Converting Mutual Funds to iShares Low MER ETFs

In a few short months the exorbitant redemption fees, deferred sales charges in our IG funds will taper off - once these "stealth wealth killers" expire we will be switching to some low cost ETFs. After all, the large Investors Group funds were basically market indices anyway.  Here is Investors Canadian Equity and iShares XIU funds over the past 10 years.  Same pattern except Investors never got as high as the index ETF, and has not recovered.

Mutual Fund - Investors Group Canadian Equity 10 year return
Investors has a 2.26% MER compared to iShares S&P/TSX Capped Composite Index ETF 0.05% MER.  Over 32 years, losing this 2.21% difference in fees will reduce your investment in half. That's just the power of compounding on seemingly small amounts.

ETF - iShares XIU 10 year return
A comparison of other funds shows how the Investors Group management fees erode performance even more when the returns are lower.  For example Investors Canadian Bond fund has a 1.81% MER - you can bet that does not leave much of the underlying returns back in your pocket.

ETF fees are coming down with iShare recent Core Series ETFs.  Canadian Couch Potato showed what an ETF portfolio looks like with the new lower fees:

ETF nameAllocationOld feeNew fee
iShares S&P/TSX Capped Composite (XIC)20%0.25%0.05%
iShares S&P 500 (XUS)20%0.14%0.10%
iShares MSCI EAFE IMI (XEF)15%0.30%0.20%
iShares MSCI Emerging Markets IMI (XEC)5%0.35%0.25%
iShares High Quality Canadian Bond (CAB)40%0.30%0.12%

Sprott Private Credit Trust - Steady Returns - 9.8% in 2013

If you search "guaranteed returns" in Google you get almost 30 million hits. So to narrow down the possibilities, consider alternative investments in our blog, and consider Sprott Private Credit Trust.  With in, high net worth  investors can benefits by investing in "asset-based loans of Canadian companies" - of course no returns are ever guaranteed, but this fund has demonstrated steady returns in up and down public markets.

The Fund identifies short-term opportunities primarily in Canadian companies - those overlooked or under-appreciated by the general financial community due to size, perceived riskiness, complexity or timing. The Fund endeavours to preserve capital through "senior liens on collateral assets with visible potential cash flows and/or liquidation or break-up values".  Also, each potential investment must also have an "identifiable catalyst" - and event that allows the borrower to retire the loan within about 2 years.

Compare Sprott Private Credit Trust returns to the TSX or other hedge fund returns over the last few years.  Notice the monthly ups (+4.4%) and downs (-6.1%) of the TSX relative to the steady positive monthly returns of the Trust (no negatives!):

Steady monthly return for the TRUST (Sprott Private Credit Trust).

The monthly and annual return of Sprott Private Credit Fund LP (the “LP”), which shared a similar investment objective and strategy as the Fund are below - again steady returns each month.

Volatile public market and hedge fund returns.

The Sprott Private Credit Trust is open to new investments on a limited basis.  Check out for details, and due to changes in the 2013 federal budget, get tax advice on any new investments.

Alternatives to OMERS AVC

You cannot dispute the convenience and cost efficiency associated with OMERS Additional Voluntary Contributions (AVCs).  Automatic deductions from payroll are great.  The low fees of around 0.5% put any mutual fund fees to shame (often over 2%, even for your fixed income assets).

With OMERS 2013 net returns of 6%, you could wonder if you could do just as well with your own investments.  We did!  We have been thoroughly pleased with private REIT investments over the past several years that have returns competitive with OMERS (and that did not have the shock of the public market crash).

One is Centurion Apartment REIT, which per their web site "is an unincorporated open-end investment trust with the objectives of:

1) providing investors with stable and growing cash distributions, payable monthly and, to the extent reasonably possible, tax deferred, from investments in a diversified portfolio of income-producing multi-unit residential properties located in Canada and

2) maximizing REIT Unit value through the ongoing management of  Centurion Apartment REIT's assets and through the future acquisition of additional multi-unit residential properties"

This compares Centurion Apartment REIT returns to public markets (that have pushed down OMERS returns) and public REITs.  Centurion returns over 7% and offers appreciation potential as well. To hold inside your RRSP, as an alternative to OMERS AVCs, you need is a self directed plan such as from Olympia Trust, and you'll need to be an accredited investor in most cases.

Skyline Apartment REIT has similarly been a great alternative to AVCs.  It now returns 7.4% per year, just had a 1.9% capital appreciation this month, and has had capital appreciation of 35% (in addition to steady annual returns) since 2006!

OMERS 2013 Returns - Private Equity Boosts Returns

Did you know 1 in 20 Ontario employees are members of the Ontario Municipal Employee Retirement System OMERS?  They manage over 65 billion in assets!  Last years' total returns were a bit soft due to the OMERS Capital Markets low rate of return.

A breakdown of OMERS Primary Pension Plan by "Investment Entity" for 2013 and 2012 Gross Returns shows how private equity, infrastructure and real estate investments outperformed the Capital Markets segment and really gave OMERS most of last year' returns:

2013 Rate of Return
2012 Rate of Return
OMERS Capital Markets
OMERS Private Equity
Borealis Infrastructure
Oxford Properties
OMERS Strategic Investments
Total Plan

As over half of OMERS investments are public market assets (57% in 2013), and earning 0.5% in Capital Markets can barely cover the management expenses.  Private equity in contrast, contributed relatively the most - I calculated 3.3%, or half of the of the overall 6.5% return - despite its small weighting in the portfolio (14% of the portfolio).   

The public capital markets should not affect long term performance - OMERS is moving to a low beta portfolio model that emphasizes steady cash flow and low volatility.  If you apply the same principles to your investment / retirement portfolio, then you can consider some of the private market alternative investments covered in the blog:

Real Estate Investment Trusts (steady returns no market volatility, like OMERS Oxford Properties)
Lending with Syndicated Mortgages (fixed returns and investment secured with real estate)

Tangerine New Account Orange Key $25 Bonus 40132831S1

Don't forget to include this Tangerine Orange Key to earn your bonus:


ING Direct account names will change in April to new Tangerine names:

The ING Direct THRiVE Chequing® Account becomes Tangerine Chequing Account

The ING Direct Investment Savings Account (ISA) becomes Tangerine Savings Account

When you open a new Tangerine (ING DIRECT) Account with a $100 or more, you can earn a a $25 Bonus!  This applies to an Investment Savings Account, THRiVE Chequing®, RSP, Tax-Free Savings Account, or GIC with a deposit of $100 or more.

Stay tuned for new offers associated with the ING Direct Tangerine conversion.

Important dates for RRSP, RDSP, HBP and LLP

The Government of Canada Revenue Agency CRA has posted these important dates for Registered Retirement Savings Plan, Registered Disability Savings Plan, Home Buyers Plan, and Life Long Learning Plans (RRSP, RDSP, HBP and LLP).

March 3, 2014 is the deadline for contributing to an RRSP for the 2013 tax year.

December 31 of the year you turn 71 years of age is the last day you can contribute to your own RRSP. For more information, see RRSP options when you turn 71.

The deadline for opening an RDSP, making contributions and applying for the matching Grant and the income-tested Bond for the 2013 contribution year is December 31, 2013.

Home Buyers' Plan
You have to buy or build the qualifying home before October 1 of the year after the year of withdrawal. For more information, see Conditions for participating in the HBP.

Lifelong Learning Plan
The student must have received a written offer to enrol before March of the year after you withdraw funds from your RRSPs.

Increase government pension benefits - 36% more !

The federal government lets seniors aged 65 or older delay the start of their Old Age Security pension (OAS) until they reach age 70.  If you do you could get 36% more OAS pension!

The Canada Pension Plan allows for a delayed start with a higher pension as well although not many people take advantage of this - 40% of CPP contributors started their pensions at age 60 and another 35% at age 65. Less than 1% of seniors start their CPP pensions at age 70.

Many retirees fear they will outlive their retirement savings.  One approach is to tap into your riskiest retirement savings first (i.e. your RRSPs), delay your CPP and OAS payments to maximize those government benefits for life - these are also inflation-protected to boot!

Withdrawing from your RRSP and delaying OAS payments will help avoid clawback in OAS benefits.  For every dollar of income you earn over a certain threshold ($70,954 in 2013), 15% is “clawed back” by the government. Earn more than $114,793 and you don’t get to keep any of your OAS pension at all!

Another way to avoid clawbacks is to lower your income by investing in products that distribute monthly payments as 'return of capital'.  Many private REITs distribute this tax advantaged income that will not count toward your income until all your investment is payed back (reducing the adjusted cost base of the investment) - this strategy could work for about 10 years.

We currently invest in Centurion Apartment REIT, Skyline Apartment REIT and Skyline Commercial REIT, all which pay monthly distributions as tax-advantaged return of capital.  If you want to reduce income but don't need the cash flow, you can participate in the REIT distribution reinvestment plan (DRIP).

How much do you need to retire at 65? How big is your retirement nest egg?

How much money you need to retire will depend on your particular circumstances:
  • When do you want to retire?
  • What are your government benefits?
  • What are you spouse's government benefits?
  • Are you in debt payed off or will you still have a mortgage?
The table below suggests how much a single retired person and a couple may spend during retirement.  If you have a budget today, you could check your spending habits and adjust for work expenses that you may not have in retirement (e.g., daily vehicle costs and depreciation, dress clothes, etc.).  Of course your spending habits can be a lot higher or lower depending on your tastes.  Here are nest egg requirements if you need to (want to) retire at age sixty five (65).

How much do you need to retire? How big should your retirement nest egg be? What will you spend during retirement?
The rule of thumb is that your retirement nest egg has to be 25 times your annual spending needs.   So a middle class couple may need $250,000 to $750,000 to cover middle-class spending of $40,000 to $60,000 per year.  That assumes government benefits contribute $30,000 per year, that is, Canada Pension Plan benefits (reasonable if you both had long careers with average wages).

The table shows how much you need to retire at age 65.  The size of your nest egg increases if you retire earlier.

Of course there is a lot of fine print associated with the nest egg table:
  • Typical annual amounts in today’s dollars, assuming no traditional defined benefit employer pension. (2012 values ... add 5% for 2014)
  • Spending before taxes, assuming the seniors own their own home mortgage-free.