Centurion Apartment REIT Performance

Like the previous post comparing Skyline Apartment REIT performance to a publicly traded apartment REIT, the private Centurion Apartment REIT has also been compared to publicly traded investments.  A slide from a few years back shows the performance relative to the TSX.  The Centurion REIT and its related fund (Centurion Apartment Properties LP (CAPLP)) held its value through the market correction of 2008-2009.  That's the benefit of not being publicly traded.  There are a lot of footnotes to the presentation that you can find here (too small to read from my screen capture).

Yes, holding the TSX was like riding the Crazy Mouse at the Canadian National Exhibition over this period - just try keeping down your lunch on that roller coaster.  Holding Centurion Apartment REIT was like the old Alpine Way ride - coasting smoothly high above it all.

Centurion makes performance calculations readily available on their site.  The following charts the LP and REIT since March 2006 to December 2012.  It assumes dividends are reinvested - returns are actually slightly better in the REIT given that there is a DRIP discount not shown here.

The overall returns are summarized below - pretty strong numbers!  

Skyline Apartment REIT vs Public REIT

This post compares the return of a publicly traded REIT and a private REIT.  The Skyline Apartment REIT is the private REIT example.  Although it holds both apartments and commercial property, we can compare it to Canadian Apartment REIT (discussed in the earlier condo vs. REIT post).

Skyline has just increased their unit value significantly, so feel free to look back at earlier investment values as well.  The chart below shows the unit value and total return assuming the monthly distributions were reinvested in their DRIP plan.  Since January 2006, a single $10 unit would have grown to 1.89 units valued at $13.25 each - a January 2013 value of $25.01.  That's a 14% annual return.

Skyline Apartment REIT

The shares in Canadian Apartment Properties REIT increased from $16 to $24.40 over the same 7 year period - that is an annual return of 13.6%.  When you add in the total distributions of $7.58, Canadian Apartment Properties REIT comes out ahead, but as you can see below, its at the price of a lot of volatility.


Condo vs. REIT 2012 (straw man comparison?)

Macquarie Equities Research has run a series of comparisons comparing the value of owning a Real Estate Investment Trust (REIT) to owning an individual condo (see latest).  That comparison compares publicly traded REITs like Boardwalk REIT (see chart) and the Canadian Apartment Properties REIT (see chart).

In the latest comparison, the 2008 to 2011 return for the Toronto Condo was 35.3% compared to 66.1% for the Canadian Apartment REIT.  Here's a snippit:

More recently, the value of condos in downtown Toronto area slipped by 1.8 per cent in 2012, equivalent to a $6000 capital loss given an average price over $340,000.  With some net rental income, say $1500, 2012 would still leave you with a total annual loss of over 1% holding the condo.  Canadian Apartment Properties REIT appreciated by 9.8% in 2012 and provided a distribution of 4.9% - a total annual gain of 14.7% holding the REIT.

I would not be just a nothin'
 my head 
all full of stuffin'
If I only had a brain.
The condo investment is really a "straw man" in this comparison - set up to easily knock down and beat out his stuffing.  A more reasonable comparison would be between a duplex or triplex in a non-frothy market, since the return on condos in Toronto or Calgary is obviously speculative and dependent on the price increases.

You can have the same hands-off management of a condo by considering a joint venture with a group like Brennan Property Investments.  They list current investment opportunities on their site (here) - today there is an Orillia fourplex opportunity with an expected total annual profit of 45.0% over a 5 year period - that is a 225% total return over 5 years.  This relies on only a 3% capital appreciation per year.  This exceeds the annual return of the REIT and the straw man Toronto and Calgary condos.  The purchase price for the 4-plex is the same as the average Toronto Condo price in 2012.

Of course there is the issue of diversity and level of effort involved - public REITs win on diversity and level of effort in the initial stages.  And for the Orillia fourplex, while you may get paid out first, you are sharing returns with your joint venture partner.

PS - Look for a future post on a comparison with private apartment REITs and smaller joint ventures.

Skyline Apartment REIT Rocks!

The Skyline Apartment REIT has just announced an update to its unit price!  The unit price of $11.00 per unit has held steady since 2009.  Today's unit price of $13.25 is a 20.45% appreciation.

"The increase in value of Skyline Apartment REIT's Units is due to its increased portfolio value which is the result of several factors including; capitalization rate compression, expense reduction, cash flows from new and existing properties and active management.", says the release.

The Skyline Apartment REIT continues to distribute $0.99 per unit annually, meaning the yield drops from 9% to 7.47% on the higher unit price.  If returns are used in the DRIP program to acquire more units, then compounded monthly distributions provide a higher annual effective return.  That is, (1+0.0747/12)^12 = 1.077 .. just over 7.7% per year.

The new yield is in line with that of Centurion Apartment REIT, which dropped after their most recent unit valuations - read increase.  Private REITs continue to offer great returns, low volatility (no volatility?), tax efficient distributions, and the potential for capital appreciation - just like today!

PS - Private REITs are available to accredited investors.

Prescribed Rate - Spousal or Child Loan

Are you 'in the one percent'?  Taking advantage of CRA's 1% prescribed loan rate that is?  Income splitting could help boost you from the 99% of income earners and up into the top.

CRA indicates that income splitting with a spousal loan is OK as long as the 'tranferor' of the invested funds is paid interest at the 'prescribed rate', and that the interest is paid no later than 30 days after the end of each calendar year in which it becomes payable.  Details can be found in section 21 of the following CRA interpretation bulletin IT-511R.  The deadline for 2012 interest loan is fast approaching, so act soon.

The prescribed rate is posted by CRA and has been at 1% since April 2009.  A good example calculation of how a this can save money can be found on the taxtips.ca site here.

Check with CRA here for the current prescribed rate including the first quarter rate for 2013.  Remember, even if rates go up (not likely for 2013) your prescribed rate is locked in over the life of the loan.  An example loan agreement can be found at the lawdepot.com (fill out their online form).

Currency Converter For Capital Gains and Losses

Soon it will be tax time - time for tallying capital gains and losses for last year.  CRA gives you a choice of calculation methods that you can use in your favour:

"Report your gains or losses in Canadian dollars. Use the exchange rate that was in effect on the day of the transaction or, if there were transactions at various times throughout the year, you can use the average annual exchange rate."

CRA has handy tools for looking up the exchange rates on a particular day here (any day in the last 10 years), and the annual average exchange rates here (any year going back to 1995 - 2009).  Monthly average exchange rates (which you won't need to use) and annual average exchange rates from 1997 to 2012 can be found here.  To save you the trouble, the 2012 average exchange rate for US dollars is 1 to 0.99958008 Canadian dollars.

PS - If you need that accuracy to the 8th decimal place you obviously had some big gains or losses last year!

Shoestring Potato Portfolio

Couch potato portfolios are those that you can set up with ease and have only a few holdings, making them easier to manage, and giving you more couch potato time.  Portfolios can consist of just a few ETFs or low fee mutual funds and generally cover Canadian, US, and Global equities and fixed income.  More elaborate couch potato potato portfolios (e.g., the "Uber Tuber") are a little more diverse in their holdings.

A Shoesting Potato Portfolio is a variation on these - its key feature is that it swaps out the fixed income holdings with DIY alternatives.  The rationale is that with some modest effort and by moving up the risk ladder, you can actually have your fixed income component contribute as much as your equities component,without the risks of i) having the meagre fixed income yield eaten by management fees, ii) losing capital if (when) interest rates go up, or iii) losing power buying after by being stuck with in uber-low yields.

To see how it works, take a look at the Global Couch Potato portfolio.  One option consists of :

Canadian equity                 20% BMO S&P/TSX Capped Composite (ZCN)
US and international equity 40% iShares MSCI World (XWD)
Canadian bonds                 40% iShares DEX Universe Bond (XBB)

The Shoesting Potato Portfolio drops the Canadian bonds in favour of things like GICs which can outperform short term bonds and money market funds when you shop around, and private REITs that outperform longer bonds and are competitive with corporate bond yields.  These are other options too noted in the investing101.ca blog.  Of course all this gives you less couch time - you'll have to put on your shoes, tie those shoestings and get up or out to build the fixed part of your portfolio.  But it is doable.  You could never do this with the equities side and still have couch time - really, the eSeries fund and ETF management fees for equities are worth every penny.

Survivor Bias in Mutual Funds

Imagine you were reviewing the safety record of a car model you were considering to buy, and you found out it had the lowest incidence of injuries in accidents.  Not bad.  But then you read the fine print of the safety record and it says a lot of the passengers actually died in accidents and those numbers have not been included - only the driver injuries are counted.  Hiding the car safety performance for those poor folks riding shot-gun would obviously be a scandal!

Such statistical funny business would never happen in vehicle safety reporting, but it happens routinely in mutual fund performance reporting.  Its called survivorship bias and in the mutual fund industry it happens through the merger of funds - the performance of the poor performing fund is lost and the only high performing fund performance survives in future reporting.

Research studies have shown this practice overestimates true fund performance.  So beware of glowing mutual fund performance reports that outwit and outplay fund buyers by hiding the poor performance of those funds voted off the island.

PS - often you see a disclaimer on performance reports that past performance may not be indicative of future performance.  In the case of survivorship bias we can take this a step further and say that "past performance may not even be indicate of past performance!"

Real Returns and Inflation Risks

You may have heard the term "real rate of return".  It is how much buying power your investment gives you after your consider the 'cost' of inflation.  Investors Group January newsletter warns of the risks of low-yield fixed income investments once you consider the real return.

Their chart shows the real return of a short term investment like a 1-year GIC (i.e., the grey bar labelled 'after inflation' below).  It assumes it is in taxable account (non-registered).  Sadly, you are losing buying power after inflation!

Investors Group is underestimating the 1 year return you could get if you shop around.  Achieva Financial even offers a 2% savings account rate, but your a still earning less than inflation after taxes, so if you must be in short term fixed income holdings, at least don't leave 1% on the table.  Investors Group's conclusion is that you should consider equities or bonds.

What makes more sense is to stick with high yielding fixed income investments.  Avoid the big banks for GICs, and stay away from bond and money market funds where management expenses will put you further in the hole and could put you at risk of losing principal when today's record-low interest rates increase.  Achieva's 5-year GIC rate of 2.85% or ICICI's promotional rate of 3.15% will put you further ahead than Investors Group's money market or bond funds (0.28% and 1.84%, respectively, for Investors Canadian Money Market and Investors Canadian Bond considering the past year - meaning after inflation you lost buying power).  At least non-bank GICs will cover inflation, or some of the other investment ideas noted in previous posts.  Private REITs are a great way to earn a great yield and to potentially benefit from capital appreciation - something that GIC will never do for you!

Craving Simple Core Portfolios?

This is a spork...spoon and fork together at last.
For some investors, All-In-One core portfolios may be the way to go.  These are for folks who think that setting up a couch potato portfolio of funds or ETFs is too much work and who eat with a "spork" to simplify their lives.

There are high cost portfolios available from Investors Group that are "perfect choice for investors who are just starting out or who have little time to spend managing their portfolios".  Or those who have not read any earlier posts.  These portfolios fall into risk tolerance flavours like Aggressive, Moderate Aggressive, Moderate, Conservative, or Growth or Income.  For example, the Allegro Moderate Aggressive Portfolio is a Global Equity fund - its a stew of other Investors Group funds.  The hardly palatable MER is 2.67% and is based on a weighting of ingredient fund fees with a dash of 0.07% added on top to hold it all together.

Want the same thing in an ETF? Try iShares' CBD - Balanced Income CorePortfolio™ Fund.  It "combines  several core asset classes, including Canadian and Global Equity, Emerging Markets Equity, Global Real Estate, Fixed Income, Preferred Shares, Commodities, in one low-cost fund".  The MER is slim and trim at a mere 0.69%.  iShares also offers Balanced Growth, Conservative, and Income CorePortfolios in case you crave more or less sizzle.

TD offers Comfort Portfolios.  Again, these are bundles of individual TD funds, giving you diversity with simplicity. There MERs range from 1.75% for the TD Comfort Balanced Income Portfolio, up to 2.21% for the TD Comfort Aggressive Growth Portfolio.

All-in-one, mutual fund alternatives include the Beutel Goodman Balanced Fund (it has a low MER of 1.24%) but you may be soured paying an up front sales charge to get in.  The tasty Questrade fee rebate is 0.225%.  The McLean Budden Balanced Growth Fund, now a Sun Life MFS fund, was a great value for D Series funds, but new A series funds had a MER of 1.95%.  Not sure if the Questrade fee rebate is 0.225% still applies.  Lastly, the Mawer Canadian Balanced Retirement Savings Cl A Mutual Fund is a good choice - MER of only 1% and a Questrade fee rebate of 0.135%.

With all these choices, hot aggressive funds, cool conservative ones, and those in between, one core portfolio may be just right for you.

NETFILE Passwords for the Taxman 2013

Hey, no new web access code to file your tax return.  CRA has simplified the process of filing an income tax return in 2013.  All that you need now is your social insurance number and date of birth.

If you are worried about security, CRA notice letters indicate that address and banking system information cannot be changed in the system.  You can use the CRA's My Account service here to update banking information, check refund status, and more.

Thanks Taxman!

Tax Preparation, Filing, and Planning Software

Remember when your taxes used to be so simple that you did them by hand?  Well, those days are long gone for many Canadians and Canadian investors so tax preparation software is a must for many of us.  Software options include UFile, Cantax, Taxnic, Taxprep, Profile, TurboTax (QuickTax) and Quicken. There is also freeware software like UDoTaxes and StudioTax.

The best thing about the software is the ability to do 'what if' analysis to see how different investments will affect your tax bill or tax rebate.  Also, when preparing a whole family's returns, the software can also determine which spouse should claim certain deductions to maximize the tax benefits.  Beware that online software may allow you to save different 'what if' versions of the return.  For a few more dollars, buy the CD.

I use the taxtips.ca tool (here) for rough calculations of taxes.  The site offers a basic calculator for an individual and a detailed one for you and your spouse where you can also account for more deductions and credits.  The taxtips.ca tools allow you to predict next years' taxes while using last years tax software to predict next years returns may only be an approximation (as tax rates change).  This is not the case for 2012 and 2013 where tax rates are steady.

Ufile software has been a mainstay in our house for over 5 years and has always worked without a glitch.  We have tested its features for the usual options including business expenses and earnings, and for exotic flow through limited partnership resource pools.  Support has been outstanding, especially on those flow through shares, where it was greatly needed.  Ufile is usually available for about $20 - this year I picked it up at The Source.  This year there are 'free' CDs mailed to existing customers that you can pay to activate - that is convenient!  You can file up to 10 returns, and your 'what if' scenario versions don't count toward the total (it only counts when you finalize a return to NETFILE it).

Progressive Fund Management Fees

The last post on Investors Group fees and performance is disappointing, especially if you are locked into some of their funds which the highest, longest deferred sales charges in the business.

It is possible to find funds offering better value for their fees.  I have noted some in past posts.  Many private investment counsels offer fees for portfolios and funds of 1 to 1.5%.  Bank brokers fees are negotiable and can be as low as 1% for larger accounts of ..one...million...dollars.  In some cases, the fixed income component of the bank broker holdings may come with no fees, with fees applied only on the equities - this pushes down your overall effective fee percentage.

Avenue Investment Management offers innovative performance-related fee reductions whereby the equity fund fee is cut in half whenever the return is negative.  They have a performance based fee for returns over 10%, but it is capped at 1% which should tend to deter too much risk.  Fees are also reasonable to begin with (the Avenue Total Return Equity Portfolio has a management fee of 1.5% of assets under management. for equity portfolios over $500,000).

Investors Group Fund Lags the Market

When funds get really big they have a tendency to follow the market.  Investors Group's Investors Canadian Equity-A has assets of over 1 billion dollars.  Its management expense ratio (MER) is 2.66%.

An Investors advisor once said that actively managed funds can do better than the market, or passively managed index funds with very low fees (e.g., Horizons' HXT).

A few years back I tested this theory and found that many Investors Group funds followed the market and lagged behind average returns.  The following graph revisits this test and compares Investors Group's Investors Canadian Equity-A with the TSX Composite Index.  The index total return is shown in red and the Investors Group fund in blue.  Over the past 5 years the Investors Group fund has lagged by about 12%.

What is the compound effect of a management fee of 2.66 % each year for 5 years?  Its a loss of 14%.  So if the actively managed fund does a little better than the index, then it doesn't do it by much, and not enough to justify the management fee.

The other things advisors have said is that Investors Group funds are not correlated to the overall market and have holdings that don't overexpose then to sectors that are overweighted in indexes.  Without going a formal correlation of Investors Canadian Equity and the index, the graph repeats what I found several years ago which is a strong correlation between the fund and the index.  So why buy the fund?

Here is the same chart for a 10 year period.  Do you notice the correlation?  The big fund just moves with the market.  The overall movement in values year to year and month by month are closely aligned between the fund and the index.

Based on performance is there any reason to buy the Investors Group fund instead of a low cost index fund?  I'm not strictly against holding funds or against fees as large as the Investors Group fund fees.  But those fees have to demonstrate value somehow to be justified.  Smaller, more nimble funds are more likely to achieve returns that can beat the index.

Technology Stocks - do Apple fans remember digital ?

A close family member of mine worked at Digital Equipment Corp. (D.E.C.) for many many years.  And he put all of his retirement savings into its shares - after all he got them at a discount.  The stories were that "Digital" was an industry leader, making chips in the 1990's with x millions of floating point operations per second ... yada yada yada - it was a sure thing he'd say.  You may be using their ethernet network technology this very instant, but as for the rest, you can read the history of the company online.
Basically, after struggling in the early 1990's pieces went to Compaq, then bought by Hewlett-Packard in the new millenium, and we know where the HP story is going now (NYSE:HPQ).  The eventual failure of technology companies is a common theme in the market, whether its PCs running Windows replacing VAX's running Unix back then, or Tablets running Android and Apple OS replacing PCs today ... so beware.

Today said family member says "never buy stocks - its too risky" - unfortunately having been burned badly in DEC's downfall.  Its a lesson about diversification that hits close to home.  We have a few old recipe binders bearing the snazzy logo at home, and not much else to show for investment in a former technology titan.

Preferred Share Strategies

There are low cost ways to hold a diversified basket of preferred shares.  The iShares' CPD - S&P/TSX Canadian Preferred Share Index Fund has 173 different holdings in various sectors.  The distribution yield is 4.78%.

The current Management Expense Ratio (MER) is 0.50%, meaning that over 10% of the return is going to manage the fund.  Are there any strategies that could help you get that back?  You could simply go to the holdings list and start buying the same individual shares in an online discount brokerage account and have no yearly management fee.

The problem with this approach is that your trading fees will add up and you will not get the diversification of the fund.  Splitting $50,000 in 20 stocks at $2500 each will have a trading cost of $200 (assume $9.95 trades at Questrade) or more - that's a cost of 0.4% of the investment.  Obviously you are not much further ahead.  Purchase larger amounts, with cheaper trades, say at Interactive Brokers, and this could work.  But since Interactive Brokers does not have registered accounts, get ready for a lot of paperwork.

Another strategy is to buy shares on first issue and hold them at one of the big banks' brokerage arms.  This avoids the up front trading fees.  Because banks get a fee at the time of sale it is possible to have an account that holds these shares but has no annual fees.  This is not their typical model and it may be a promotion to get you to fully invest at the brokers - typical their would be annual fees, often based on family assets being held at the broker.

PS - As noted before there may be no better strategy than holding the Malachite Aggressive Preferred Fund which boasts higher returns enhanced by trading, a better credit rating than equivalent funds and all the simplicity of an ETF.

Income Splitting - Spousal Loans

One look at marginal tax rate tables, and you can tell that the more you make the more you pay - not just in an absolute sense but as a proportion of each new dollar earned.  Income splitting is a great way to lower the combined overall taxes paid by a couple by splitting off income to the spouse with the lower marginal tax rate.

Splitting income during retirement can be achieved in several ways:
  • Contributing to your spouses TFSA
  • Pension Income Splitting
  • Contributing to a spousal RRSP
Splitting income before retirement can be even more advantageous since it is possible that the higher earning spouse is paying a higher marginal tax rate now than he of she will during retirement.  You can still contribute to a spouse's TFSA before retirement.  But there are other options.

A spousal loan from the higher earning spouse to the lower earning spouse allows investment earnings to be taxed in the hands of the lower earning spouse, typically at a lower tax rate.  The Canada Revenue Agency allows this with some conditions: 

1. The loan agreement must be documented.
2. The loan interest must be paid by January 30th of the following year.

The rate for the loan is the “prescribed rate” set by Canada Revenue Agency every quarter. The rate has been at a historic low of 1% April 2009.  Interestingly, if you enter into an agreement today, the rate stands for the duration of the loan.

As an example, say the higher taxed spouse (income above $87k) loans $10,000 to the other (income below $39k) to invest in eligible dividend paying stocks yielding 5% ($500 annual earning).  The higher taxed spouse will pay about 43% tax on the 1% interest earned per year, or $43 of the $100 loan interest.  The lower taxed spouse will pay about -2% tax on eligible dividends, a return of $10, resulting in a net earning of $510.  Subtract the other spouses tax of $43 and the combined net earning with income splitting is $467.  Compare that with no income splitting and the higher taxed spouse holding the investment and paying 25% tax, for a net earning of $375.  Income splitting adds 25% more to the net return!  

Although the example above is for eligible dividends, a similar tax advantage exists for other income types.  On "Other Income" like interest from a MIC, syndicated mortgage, etc. the relative gain is higher.  The  lower taxed spouse will pay about 20% tax on eligible dividends, or $100, resulting in a net earning of $400.  Again, subtract the other spouses tax of $43 and the combined net earning is $357.  Compare that to the higher taxed spouse holding the investment and paying 43% tax on interest, for a net earning of $285.  Income splitting again adds 25% more to the net return.  

PS - This strategy also works for loans to a child.  But remember the child legally owns the investment earnings.

Risk of Large Mutual Funds

When you own a mutual fund that is so large that it doesn't just follow the market, it is the market, you are better off holding a low MER index fund or ETF.  A great review of the top 10 Canadian equity funds by assets showed the risks of owning them:
  • 9 out of 10 funds trailed the index (5 out of 10 funds of them trailed by more than 10%).
  • One fund beat the index by 2%, and no fund beat the index by more than 10% over five years.
  • Half of them dropped out of the top 10 Canadian Equity Funds (by assets) of over the 5 year period.
The average MER was 2.4%, so its no wonder that with that much coming off the top that large funds cannot possibly get ahead.  Returns demonstrate a reversion to the mean market (the index) when your holdings actually represent the mean market, and the fees put you in the hole.  

Mutual funds that have at their core a strategy that outperforms the index are one alternative.  Dimensional Funds is one example that offers increased exposure to small issuers and value securities - the parts of the market that research has shown beat the index over time.  Check out their library page to dig more into the details including observations, opinion, and links from financial economists Eugene Fama and Kenneth French.

Take the Dimensional Canadian Core Equity Fund as one alternative - the MER is a reasonable 1.55% and if you hold it at Questrade in a large portfolio, the Mutual Fund Maximizer Rebate could put 0.9% of that back in your pocket.  The net fees would be 0.65% which is lower than something like iShares' Canadian Fundamental Index Fund, an ETF that tracks the FTSE RAFI Canada Index. 

Mutual funds can offer time savings to you relative to trading stocks and ETFs, whether that is over the year or simply at tax time - and your time is money (directly or indirectly through opportunity costs).  If you avoid large funds and find those with winning strategies with low fees, then mutual funds can have a place in your portfolio.

Well, whatta ya know ..

Back in 1977, Warren Buffett told shareholders in Berkshire Hathaway that the company would only invest in a business that the directors could understand.  You can use this philosophy in your investments just like me.

When not investing, I find time to run the Pizza Lunch at my child's elementary school.  Its a great way to raise funds for the school's discretionary programs and to give back to my community.  It also brings home the relative simplicity of the pizza business!

Since 1967, Pizza Pizza has been making this classic super pizza (see pic) and delivering it around southern Ontario.  The chain is no pervasive in the region that Canadian Border Security had been known to ask returning residents if they could repeat Pizza Pizza's phone number to prove their residency ("It's nine-six-seven-eleven-eleven officer").

What I can understand:
Over the past ten years, same store sales growth has averaged 4%.
The dividend sits at 7.16 % and a 4.2% increase has just been announced (eligible dividend for tax credits).
The new corporation works much the same way as the income fund and receives a 6% royalty on sales at Pizza Pizza restaurants and a 9% on sales of Pizza 73 restaurants (simple structure).
- The menu is being updated and expanded based on health considerations (Heart Smart, gluten free, thin crust/lower carbs, etc.), and demographics (in the GTA this means Halal meat products).

Keeps me coming back for more!

More on Lending - Syndicated Mortgages

Real estate developers may not qualify for traditional mortgages, and money doesn't grow on trees.  Fortunately, a group of investors can combine financial resources to provide secured mortgages to developers or individual borrowers.  Bringing together individual lenders to build a large mortgage loan is called syndication.

Westpoint Capital provides a comparison of MICs vs. syndicated mortgages on their site.  The potential return on syndicated mortgages is greater (often over 10%) but the risk is also greater due to limited diversification.  They offer a choice of mortgages to participate in and these can range from mortgages on raw land for potential development to mortgages to individuals on private homes for various purposes.  Terms can be 1 or more years but payments are made only at the end of the term.

Tier 1 Transaction Advisory Services Inc also offers syndicated mortgages on developments ranging from condominiums to residences with health care services to vacation time-shares.  Examples of current and past projects are on their site.  Returns are typically 8%, paid monthly, with a 4% per year end of term bonus.  Terms are usually up to 4 years.  Investments are RRSP, TFSA,  and RESP eligible - a tax effective way to hold these interest-bearing investments!

Lend Money to Make Money

There are many ways to lend money to make money.  Publicly traded and private MICs like Timbercreek Mortgage Investment Corporation or Fisgard lend money as mortgage loans, secured by real estate.  Timbercreek mortgages are secured by residential (including multi-residential), office, retail and industrial real property across Canada.  There is no arguing that the yields are steady (7.38% now):

Funds like Fisgard MIC invest in residential mortgages and yield less (5.0%).

Timbercreek MIC stock trades on the TSE and you can hold it in registered account to shelter the distributions from taxes.  If you hold it in an online discount broker like Questrade you would have no account fees for RESP, TFSA, or RRSP accounts, so that 7.38% stays in your pocket.

In contrast, the Fisgard MIC must be held in one of their accounts - an RRSP account costs $100 per year while an RESP account costs $24 per year - a TFSA account is only $36 per year.  With $5000 in an RRSP account, that fee eats up 2%, or 40% of the current 5% earnings - ouch!  Obviously, these fit best with larger investment amounts - the RESP fee is more reasonable (only 0.96% of a $2500 investment).

More exotic funds that lend money include the Sprott Private Credit Trust.  The trust has some unique features such as having tax sheltered distributions.  Unlike the MICs, loans are secured through senior liens on collateral assets.  The trust is offered on a private placement basis to investors who meet certain eligibility or minimum purchase amount requirements.

Best Preferred Share Fund?

Where is your comfort zone on the risk reward scale?  How far will you walk out before feeling uneasy about taking the plunge on different types of investment?

Preferred shares and funds strike a good balance between risk and reward. The value of preferred shares in creditworthy companies tends to remain steady relative to common shares.  Dividends are paid quarterly and can sometimes be "cumulative", meaning your dividends have to get paid before those of common shareholders.

The following chart shows the variability of BCE Inc. common shares (5.27 %) relative to their preferred share series K (4.06% dividend).  Obviously the higher dividend of the common shares comes at a price.

Preferred share funds offer diversification over holding individual preferred shares.  Options include BMO S&P/TSX Laddered Preferred Share Index ETF (Ticker ZPR).  Holds a diversified set of shares from several industries (details), and is 'laddered' to manage interest rate sensitivity.  The current yield is 4.87 % and would qualify for dividend tax credits, effectively increasing the yield after the credits.  The annual management fee is only 0.45%.

Want more enhanced returns?  Consider a fund like the Malachite Aggressive Preferred Fund which combines trading of preferred shares to enhance overall returns.  The results speak for themselves as the fund returned a healthy +12.76% (after expenses, before fees) compared to +5.50% for its benchmark BMO-CM “50″ Index last year.  The fees are reasonable (1% on the first $500,000, 0.75% on the next $500,000, and 0.5% on the balance) and can best be described as great value.  Yes, you could save 0.5% on fees by holding iShare's S&P/TSX Canadian Preferred Share Index Fund (Ticker CPD) - but since CPD's 12 month return was only 4.9%, why not pay an extra 0.5% to earn an additional 7% through Malachite's trading expertise?

Check out the Malachite returns on the PrefBlog.  The fund is available directly through Hymas Investment Management, or through Odlum Brown Limited.

Put Management Fees Back in Your Pocket

While its best to hold products that have low management fees (TD eSeries funds, or equivalent ETFs).  If for some reason funds are your thing, you can actually have some of the management fee returned back to you.
Questrade has an exclusive trailer fee rebate that returns a portion of the management fee to you.  Its called the Mutual Fund MAXIMIZER and it rebates trailer fees to you whenever they exceed $29.95 per month, or about $360 per year.  So if your mutual fund is entitled to a rebate of 1% and you hold $36,00 in mutual funds you would just break even.  If your rebate is higher or your holdings are larger, then you start getting money back.

Expect to get back more on equity funds and less on bond or index funds.  Some rebates can be over 1.3% but that is on funds with higher fees to begin with.  Some examples: TD Global Dividend rebates 0.9% out of the 2.45% MER; TD Canadian Bond rebates 0.45% of the 1.11% MER; TD Canadian Index rebates 0.135% out of 0.33%.  The net effect is to put your fees closer to ETFs, but not quite.  Canadian equity index ETFs have MERs as low as 0.07% (Horizon's HXT), or 0.09% (Vanguard's VCE) to begin with, and you don;t have to pay the monthly Mutual Fund MAXIMIZER fee for it.

If you already have a large mutual fund portfolio that you are happy with and are not ready to make the switch to ETFs, then consider switching your holdings in kind to Questrade.  If you open a large new account ($100k) you may even be entitled to promotions like a free iPad mini.

Check out the rebate potential in Questrade's rebate calculator (note: it does not seem to account for the monthly fee you have to overcome before you start getting trailer fees back).

Profit from Renewable Energy

How would you like to smile every time it rains for days or there is long snowy winter?

One way is to invest in renewable power stocks to get exposure to the growing market for green energy - a good choice is Brookfield Renewable Energy Partners.  It currently yields 4.5% and just announced an increase yesterday.

Brookfield targets 60-70% of income for distribution, meaning there is plenty of cash to develop more projects to add to income.  As a result, Brookfield is targeting an annual increase in distributions of 3-5% which should support the share price over time.

Brookfield has a pipeline of projects, and strong long term relationships with the design and construction experts to bring these projects online.   Its hydroelectric generation portfolio consists of 170 hydropower facilities, powered by the flow of water whenever it rains, or when snow melts during the spring "freshet".

Many projects, like those in Ontario are supported by 20 year power purchase agreements which means the customer is guaranteed to buy the product year after year at set prices.  So when it rains, the river flows and the cash register rings.  Compare that to companies like Apple who need a new product and reinvention every 6 months to keep customers flowing into stores and to keep market share.

The Brookfield Renewable Energy Partners chart has been up and to the right for years.  There are a lot of reasons to expect it to continue.  Volatility is relatively low (beta of 0.28), which means you can sleep at night, and holding it may even put a little smile on your face whenever it rains and snows!

PS - Brookfield also has solar farms, which means you can smile rain or shine.

Private REITs

If you followed the previous posts and are thinking about investment return marginal tax rates (that maximize what you keep relative to the government), are concerned with low yields (that may not cover inflation), are struggling with MERs (that can eat up a large part of your yield), and are looking for low volatility relative the publicly traded stocks or ETFs (that may keep you up at night), whew!.... then private Real Estate Investment Trusts (REITs) may be just for you.

On taxation, private REIT distributions are typically taxed as return of capital, meaning that your tax rate today is zero.  Of course any return of capital lowers the cost base of the investment and translates into capital gains when you sell the REIT units.  Still, the marginal tax rate on capital gains is pretty favourable to the "Other Income" taxed as interest, say, from a MIC.  So tax advantages of private REITs are nice in non-registered, taxed accounts.

On yields, several private REITs are certainly high enough to cover inflation.  Centurion REIT boasts a distribution of over 7%.  The Skyline Apartment REIT and Skyline Commercial REIT have distributions of 9%.

On MERs, Centurion and Skyline do not have management fees deducted from the yields noted above - of course there is management of properties, and there is plenty of marketing that goes on from online ads, and recently radio ads for these.  But these do not come off the top of the 7-9% earnings.  If you buy directly from the companies, there is no management fee.  If you want to hold these in a registered account, you have to consider that opening a self-directed trust account could cost you $150 per year, that is like cutting 3% off the earnings on a $5000 investment, so consider the amount invested when holding these in registered accounts.

On volatility, REIT unit values are appraised internally based on the value of all the holdings.  There are no market spikes or drops.  And since the value of investment real estate is not emotionally driven, or run up by new money coming into a community, prices are stable.  Over time unit values tend to go up due to inflation as rents increase and the real estate value increase.  So you get 7-9% return plus capital appreciation over time.

Of course there can be aspects of private REITs that you view as a 'downside'.  Some have a lock in period with penalties for early withdrawal, some don't.  You have to be an accredited investor (typically high net worth) to qualify to invest in these and there are minimum investment amounts to consider.

Satisfaction with MICs

Can't get no satisfaction in fixed income yields?  Net worth not high enough for Keith Richards to return your calls?  Maybe you need the right MIC investment ... not that Mick ...Mortgage Investment Corporation (MIC) investments that is.

If you want your portfolio value to move like Jagger, your fixed income component has to move too. MICs are one way to add yield without taking on too much risk.

Fisgard has a nice reference guide for those looking for attractive yields from investments secured by Canadian Real Estate.  And MDJ has a good primer on what a MIC is with a lot of discussion.

Be warned.  MIC principal and returns are not guaranteed.  Even long-running MICs from Carevest have run into trouble through decreasing yields, impaired loans, and principal erosion up to 10% on redemption (!).  Suddenly that juicy 6.5% yield doesn't look so good when 10% is coming off the top and you've lost all sympathy for the devils peddling these products.

The MDJ discussion talks about REITs as an alternative without the MIC issues (tie up periods, early redemption penalties).  More on REITs in a future post.

Low Volatility Yield Stocks

Looking where to park fixed income cash for the medium term?  Low volatility stocks like MICs are one option.  Stocks like Timbercreek Mortgage Investment (Stock Symbol: TMC-T) are pure yield plays with a low volatility.  Google finance reports a small correlation to the market, or "beta" of 0.07.  A stock that perfectly tracks the market has beta of 1.00, and a stock that is more volatile than the market has a beta great than 1.00, so you get the picture from this 5 year chart.

The current yield is over 7% with monthly distributions - great for registered accounts (RRSP, TFSA, RESP) since they are taxed primarily as interest.  Buy it on a dip to avoid any of the short term drops that can occur.

Lastly, to see what portfolio managers are saying about Timbercreek, you betta check out compiled BNN guest opinions here: Stockchase link.

PS - that late 2008 dip was obviously short lived ... but if you do not have the stomach for the market stay tuned for other high yield investments that are not publicly traded and can have even lower volatility.

If you must have GICs .. read on.

With bond yields so low, many bond fund returns will not grow your savings if the fund's Management Expense Ratio (MER) is high (see earlier post).  Holding lower fee alternatives or ETFs and give some nominal net earnings, but puts your principal investment at risk if (or rather when) interest rates go up.

To guarantee some net return after fees and guarantee the principal investment, Guaranteed Investment Certificates (GICs) are worth a look and can al least keep pace with inflation to preserve future buying power, assuming they are held in a registered account (RSP, TFSA, RESP).  While there are better longer term investments for fixed income if you can handle some ups and downs in the investment value, GICs are reasonable for RESP accounts when your child is in the teen years and redemption will be coming up shortly (if they get off Minecraft and get their homework done that is).

For an RRSP or TFSA account, rate shoppers cannot beat Achieva Financial.  All your deposits are 100% guaranteed by the Deposit Guarantee Corporation of Manitoba.  And since its so cold there, nobody would ever think of going there to steal your money.  Even today's 5 year rate is 2.85% which will cover inflation.  Promotional rates at ICICI may just edge out Achieva.

For an RESP account the choices for GICs is pretty slim.  CIBC will give you 1.75% for 60 months and 1.1% for two years (current rates).  Better RESP GIC rates are waiting for you at Questrade.  The current "bond bulletin" includes GIC rates listed on the last few pages and shows 2.35% for 60 months and 1.95% for two years.  These would be purchased from the bond desk and would be through B2B Bank or others.  I know that earning less than 2% is nothing to spend time chasing, but if you consider that you are getting a 20% grant on up to a $2500 deposit, its not as hard to swallow.

Those searching for the other GICs, we're sorry, here's your link.

Fixed Income Management Fees

Many seasoned investors have a significant portion of their portfolios in fixed income type investments.  In the past, holding mutual funds was a simple way to get diversity in fixed income holdings like bonds.  But bond yields have been dropping steadily over the past years, as shown in the chart below showing 10 year bond yields over the past decade:

As bond yields drop, those management fees and management expense ratios (MERs) are eating a larger and larger portion of the fixed income earnings.  If you were earning 5% ten yeas ago and had a 2% MER, the fund company was taking 40% of your earnings on bonds hldings.  Today with yields below 2%, the management fees take all the earnings and you may pay the fund company more than your earnings, meaning you would have been better off holding cash.

Even in cash you would be losing buying power each year since inflation is rarely below 1.5% as the Statistics Canada chart below shows.

The take-away?  Buyer beware on bond mutual funds.  Investor's Group bond funds like Investors Canadian Bond charge 1.81% (ouch!), which eats up most of a bond portfolio yield.  A TD Canadian Bond Index eSeries fund has a MER of only 0.51% (better..), putting significantly more of the earnings into your pocket.  An ETF like Vanguard's Canadian Aggregate Bond Index ETF (VAB) has a lower MER of only 0.2% (nice!).  When the benchmark yield is only 2.3% (January 2013 Barclays Global Aggregate Canadian Float Adjusted Bond Index), that MER is a big deal.

Look for some other ideas on fixed income strategies in upcoming posts.

More to ponder -  Investors Group may hit you with over 5% deferred sales charge if you want your money back in the first year, and TD can ding you a 2% trading charge if you move money in 30 days.  When you buy an ETF you have a trading fee which can be a high or low percentage depending on the fee and the amount invested.  These should not be big factors for long term investors, and long term savings.

TFSA Account

What investments make sense to hold in your TFSA (Tax Free Savings Account)?  Generally, those with the highest taxes make the most sense to shelter in this account.  Referring to your marginal tax rate in the earlier post would tell you what type of earning is taxed the most.

But the tax rate is not the only factor - the absolute savings can also come into play.  Say you can earn 2 % in a 5-year term GIC.  Interest is taxed as Other Income which has the highest marginal tax rate, so putting it in your TFSA would seem like a good idea since you could reduce taxes by 20% for low income earners (reduce taxes by 0.4 % in an absolute sense).

But say you also hold a private REIT earning 8% and distributed as return of capital (i.e., no taxes).  Even though the tax rate is low (0%) it may be better to hold this in your TFSA instead - although the current tax rate is 0%, you would eventually reduce taxes as capital gains when sold at a rate of 10% - an absolute amount of 0.8% in the investment.

Its easier to see with example numbers:

Investment Type       GIC                    REIT
Earnings Type           Other Income      Return of Capital
Earnings Rate           2%                      8%
Marginal Tax Rate   20%                    0% (today), 10% as capital gains when sold
Absolute Savings       0.4%                   0.8%

So the REIT may be taxed at a lower rate (now and when sold) but may provide the greater absolute savings.

Rule of 72

The Rule of 72" is used to estimate the number of periods required to double an investment.  For example, if you were to invest $100 with compounding interest earning 9% per year, the rule of 72 gives 72/9 = 8 years required for the investment to double and be worth $200 - the exact calculation is 8.0432 years.

The attached table shows the periods to double your investment using the rule.  So your high yield interest account earning 2% will double your TFSA in 36 years - which you may live to see.  In contrast, a dividend paying fund earning 4% will double in 18 years.  Earn 300 more basis points (3%), in some private REIT yielding 7%, and you double your money in just over 10 years.

Of course this does not consider taxes but you get the point that a few percentage points in earnings make a big difference in how you investment grows.  So pay attention to management expenses of funds the erode your earnings and growth.

You can also use the Rule of 72 to estimate how inflation eats away at your buying power - a 2% inflation rate means your $100 investment has only $50 of buying power in 36 years.


Selecting the right investment should not be made on the basis of taxes .. but for many, you should not ignore it.  Marginal tax rates vary according to the type of investment.  And depending on your income, some marginal taxes rates are negative - yes! - you pay negative tax on earned dividends if your income is low, and if the dividends are eligible.  So holding eligible dividend paying stocks may be right for you.

Check out this link for the marginal tax rate in your province:
Marginal Tax Rates

You can see that in Ontario eligible Canadian dividends are taxed at a rate of -1.89% in 2013 if you earn less than $39,723.  So $1000 of dividends gets you get back $18.90 from the government.  Compare that to Other Income like earnings from a GIC or interest paying account - for $1000 of Other Income you pay $20.05.