globally, especially in comparison to the U.S. dollar.

3. Gary Gordon, president of Pacific Park Financial in Ladera Ranch, Calif., with $115 million AUM.

The S&P 500 will rise from current levels to top 2100 at some point in 2014, though it will finish closer to 1975. It will be a much rockier ride than 2012 or 2013 due to the heavy spotlight on how much and when the U.S. Federal Reserve shifts its rate policies.

Rate sensitivity will create greater volatility than investors currently think. The primary catalyst that will drive the market higher, though, is an extremely measured, very slow Fed exit from QE, meaning that they will be relatively successful at keeping a lid on interest rates in 2014.

As long as the 10-year Treasury note does not rise beyond the 3.25% level, investors will continue to put more money to work in stock assets. Due to valuation concerns, however, I give the nod to a foreign ETF that will benefit both from the Fed's measured exit and the European Central Bank's increased stimulus.WisdomTree Hedged German Equity ( DXGE ) offers exposure to some of the best German brands (e.g.,Daimler ( DDAIF ),Siemens (SI),Bayer (BAYRY), etc). Germany is the best in regional breed. A price-to-sales ratio of 0.6 is a huge bargain relative to what's out there. And investors do not have to worry about fluctuations in the value of the euro.

But U.S. is slowly tapering quantitative easing. Europe, on the other hand, is still cutting and stimulating. The dollar will strengthen against the euro, helping DXGE. Declines in the euro's value increase exports. Investors will play the global central bank policy game as long as the Fed doesn't tighten too fast.

4. Daniel Beckerman, president of Beckerman Institutional in Oakhurst, N.J., with $45 Million in AUM .

Emerging market stocks have lagged other asset classes so far this year. The year-to-date return for theiShares MSCI Emerging Markets (EEM) is -5%. In contrast, the S&P 500 soared over 31%.
However, I view emerging market stocks as a classic contrarian/value play. They are out of favor and they are cheap. Emerging market stocks trade at a price-to-earnings ratio of about 12. This places them at about a 25% discount to U.S. stocks. Although much has been said about their recent underperformance, emerging market stocks have enjoyed superior returns to U.S. stocks in eight out of the last 10 full calendar years.

Furthermore, although there have been concerns about a slowdown in China and India, the growth rate of the emerging markets, overall, trumps that of the developed world. It is also the developed world that now has the largest debt imbalances, whereas the emerging markets are in better shape.
My ETF pick for 2014 would beWisdomTree Emerging Markets Small-Cap Dividend (DGS). Because it invests in smaller companies, you have more direct exposure to companies that are selling products and services directly to the emerging markets consumer.

The larger companies tend to do more business in the U.S., Europe and Japan. The P/E ratio for DGS is about 12. Therefore, it is not trading at a premium to emerging market stocks generally. And small companies tend to outperform larger ones in the long run.

Also, because the ETF overweights dividend-paying securities, you end up with more exposure to shareholder-friendly companies. In terms of performance, DGS has beat out its general emerging market counterpart ETFs such as EEM over the past five years and since it was launched in 2007.
The risks in this space are that emerging markets behave with more volatility than the U.S., so they can be subject to more downside in a sell-off. Also, it is possible for the relative outperformance in developed-market stocks to continue in the near term.

However, this probability is more than priced in. I expect to see relative underperformance in both U.S. stocks and bonds compared to the emerging market world.

5. John Forlines, chairman of JAForlines Global in Locust Valley, N.Y., with $411 million in AUM.

While U.S. bank stocks have largely recovered from the Great Recession, European banks remain priced for depression. As a result, we favor owning European financial stocks throughiShares MSCI Europe Financials (EUFN), which owns European banks, insurers and diversified financial firms.
Pro-austerity governments have been defeated in many countries, and even Germany will likely ease its stance on the issue with German Chancellor Angela Merkel's center-right CDU/CSU party (Christian Democratic Union of Germany and the Christian Social Union of Bavaria) forming a "grand coalition" with the center-left SPD party (Social Democratic Party) following this year's elections.

The easing of austerity measures across the continent has been ongoing, but its positive effects have just begun to be realized. Eurozone GDP growth has turned positive and many leading indicators suggest that a further strengthening of economic conditions is in order. With sovereign bond yields in crisis countries having fallen significantly, we expect a further easing of austerity measures, which should continue to stimulate growth.

We expect the European Central Bank to act much more aggressively if signs of a new crisis emerge. The days of wooden insistence by the ECB that crisis countries save their banking systems on their own have passed. Even absent renewed crisis, we expect additional accommodation to be provided by the ECB next year.

Disinflation has been the dominant force in the eurozone since late 2011 and some countries have entered or are on the edge of outright deflation. There are three policy measures that the ECB can employ to help generate inflation, which is badly needed to help bring down debt burdens in many countries. First, a third round of the ECB's long-term refinancing operations would help buffer banks' balance sheets and enable them to increase lending. Second, the ECB could employ negative interest rates on deposits held at the ECB to encourage banks to make loans rather than hoard cash. Third, the ECB could follow the lead of the other major central banks and pursue a policy of asset purchases.

The latter two policies would be controversial, but we believe the ECB would implement them if necessary to prevent deflation. If we are right in our assumptions, then European bank stocks are undervalued and 2014 may see their valuations driven much higher.

6. Charles Freeman, portfolio manager at Holderness Investments Company in Greensboro, N.C. with $106 million in AUM

For 2014, we are looking atWisdomTree Europe Hedged Equity (HEDJ). Europe has started a tentative recovery, and we look for momentum to accelerate next year. After coming out of recession earlier this year, PMI numbers show expansion in Eurozone manufacturing and confidence is firming. The recovery is not exactly even, with Germany leading and France slipping in many categories. Still, European Cental Bank President Mario Draghi is keenly aware of the fragility, and has committed that the ECB will step in as necessary. A significantly lower-than-expected inflation number in October has sparked comparisons to Japan in the 1990s. Draghi swiftly cut the main refinancing rate to 0.25% in response, and we think the ECB will do much more in an effort to avoid a deflationary cycle.

Politically, there have been several positive developments that should support the recovery into 2014. Angela Merkel was able to prevail for a 3rd term and negotiate a coalition government in Germany. Progress has been made regarding a banking union, which will certainly help confidence going forward. The ECB has already been named supervisor to the region's largest banks, and will begin financial reviews next year. Further, finance ministers are very close to an agreement on an agency and fund to support troubled banks in the future.

Lastly, the main reason why we like HEDJ vs. another Europe ETF is that the euro effects are hedged. We think the euro may depreciate in 2014, so U.S. investors would want to hedge the currency effects. With the ECB's commitment to more stimulus, and the uneven recovery among countries; we think that more will be done regarding monetary policy next year which should pressure the euro. Also, with the Fed beginning to taper, we expect the dollar to appreciate against the euro. So by hedging the euro, positive returns in Europe should be augmented.

7. A. Gary Shilling, president of A. Gary Shilling & Co. in Springfield, N.J.

My recommendation for 2014 is currency-hedged Japanese equities as tracked byWisdomTree Japan Hedged Equity (DXJ).

Unlike his predecessors in recent years, Prime Minister Abe retains enough voter backing to override the powerful but cautious government bureaucracy to implement his three arrows. He hopes that massive central bank purchases of government securities, substantial government spending and structural reform will propel the economy out of its two-decade-long deflationary depression. The first two are easy to implement since Abe installed his backers as the Bank of Japan's leaders, and fiscal stimuli already have been emphasized for two decades.

Structural reform is tough since Japan was ruled by military feudalism until the 1850s, when the U.S. forced her to open to the West. That led to forced industrialization and the facade of Westernization, but feudalistic attitudes remain.

Japan's low fertility rate and zero-immigration policy are already causing population and workforce declines. Women are an obvious source of new employees, but they didn't work outside the home during feudalism and Japan's female labor participation rate is among the lowest of developed countries.

Japan's lifetime employment system follows from feudalism, in which people are tied for their natural lives to their liege lords. Lifetime employment commitments by major businesses in Japan, of course, deter hiring except for temporaries and, therefore, impede efficiency.

Corporate takeovers also spur efficiency, but are shunned in Japan, where takeovers in feudalism were military and involved the horrors of war. Land is the economic base in feudalism, and its carry-over makes agricultural land reform in Japan very difficult. This is especially true in rice farming, where small plots are common, producers are heavily subsidized and imports are curtailed.
Political divisions in feudalistic domains aren't normally based on proportional population, and that's still the case in Japan. Because the Liberal Democratic Party controlled Japan for most of its postwar history and received much of its support from rural areas, those districts generally have greater representation in the parliament, the Diet, than do urban areas.

Some rural districts have only a few thousand people but one representative, while some districts in major cities with hundreds of thousands also have just one representative. As a result of agriculture's tremendous political power, river beds in rural areas are paved while needed airport and highway investments in Tokyo wait.

Still, Abe's efforts to stimulate economic growth, eliminate debilitating deflation and trash the yen to benefit exporters should be enough to propel Japanese stocks in 2014. Currency-hedged equities avoid giving back in foreign exchange losses the gains in yen terms.
Best U.S. ETFs

8. Neena Mishra, director of ETF Research at Zacks Investment Research in Chicago, Ill.

U.S. stocks had an excellent performance during 2013. I expect 2014 to be another good year for stocks, though it will probably not be as spectacular as this year.

There is no doubt that quantitative easing has been a major force behind the market's rally this year but the start of tapering signals that the economy is now strong enough to withstand the gradual withdrawal of the Federal Reserve's support.

A healing labor market, improving housing market, lower energy prices and still very accommodative monetary policy are expected to further support the market, while the fiscal uncertainty continues to pose some head winds.

At current levels stocks are not cheap, but they are not expensive either, specially compared with most other asset classes. Further, corporate earnings will grow as the economy improves further.
A gradual rise in interest rates is good for stocks in general, but some sectors will do better than others. Industrials and technology are among the sectors that do well when the economy grows, and on the other hand, rate-sensitive sectors will be hurt.

Also, once the QE begins to fade away, investors will turn their focus on fundamentals and only the "better" or "high-quality" stocks will shine. Academic research shows that high-quality companies consistently deliver better risk-adjusted returns than the broader market over the long term.
My pick for 2014 is iShares MSCI U.S.Quality Factor (QUAL). QUAL identifies high-quality stocks on the basis of three main fundamental variables: high return on equity, stable year-over-year earnings growth and low financial leverage.

Apple (AAPL),Google (GOOG) andJohnson & Johnson (JNJ) are the top three holdings of the fund, while technology takes about 40% of the asset base.

I like the ETF's focus on larger, stable, cash-rich companies in industries that typically perform well in the higher-growth environment. With the economic growth picking up in the eurozone, Japan and China, large-cap companies that derive almost half of their revenue from the outside of the U.S., may perform well. They also look attractive compared with the small-cap companies on a valuation basis. However, they may underperform if investors continue to favor high-beta, domestically focused stocks.

9. Joe Barrato, CEO of Arrow Investment Advisors in Olney, Md., with $621.3 million in AUM.

With Fed tapering on the horizon, interest-rate risk will continue to challenge investors to seek alternative sources of income, with the search for yield remaining a driving theme in 2014. Since roughly two-thirds of fixed-income issuance occurs outside the U.S., we believe a global approach to fixed income makes sense for purposes of yield, return opportunities and diversification.
We also see improving global growth next year, which may benefit international equities, particularly in developed countries where valuations and fundamentals remain relatively attractive.
Concerns over rising interest rates have led some investors to reduce the duration of their fixed-income holdings in an attempt to reduce volatility. One approach is to take duration out of the equation by looking for alternatives to traditional bond investments. With interest rates at or near an all-time low, investors' fears about rising interest rates are justifiable, making a multi-asset approach to yield attractive next year.

As such, we continue to talk with investors aboutArrow Dow Jones Global Yield (GYLD), which offers a competitive yield (30-day SEC yield of 6.04% and distribution yield of 7.22% as of Dec. 17) along with multiasset exposure to potential growth opportunities on a global scale. In addition to global equity exposure, GYLD provides equal weight exposure to global sovereign debt, global corporate debt, global alternatives such as master limited partnerships (MLPs) and global real estate.

Low Cost ETF Portfolios

Fama and French: Three Factor Model
Until 1992, researchers couldn't fully explain what sources of investment risk produced higher returns . Earlier, the exposure to the equity market (as opposed to fixed income holdings) was used to explain about 70% of returns.  Call it the market factor.

In 1992, Eugene F. Fama of the University of Chicago and Kenneth R. French of Yale University developed a three-factor model, adding two fundamental factors to better describe the differences in the returns among stock asset classes over time. 
Spam-a and French's: Three Slice Lunch

They concluded that exposure to three risk factors in their fancy model — i.e., market, size, and price (book-to-market) — together could explain about 90% of the variability of returns of diversified portfolios.  Can anyone explain why there are fancy Dijon mustards and no fancy Dijon ketchups?

Fama and French showed how much of average annual returns each of the three factors explained.  Over 85 years, the size factor (the difference between small and large stocks) and the value factor (book value to market value) explained as much as the market factor (exposure to equities minus T-bills).  See bar chart at left.

Comparing some individual stocks you can see how value pays off.  I love this comparison of a growth stock like Motorola (MSI on the NYSE) and the value stock for makers of SPAM, Hormel Foods Corporation (HRL on the NYSE).  Over 25 years, Motorola is up over 1000%, while Hormel Foods is up over 10,000%.   

You can take advantage of the three factor model in your investing.  Dimensional Fund Advisor funds tap into the Fama and French investing philosophy and previously were
 available to high-net-worth clients through a small group of fee-only advisors.  Alternatively, ETF portfolios have been developed to also match the Fama and French philosophy - the model ETF portfolio below has a weighted MER of 0.36% and assumes 60% equities and 40% fixed income.

Asset class                      Allocation                 Exchange-traded fund                    MER
Canadian core equity            12%               Claymore Canadian Fundamental (CRQ)   0.68%
Canadian small-cap equity    8%                 iShares S&P/TSX Small Cap (XCS)             0.55%
U.S. core equity                     8%                 PowerShares FTSE RAFI US 1000 (PRF)   0.46%
U.S. value equity                    4%                Vanguard Value (VTV)                                 0.14%
U.S. small-cap equity             4%                Vanguard Small-Cap (VB)                            0.14%
International core equity        8%                Vanguard Europe Pacific (VEA)                   0.15%
International value equity      4%                 iShares MSCI EAFE Value (EFV)                 0.40%
International small-cap equity 4%            Vanguard FTSE All-World ex-US Small-Cap (VSS) 0.40%
Emerging markets equity       4%                Vanguard Emerging Markets (VWO)             0.27%
Global real estate                  4%                Claymore Global Real Estate (CGR)             0.70%
Short-term bonds                 40%                iShares DEX Short Term Bond (XSB)           0.25%

You can hold the Dimensional Fund Advisor Mutual Funds at Questrade.  If you do, you can also minimize adviser fees by reclaiming up to 0.9% of the trailer fee with their Mutual Fund Maximizer Rebate.  The rebates kick in after a monthly processing fee is reached (capped at $29.95 per month). Questrade has Dimensional funds available including:
  • DFA US Value
  • DFA US Small Cap
  • DFA International Value
  • DFA International Small Cap
  • DFA 5-Year Global Fixed Income
  • DFA Canadian Core Equity
  • DFA International Core Equity
  • DFA US Core Equity
  • DFA Global Real Estate Securities
Get creative and you can mix and match Dimensional mutual funds and ETFs - you can buy the ETFs for fee at Questrade and benefit from the trailer rebate.  Advisors have developed model portfolios using this approach (they charge a minimum of 1% on top of the MER, but their fees can be tax-deductible on non-registered investments). Below are suggested weightings of DFA funds and ETFs from Vanguard if you want to put the portfolio together your self based on your risk profile.


Sir Paul says Beep Beep, Beep Beep, Yeah!
Yes, a car is the worst investment you can ever make - guaranteed in most cases to depreciate to zero.  But CAR, Canadian Apartment Properties REIT, CAR-UN.TO, or "Cap" or "Cap REIT" shares are poised to drive higher.

Seeking Alpha recently suggested a 25% upside on the stock and cites these fundamentals:
  • Operating revenues up 22% year/year
  • Net operating income ("NOI") up 23.3% year/year (same property NOI up 5.5% year/year)
  • Funds from operations ("FFO") up 33.2% year/year (up 13.7% per unit year/year)
  • FFO payout ratio declined from 81% to 73.2%
The monthly dividend of 9.6 cents per share pays daddy every month, cruisin' all the way down Penny Lane.  That's a 5.4% annual yield.

Oooooooooooooooooooo !
Company report facts:

Cap REIT owns and operates a portfolio of multi-unit residential rental properties, including apartments, townhomes and manufactured home communities located in and near major urban centres. Cap REIT's concentration on the residential real estate market is aimed at solid year over year income growth in a portfolio with stable occupancy. In addition, Cap REIT mitigates risk through demographic diversification by operating properties across the affordable, mid-tier and luxury sectors as well as through geographic diversification across Canada. As at June 30, 2013, CAPREIT owned interests in 37,998 residential units, comprised of 34,628 residential suites and 14 manufactured home communities ("MHC"), comprising 3,370 land lease sites.

Like most Canadian REITs, Cap REIT has been on a slide since the summer.  Right now it sells for less than book value, giving some protection on the downside.

Talking Sharks and Floating Rate Income Funds

When I was as kid there was this annoying talking shark on TV called Jabberjaw.  He talked like Curly from The Three Stooges.  Luckily it was only on with the Saturday morning cartoons.

Today there is an annoying shark on TV called Kevin O'Leary ... his hair looks like Curly's from The Three Stooges. Unfortunately, he's all over the place on CBC, on CFRB 1010 for the morning and afternoon drive.

Both Jabberjaw and O'Leary are two-dimensional characters with some entertainment value but not always a whole lot of substance.  One exception may be the O'Leary Funds Floating Rate Income Fund.  It is described as a:

"a diversified portfolio comprised of senior secured floating rate loans, floating rate notes and other debt obligations of investment and non-investment grade global issuers"

The fund intends to generate income while protecting capital from the impact of increasing interest rates.  It does this by keeping a short portfolio duration (under one year), which limits impact when (not if) rates increase.  The target distribution is almost 5.9%.

Fund companies must smell blood and are now circling investors and pushing FRN's (floating rate notes).  Dynamic Funds is offering a similar fund and ING will be soon.  O'Leary Funds and others are squid-jiggin' investors by understating the risk of FRN's - the BMO FRN fund has not recovered from its credit crisis losses.  So look before you leap into these murky waters!

Turducken Investing Strategy This Thanksgiving

Apparently my local Sobey's isn't stocking turducken this year because they were all getting stolen!  So while I lament another turducken-less Thanksgiving - I still haven't tried it - I'll just have to be content to work on my Turducken Portfolio this weekend.
Inspiration for Turducken Portfolio ! Yum !!!

Just like turducken, as Turducken Portfolio is transparent in terms of what's in it.  Unlike other meats where its hard to relate the animal to the food (think pig - pork - ham, or cow - beef - steak), a turducken has a turkey's meat, a duck's meat, and a chicken's meat in it.  All stuffed in each other like those Russian nesting dolls.

If you can't tell what's in your portfolio and it has a fancy name like Allegro or Alto that doesn't tell you what's in it, like those from Investors Group, then sharpen the Ginsu blade and slide it open for a peek.  In the case of many Investors Group portfolio, they are stuffed with other managed funds that follow benchmark indices.

Investors Group management fees are to your investment as pan drippings are to a Thanksgiving meal: a slow and steady drip, drip, drip.  There is nothing worse than a dried up turkey or investment portfolio that has been drained dry by management fees.  As a turducken keeps the taste inside the layers, and a Turducken Portfolio keeps the earnings inside by keeping fee losses low.

A BMO Monthly Income ETF has a management fee of only 0.55%.  As they say, "ZMI is a fund of fund, the management fees charged are reduced by those accrued in the underlying funds."  Holding a range of bond, REIT, utility and financial ETFs it scores high on the Turducken-meter. It yields over 5%.  Compare this to Investors Group portfolios that add to the fees of the underlying funds.  It may be 0.15%, but in a conservative portfolio with low yields, that drip, drip drip adds up over time.

So forget about those starchy Couch Potato investing strategies!  Bury that Uber Tuber and dig into a Turducken Portfolio this year!

Rain Tax Developments and REIT Financial Impacts

More municipalities are signing on to a "rain tax" to fund stormwater management programs.  These programs include the ongoing operation and maintenance of drainage systems (storm sewers, ponds) and construction of new infrastructure to reduce flood risks, limit erosion and improve water quality in creeks and rivers.  With flood damages now surpassing fire as the largest cost to insurers, there is no wonder that stormwater management needs are front and centre.  The July 8, 2013 storm in the GTA was a not so gentle reminder of the infrastructure deficit facing municipalities.

Municipalities have adopted different fee structures to distribute costs  - each will affect REITs and other property owners differently.  In some cases, a flat fee to all property owners is chosen and this will benefit large properties (retail, industrial and commercial REIT).  For example, Richmond Hill's flat fee (starting October 2013) will keep the largest property fees low in proportion to the property size.  Essentially, smaller properties subsidize the larger ones.  In contrast, Mississauga's fee based on impervious land use will result in the highest fees for the largest, most-highly paved properties.  The same approach was followed in Kitchener and Waterloo who implemented their user fees 2 years ago.

Apartment REITs may get the most equitable fee allocation.  Vertical developments are the most sustainable, lowest runoff residential land use and several stormwater fee structures recognize that.  The Mississauga, Kitchener, Waterloo approach will reward compact development - high rise apartments will have a lower cost per unit compared to low rise apartments since you only pay once for the rooftop area, no matter how many floors.  In Richmond Hill, the flat rate will apply once to condo buildings and complexes, and "multi-residential" residential properties with one owner.  While multi-residential may be subsidizing larger malls and industrial properties in Richmond Hill what have the same flat fee, the fact that only 80% of costs are allocated to non-residential uses means the absolute fee is low.

Stay tuned for analysis on cost per property comparisons and cost per area impacts.  Also, what can REITs do to reduce the impact of fees by taking advantage of credit programs for property owners offered by some municipalities. now on Twitter

Follow us at @Investing_Ideas.  Our user name is Investing 101.

CareVest Carecana Redemption - Tin Roof Rusted

Carecana Management Corp. is mailing interim CareVest statements.  To reduce costs, only online statements will be available as of January 1, 2014.

If you are part of a redemption for Class A Shares in Carevest Mortgage Investment Corporation, the statement will be helpful in tracking capital losses given the cut in redemption price.  Balances of un-redeemed shares are shown in a "Total Cash Account" line item (not really cash given it shows an amount of shares under the "Shares Held" column).

The Class A Shares price remains at $9.90 for its NAV / Redemption Price Per Share.

PS - driving up Highway 404 you can spot a fading "Financing by Carevest" sign off to the east.   Too many bad deals on speculative developments might have dragged down this MIC.  When you see a faded sign at the side of the road, its always better if it says 15 miles to the Looooooove Shack!  Love Shack Yeah.

Timbercreek MIC on Decline

Timbercreek Mortgage Investment Corp's steady steel wheels have run off the rails, with the price of TMC falling by over 12% in the last year.  Typically it has seen no price action and has had very low beta.  The whip came down in June, pushing the MIC's yield to a sweet as brown sugar 8%.  This is despite the steady 6.3 cent payout per month (equivalent to 0.68% this past September).


Another MIC ready for a comeback!
In an interview with, Andrew Jones, Managing Director, Debt Investments at Timbercreek Asset Management, was asked about the impact of rising interest rates.  Jones noted that MICs have built-in protection as the loans are typically of short duration (e.g., Timbercreek average duration remaining is between 18-24 months).  The high portfolio turnover means about half of  loans could be repaid each year. So the MIC is able to pursue new loans at higher interest rates in a short time if rates rise.  Also loans can include floor rates based on prime so that the MIC benefits from an increase in prime but is protected by a minimum 'floor' interest rate. That should gimme shelter from the shattered price drop of late.

Timbercreek announced it has received shareholder approval for the Corporation's transition from the Canadian securities regulatory regime for investment funds to the regulatory regime for non-investment fund reporting issuers.  Pricing will hopefully correct after the transition.

It has been noted that while a public company is more expensive to operate than a fund, Timbercreek says shareholders will benefit because the funds will no longer pay trailer fees to investment advisers who sell their units.

Blackberry Crumbles - How to Fix


1/2 cup all-purpose flour
1/2 cup light brown sugar
$5 cash per share
1/4 cup granulated sugar
1/2 teaspoon ground cinnamon
1 pinch salt
1/2 cup oats
6 tablespoons cold butter, cut into small pieces
4 cups mixed berries
millions in unsold inventory
1/2 cup granulated sugar
2 tablespoons cornstarch
Equipment: 6 (6-ounce) ramekins

How to Fix

Preheat oven to 350 degrees F.

In a large bowl combine flour, brown sugar, 1/4 cup sugar, cinnamon, salt and oats. Using a pastry blender, a fork or your hands cut in butter. Remove nuts!!!! Keep cold until ready to use.

In a large bowl combine berries, 1/2 cup sugar, and cornstarch; toss to coat. Evenly divide the fruit mixture between the 6 ramekins .. see if any is leftover for shareholders. Top with crumble topping. Bake until top is golden and fruit is bubbly, about 35 minutes ..may take more than a few quarter says Prem. Serve warm.

At least you'll feel good eating this.  Ingredients probably costs a lot less than what you bought your shares for!!!

Canadian REITs Beat-up - Trading at Discount to NAV

First Asset kicks the REIT tires at the end of August in a commentary on their funds:

REITs = seem beat-up like some cheesy DIY super hero
"Real estate equities on aggregate are currently trading at a ~13% discount to NAV while they generally trade at a premium. Implied cap rates are ~375bps higher than the benchmark 10 Year Government of Canada bond yield, slightly tighter than the long term average. A 25bps change in cap rates affects NAV by an average of 8-9% for our universe under consideration; alternatively a 25bps increase in cap rates implies REITs must grow same-property NOI by 3-4% in order to maintain current valuations. Assuming REITs trade at NAV, we estimate that the market is pricing in a 50bps expansion in cap rates. Given that the private market has not yet seen any expansion in cap rates, we view this expectation as premature.

Cash flow for the next year looks poised to increase on the back of favorable financing terms, continued strength in property fundamentals, and little in the way of forecast new supply. Based on our mid to high single digit cash flow growth outlook, and 5-6% distribution yield, high single to low double digit total returns appear achievable on a twelve month view. We acknowledge that higher interest rates could result in multiple compression which would temper our total return view."

The REIT ETFs from BMO (ZRE) and iShares (XRE) were both down about 15% from May highs.  The following charts show that today you can buy into these REIT funds at late 2011 prices !



Most REITs’ existing debt, which is renewing at 10% a year, is priced 1.5-2% above todays market rates for new debt.  So there is still an opportunity for REITs to to reduce interest costs when debt is refinanced.

Alien ETF Concept - No Fee Purchases at Questrade

For those with small investment portfolios, fees often forced investors into mutual funds in order to get diversification and to avoid erosion of returns from the fees of many small trades for many small holdings.

Free ETF purchases at Questrade now frees investors to purchase a few ETF shares at a time without that erosion.  Questrade says the following regarding limits on fee-free purchase:

"No limits. None. Nada. Zilch. You can buy one ETF or all of them, one share or as many as you’d like. There are no restrictions, no minimum investment amount, no maximum number of ETFs you can buy."

ETFonehome.. "Mom, I saved on trading fees!"
This is an alien concept that can open up new strategies for investors. Of course there is the hassle of making those small purchases.  If you holdings are large enough and provide a DRIP to purchase more shares with distributions then this is not an issue (DRIP purchases are free free already).   But if you are building a position in a different ETF, then free-free ETF purchases will help you get there.

This is an equation given under Portfolio Size for Choosing ETFs over Index Funds:

Size of portfolio for choosing ETFs = Trading commissions / (Higher MER – Lower MER)

An example Sleepy Mini Portfolio analysis showed that a $143,000 portfolio was needed to favour index ETFs over TD eSeries funds, considering $30 a trade.  With Trading Commissions = $0 on the right of the equation, the size of the portfolio on the left drops to $0 too, meaning index ETFs can be cost-effectively selected over index mutual funds for any size.

Best RESP GIC Rates .. The Bonds List

Despite other shortcomings (don't get me started), Questrade, does offer the best way to earn a guaranteed RESP GIC return in those years before redemption.  Perhaps you had some equity investment in the RESP in those early years and are looking to lock in the returns for the eventual redemption.  A self-directed Questrade RESP account may be the answer since you can sell your securities and buy GICs in the same account.
Top of the Bonds List

A big bank like RBC (Royal Bank) offers returns of 1.3% to 1.4% on 1 to 2 year non-redeemable GIC deposits in an RESP account.  Minimum deposit is $1000. Questrade does better.  Their returns are listed in this:

Questrade "Bonds" List

Scroll to the end of the list for the TERM DEPOSITS / GIC: 1 - 6 YEARS table where you'll find better rates from 2.0% to 2.25% for 1 to 2 year terms.  Rates are offered by several banks and trust companies.  Interestingly, Royal Bank offers 1.4% to 1.9% rates on 1 and 2 year deposits through Questrade - higher than what is shown on their web site: RBC GIC rates link
Bottom of Bonds List

Buying the GIC has no trading fee, even though its shown in your 'trading' account.  The GIC rates are competitive with the best non-RESP GIC rates you can get from someone like Achieva Financial, who we use for TFSA and RESP GICs.

The Questrade onds List also has a bunch of Bonds ... real Bonds, from Secondary Municipal, Government and Corporate Strips, High Yield, Corporate and Provincial products.  Scanning the corporate bonds list you'll find that you won't crack the 3.0% yield to maturity for most issues unless you lock up your money for 6 years.

Investors Group Zombie Fund Apocalypse

Have some brains.  Don't feed the IG zombie funds either !
Investors Group is having a special meeting to gobble up their poor performing funds.  Gone (like the last Twinkie in Zombieland) are Investors Real Return Bond Fund, European Dividend Growth Fund, Summa Global SRI Fund, Summa Global SRI Class, Mergers & Aquisitions Fund, Mergers & Aquisitions Class, and Mackenzie Universal Global Growth Class.

When IG "double-taps" their zombie funds, rolling them up into similar viable funds, it creates a survivor bias in the returns - the performance of the zombies is deep-sixed forever while that of the continuing fund lives on.

What is the impact of this? A Zero Alpha Group news release stated it simply as this:

According to the Savant Capital/ZAG study, when the little-understood “survivor bias” factor is taken into account, actively managed mutual funds in all nine of the Morningstar Principia “style boxes” lagged their related indexes for the 10-year period. In all but one of the 42 narrower Morningstar fund categories, the survivor bias effect worked to inflate fund returns. The Savant Capital/ZAG analysis also shows that the purging of the weakest funds from the Morningstar database boosted apparent returns on average by 1.6 percent per year from 1995-2004.

I don't know what the big deal is.  IG doesn't even show fund return on my statements.  Just like in Zombieland Rule #22,  you have to know your way out .. of Investors Group funds that is.  Wait for those sky-high redemption penalties (deferred sales charges) to wind down, work on your cardio, and run away into some index ETFs that can mimic the return of the increasingly bigger and bigger IG survivor / continuing funds.

P3 Guaranteed Investment Return - Pizza Ponzi Pyramid !!!

See this guy for a scheme that doesn't work.
Where can you get a guaranteed 50% return on investment in one month.  Yes - one month with no risk.

It is possible if you consider P3 projects - no, not those old school Public Private Partnerships.  I mean Pizza Ponzi Pyramid schemes.  This is the best example I have found.  It's great for the pocket book but tough on the waistline.  Best of all, there are gluten free and Halal options in some markets.

See these guys for a tasty 50% return !
Feast your eyes on the tried and taste-tested analysis below.  You'll need a cash-back credit card, on internet connection for the online survey and an appetite since the questionnaire 'prize' is valid for thirty days.

The return is 50% on in investment and you could earn that in as little as a few days and in two visits if you are on your second or greater iteration of the scheme (and have the fee item in hand at the first visit).

CareVest MIC Capital Loss on Converted Shares

If you are redeeming CareVest MIC shares this year, you may have to consider the capital loss considerations with the conversion and reevaluation of shares.

For example, Series 2 First Preferred shares bought a few years ago at $1.00 per share would have been converted to amalgamated corporation shares that were converted to Class A shares.  My statements show a conversion of 0.09517 meaning 1000 original shares with a purchase valued of $1000 gets you 95.17 new shares.  At $9.90 each, the value of the new shares is $942.18.  That's a loss of 5.7% or most of one years'returns from the MIC before the conversion.

The current distribution rate for Class A shares is cited as 0.036400 per month, or about 4.4% per year.

Pizza Pizza Investor Smiles

Even the pizza is smiling !
Investors who put their dough into Pizza Pizza certainly have something to smile about.  The royalty corps (TSX:PZA) has risen over $1 a share to over $12 over this past month.

It has been a strong run over the past few years as well and up a not-too-crusty 20% since the last post recommending it here in January.  That capital growth is on top of the baked-in 6.2% dividend you get at today's price.

Recently the company announced a 4% increase to its monthly shareholder dividend (up from $0.0625 to $0.065 per share).  As an eligible Canadian dividend, that return is equivalent to interest earnings of over 8% after tax.  Investors looking for yield should consider this as part of a diversified income producing portfolio.

CareVest MIC back to Carecana from Valiant

Longest-running, strong
 performing MIC
Pucker up to Carecana again.  Shareholder transfer agent duties are going back to Carecana from  Valiant Trust.  All inquiries and administrative requirements will be handled by Carecana Investor Relations - 1 800 278 3611.

Let's hope those CareVest MIC Class A share redemption cheques keep coming, and there is no interruption of staged payments for retracted shares.

Some MICs just keep rolling and rolling!

Be like OMERS not HOMERS - Invest Like a Pension Manager

"First you get the sugar,
then you get the power,
 then you get the women!"
- Homer Simpson
An advisor at my bank's full service broker told me that his goal in managing money was to be like a pension manager - that is, forget the Homer Simpson get rick quick schemes or "swinging for the fences".  Instead, his style was to progress slowly and surely, not extending yourself too far out on the risk vs. reward curve.  Basically, be like OMERS and not HOMERS.

Nearly 1 in 20 employed Ontario residents is a member of the Ontario Municipal Employees Retirement Savings plan - that's over 400,000 people climbing their way up the sunshine list like spring-blooming clematises...clematii, sun-loving vines.

OMERS' strategy for steady sustainable (and less volative) growth is to shift to more private equity, and less public equity.  For a large pension fund, public equity gives the portfolio that up and down motion that causes pension contributors to "toss their corn dogs" like kids on a state fair roller coaster.

OMERS' solution is to shift to 47% private equity in the portfolio saying this 'direct drive" ownership model provides greater control of investments with lower cost.  In some ways this is just like an individual investor trying to lower his management fees or seeking out private investments like MICs, mortgages or REITS.  The challenge for the individual is doing this with enough diversification.

"Forget the sugar (energy from ethanol is a waste of time),
then you get the uranium, then you get the power!"
 Borealis Infrastructure's Bruce Power nuclear generating station.
In 2012 OMERS posted these returns for parts of their portfolio:

OMERS Capital Markets    +7.5%
OMERS Private Equity   +19.2%
Borealis Infrastructure  +12.7%
Oxford Properties  +16.9%
OMERS Strategic Investments - 10.1%

Overall return 10.0%

The private equity components' weighted return was 13.8%, while the public equity (Capital Markets) was only 7.5%.  Many OMERS members can tap into this diversified, and private equity weighted investment portfolio at a nominal cost of only $35 per year through the relatively new AVCs additional voluntary contribution program.

Compared to my bank broker's management fee of 1 to 2% (on top of the underlying ETF fees in the holdings he favours) individuals in the AVCs program can easily be like OMERS and not like HOMERs when it comes to retirement investing.

PS - Unlike Homer's Springfield Nuclear Power company, Bruce Power has banned the use of Rubik's Cubes in all operator training.

Tax Slip Tracking with Online Broker - Interactive Brokers vs. Questrade

Maybe you have one of those Hermione Granger Time Turner trinkets that lets you go back in time and redo you tax returns painlessly over and over again.  I'm guessing you don't because you are reading and investment blog and could otherwise make your dough time travelling and picking lottery numbers instead of investing.  For you your time is money - and you get what you pay for when it comes to documentation and on-line brokers.  Here is an example of the difference between Questrade and Interactive Brokers when it comes to versions of your tax slips, T5s, T3s, etc.

Obviously it is important that you file your tax return with the most current slips.  Questrade's web site keeps you guessing as to whether a slip has been amended or not.  First of all, their client notice portion of MyQuestrade is full of generic notices and nothing specific to you to tell you than an amendment has been made to your slips.  Second of all, the listing of available slips in an account is inconsistent and not helpful.  You basically have to download, open and compare slips in the list to earlier slips to see if there are changes.    Below is an example - the captions in 2012 don't indicate if the slips is original or amended .. and yes 2011 slips were amended in August (ouch)!

MyQuestrade Tax Slip List .. good luck!

This year even some of the original slips had the amended "A" code on the slip report code (Box 16 on a T3), so good luck with CRA this year you masochistic Questrade clients!  Let's look at Interactive Brokers. First, they send email alerts when you have a new secure message on the site.  And they clearly sort and describe the versions of your tax slips.  Below is an example from the Interactive Broker's site.

Interactive Brokers - effective  tax slip version tracking.
Yes Questrade has 95 cent trades now ... you saved 4 cents!  We round off cents in Canada now so don't go pinching pennies with Questrade when the dollars and sense (cents) are in managing you time better.  Avoid Questrade if at all possible....that means more time for you to kick back and sip butter beer and pumpkin juice!

CVC Market Point Inc. leaving the GTA

CVC Market Point Inc. is leaving Mississauga.  Investors in Carevest MIC and Canadian Horizons should not be affected and can contact Carecana Investor Relations for any administrative questions and needs.
Cee Vee See ya later Ontario !

The rationale for the move as stated in a letter to investors was that it did not make sense selling new products in the Ontario Market.  Obviously as the Carevest MICs 'go public' there is no need to have offices to go in and shop for their products.  Products will still be available through some exempt market dealers and investment advisors.

Apartment REIT Adds Value With Upgrades

How can an apartment REIT add value to unit holders?  One approach is to upgrade properties and reposition them in the market, that is,  increasing rent cashflow and increasing the associated property value.  Property values can be expressed as a multiple of the free cash flow (i.e., the capitalization rate ('cap rate') is the ratio of free cash flow to asset value).

Skyline Apartment REIT provides and example for a Hamilton property where extensive units upgrades have increased the rent by up to $500 per month or $6000 per year.  The investment per unit is in the order of $25,000.  Given a cap rate of 6 %, the increase in cash flow results in an increase in unit value of 16 times that (i.e., the inverse of the cap rate) or $96,000.  Subtract the upgrade investment and that is an increased value of $71,000 for the unit holder.

Centurion Apartment REIT has also highlighted this approach for building unit holder value.  Skyline indicates that they will reassess unit values at least yearly to reflect increases in property and overall unit value.  Of course in a large portfolio these upgrades can take time as turnover occurs over many years.

PS - Mark Twain is quoted to have said "Buy land, they're not making it any more".  He could have added "Then polish it up and reap the rewards".

Questrade Fixes Tax Slip Errors...Maybe

One thing that is definitely beyond the capability of the Questrade staff is the ability to issue correct tax slips, the first or second time.

Welcome to Questrade Loser !  Population you !
The big disappointment is that they can repeat the same mistakes year after year.  The reason I have left Questrade is the hassle of getting them to properly assign the distributions for Horizon's ETFs, particularly the covered call ETFs.  Also if you hold several of the Horizons enhanced equity income products (HEX, HEE, HEJ ...) the reports truncate the name of the fund so Questrade makes you struggle to figure out which is which - this is something you have to do in non-registered accounts to assign the return of capital for a fund, etc.

Questrade messed up covered call distributions last year and this year again, but the good news is that if you had any of these products at Questrade, they have recently revised tax slips - sorry if you submitted your tax return already!  You can check the report code box 21 to see if a tax slip is amended ("A") or original ("O").  Another problem with Questrade is that they will submit the original and amended slips to CRA but indicate that both of them are original - YES YOU GET TO PAY TAXES ON THE SAME DISTRIBUTIONS TWICE AS CAPITAL GAINS, AND DIVIDEND - OH WHAT FUN!  Can Questrade staff sort this out for you?  No way.

Stay away from Questrade!

Investors Group Portfolio Changes

Investors Group is changing the make-up of several of their portfolios.

The Maxxum Dividend Growth Fund (by IG Mackenzie) with a 15 year annual return of 4% is being dropped (5% weighting) from Alto Monthly Income and Alto Monthly Income and Growth portfolios.

The Real Return Bond  Fund is getting the boot from the above portfolios as well as Allegro Conservative, Allegro Moderate Conservative, Alto Conservative and Alto Moderate Conservative portfolios.  The Pan Asian Growth Fund is being substituted for the Japanese Equity Fund.  In addition ...


PS - The IG notice says there will be no material impact to the MERs ... that is, they will remain sky high relative to other options.  BTW, I just got the quarterly IG portfolio styatements - no reporting of the returns - ever.  What you don't know won't make you switch.

CareVest MIC DRIP - Class A Share Distribution

Carevest Mortgage Investment Corporation Class A Shares continue to pay a distribution during the redemption period if you are enrolled in the DRIP.  Cheques are distributed by Valiant Trust.  You can enroll for EFT but that does not seem to have kicked in yet.

The distribution rate is 0.0367 per unit, that is, on each $ 9.90 share NAV.  This works out to 0.37% per month or 4.4% per year.  This is quite a drop from the distribution of 6.51% before the conversion.  You can beat that distribution from a publicly traded MIC like Timbercreek.  With the recent drop in share price over the last week it yields 7.65 %.  Alternately, a private MIC like Fisgard pays and even 5.00% right now and has none of the stomach churning unit value fluctuation.

PS - MIC-DRIP ... sounds like a runner up name for McDonald's McCafe....just sayin'....

A preferred share fund that's worth the fees! - Hymas MAPF

The Malachite Aggressive Preferred Fund (MAPF) run by Hymas Investment Management (James Hymas) is a fund that is worth the fees.  The lament about investment fund fees is really about the the performance that the management fee generates.  When your fund just follows and index, the fees just drag you down.

MAPF holds preferred shares.  What is different than preferred share indices (or the ETFs that follow these) is that holdings are actively traded, not passively held.

This is described best on the funds site which says:

The success of the fund’s trading is showing up in the very good performance against the index
the long term increases in sustainable income per unit.   As has been noted, the fund has maintained a credit quality equal to or better than the index; outperformance is due to exploitation of trading anomalies.

Again, there are no predictions for the future! The fund will continue to trade between issues in an attempt to exploit market gaps in liquidity, in an effort to outperform the index and keep the sustainable income per unit – however calculated! – growing.

A comparison of MAPF performance with the benchmarks and indices the the end of February 2013 is shown in the table below (click to enlarge).

The portfolio average 'yield to worst' is 3.87% at the end of March 2013.  With favourable tax treatment of dividends from the preferred shares, that is equivalent to over 5% of interest (other income) from a GIC or a MIC.  The trading makes up the difference in the returns and adds 3-4% to the return relative to the benchmark TXPR or a popular ETF (Blackrock's CPD) over the last year.  These returns are after expenses but before fees.  With fees in the 1% range for small holding, paying for the extra performance is certainly worth it.