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  • Mike Vanderburgh

    Mike Vanderburgh

    As a managing director of Newport Private Wealth, Mike Vanderburgh focuses on providing individuals and families with investment and wealth management services. He has more than 20 years experience dealing with successful entrepreneurs, business people and 11 of the top 100 wealthiest families in Canada.

    Prior to joining Newport Private Wealth, Mike was vice president and portfolio manager of BMO Harris Investment Management and its predecessor, Jones Heward, managing the investment needs of clients. His responsibilities included acting as a member of the investment policy committee, overseeing the management of the firm’s pooled funds and sitting on the steering committee responsible for setting the firm’s growth and strategic goals. Previously, Mike was director, Investment Services for Wittington Financial, the Weston Family’s private holding company responsible for managing in-house portfolios and overseeing external portfolio advisors. He was also an investment executive with Burns Fry (now Nesbitt Burns) and an analyst with Manulife Financial.

    Mike holds a Bachelor of Commerce from Queen’s University and an MBA from the University of Toronto. Mike is also a Chartered Financial Analyst and a Certified Financial Planner.

    Mike can be reached by email at mvanderburgh@newportprivatewealth.ca.

    Reset your clock. Market timing doesn’t work.

    I recently met with two of my clients, a retired couple, to review their investment accounts. They were pretty pleased with the performance so they asked me to take a look at an account they had managed elsewhere that hadn’t performed as well. After doing a bit of digging, it became apparent that a different strategy was being employed: market timing. This involves buying securities when you believe the market is about to go up and selling them when you believe the market is about to go down.

    Market timing, technical analysis, program trading, whatever terminology is used to describe the process, is a method that rarely benefits an individual investor and often serves to generate higher commissions for the advisor. Anyone who has taken an introductory finance course will remember that missing the ten best trading days in any year can result in an investor missing a substantial portion of their potential return. This is so often quoted that it is treated as gospel by advisors. So I decided to look at returns for the S&P TSX over the three-year period ending December 31, 2011, the same time frame that my client had asked about.

    i-3f601c535d40d856a000812be5f88c61-Ten Best Days.png

    Over the three year period, the stock market generated a positive return of 29.47%. $100 invested on January 1, 2009 would be worth $129.47 on December 31, 2011. If an investor missed the ten best trading days in each of the 3 years, 30 days in total, they would have lost 41.1%. So the saying is true.

    However, when you look at the data, many of the worst performing days fall right around the best performing days. To be fair, a market timer probably isn’t only going to be out of the market on the 30 best days. If you had also missed the three days preceding and following the best performing days, you would have generated a positive return of 2.49% over the three year period. Much better than the loss of 41.1% but significantly lower than the buy and hold strategy.

    It is only natural that as investors we seek to outperform the market. However, over the long term the best strategy is to diversify your portfolio across a large number of investment categories in a manner that reflects your tolerance for risk and your objectives for your portfolio. Properly structured, you will be able to withstand any market volatility and remain invested, resulting in superior long-term returns.

    Greece default a positive for markets

    “There is too much debt in the world and if Greece defaults on its debt, this will be good for the markets in the short term, especially if it defaults big.”

    That was the message we heard yesterday morning from Barry Allen of Marret Asset Management, considered by many to be the top manager of high yield bonds in Canada and one of the external managers we use for yield mandates.

    Barry was in to give us an update and his view was uncharacteristically optimistic: “Now that the European Central Bank has put a floor under European banks with its 3-year loans, smaller governments can now default without bringing down the banking system.”

    Barry contends that Greece and Portugal should, and will, default and this will be good for the overall global deleveraging that will continue for several years.

    He also reminded us that Italy runs a structural budgetary surplus and has a strong industrial base that “makes good things people all over the world want to buy”, especially luxury goods desired by the growing affluent classes in emerging markets.


    He thinks Italy will be successful in its efforts to crack down on tax evaders, citing the amusing anedote of the recent tax raid on the luxurious winter resort of Cortina D’Ampezzo.  Tax inspectors found 42 top-end cars registered to people with declared annual incomes of 22,000 Euros (about $29,000 CAD). The investigation highlights the problem of tax collection in Italy, which Barry thinks will ultimately be resolved given the strong sense of nationalism and patriotism in that country; the upper middle class “will do their part to put the country back on sound fiscal footing.”

    Barry’s overall message was that Europe is in better shape than the world has given it credit for. Not exactly a screaming ‘buy signal’, but still upbeat news for a grey January morning in Toronto.

    How safe are GICs?

    Yesterday marked what could be a watershed moment for investors in Europe as Germany managed to sell €3.9 billion worth of six months bonds at a negative interest rate. Marginally negative, but it demonstrates that investors are so worried about the economy in Europe that they are willing to pay Germany for the privilege of lending it money. When these bonds mature, investors will receive less money than they invested. They would quite literally be better off sticking their money under a mattress.

    Investor sentiment worldwide is cautious with a tremendous amount of cash sitting on the sidelines. Recently, I’ve had several conversations with prospective investors who have asked whether their capital would be safe in GICs. The answer to this question is not straightforward as we first have to define what “safe” means.

    If the question is whether I believe that investors will get their money back and earn a return on GICs, then the answer is “yes”. The Canadian banking system is strong and well capitalized. There is no reason to believe that investing in the debt of these banks is risky, unlike the view many investors are taking towards European banks.

    The majority of high net worth investors worked very hard to build their net worth and are naturally risk averse. They generally state that at the very least, they want to preserve the value of their portfolio. I generally interpret this to mean that they want the portfolio at a minimum, to grow greater than the rate of inflation. By stating they want to preserve the value of their portfolio they are really trying to say, “preserve my standard of living”.

    So, if the question is whether I believe that investors will preserve the value of their capital by investing in GICs, the answer is “no”. A dollar today, invested in a GIC will be worth less in the future.

    i-e435f94d582438842ab0b7cfbfd7ff04-Inflation Calculation_10Jan.png

    Investing in a locked-in one year GIC with a major bank will result in a return of 1.15% on which tax must be paid at the highest marginal rate (for this purpose assume 46.41%). The Bank of Canada puts the rate of inflation at 2.90% on a year over year basis. Since last March, the inflation rate has hovered around 3.0%, at the higher end of the Bank of Canada’s target range. In the graph, I have plotted how a portfolio invested in GICs would grow, after tax, if invested at 1.15%. I have also plotted the effect inflation would have on the cost of goods.

    For the purpose of this exercise, I have assumed that these rates hold steady going forward. In five years, the purchasing power of a dollar invested in a GIC would decline by 10.6%. In other words, a dollar invested in GICs today will be worth 89.4 cents five years from now, if inflation stays the same. With so much cash flooding the system, inflation rates may well be higher in future years, and the return more negative.

    GICs can be a good solution for the short term when uncertainty remains high, but they will do little to protect the value of your portfolio or your standard of living over time. So what do you do?

    We still believe a well diversified portfolio managed with some cash (i.e. T-bills) as a defensive measure and a a client’s tolerance for risk in mind will outperform the markets and preserve your standard of living.

    Is the U.S. job market really improving? Don’t believe everything you read.

    Earlier this week the U.S. Bureau of Labor Statistics (the “Bureau”) announced that the US unemployment rate had dropped to 8.6% and that 278,000 jobs had been created. On the surface, this seems like great news; however, I have a healthy degree of skepticism over an improving U.S. job market.

    Let me explain.  US employment peaked in March 2007 and bottomed in October 2009 losing 7.94 million jobs in the process. Unemployment rose by 8.9 million people over the same period, so it’s reasonable to assume that nearly 1 million people entered the labor force over that time and were unable to find jobs.

    i-da7c8136fd83d52d41bafdbbd86a1abc-US Economic Data.png

    Since the bottom in October, 2009, unemployment has fallen by 2.3 million but this drop includes 595,000 people who are no longer looking for work but would surely take a job in a New York minute if one was offered.  If one nets out this “marginally attached” group the number of unemployed has now only fallen by 1.7 million people. So there are still 7.2 million people who either lost their jobs or couldn’t find one during the credit crisis and recession.

    The Bureau reported that the labour force has actually fallen by 138,000 people over the same period.  How can the labour force not grow when the population is growing? According to World Bank estimates and the U.S. Census Bureau, US population has grown by 3.6 million people; 2.0 million of which are between the ages of 20 and 65…working age. In other words, on average, the U.S. has added an additional 90,000 working age people per month since October 2009. Where did these people go if the labour force didn’t grow?

    Even if one accepts the Bureau’s 2.2 million jobs having been created since October, 2009, that barely absorbs the growth in the population of working aged citizens let alone makes any dent on those who actually lost their jobs.

    It gets worse. If one adds the number of people who are working part time because they can’t get full time work to the number of unemployed the total is a staggering 15.6% of the U.S. labour force! One out of every 6.5 working people in the U.S. are earning significantly less than they were before the recession.

    Why does this matter? The consumer represents 70% of GDP in the US.  Without a meaningful improvement in jobs, the US economy will continue to languish.  When making decisions about where to invest we need to understand whether the economy is improving and whether corporate profits are likely to grow from improving demand. Our analysis goes much deeper than the reported headlines. We consult economists, analysts, our independent investment managers, our clients who own businesses, and we conduct our own research. Digging deeper enables us to gain more insight into whether an apparently improving statistic actually translates into a growing economy. In the case of reported labour statistics, we don’t believe it does.

    What type of real estate investor are you?

    i-b9802e2eb3639c5960b95e8866ba9a22-Dec14_blog_building.jpgI opened the Globe and Mail today to read with interest the article, How the rich are investing in real estate right now, written by Thane Stenner.

    Mr. Stenner had an interesting take on what he defined as four different types of real estate investors. As readers of this blog know, real estate has long been an important plank in our investment platform and I thought the subject merited further discussion of the different types of real estate investment opportunities available to high net worth investors:

    Development Real Estate – A longer term investment, this category delivers some of the highest returns available in the real estate asset category. However, it is also the riskiest in that capital can be tied up for years as the property is developed and leased out to tenants.

    Opportunities in this category include loans, which offer higher than market yields due to the risk associated with vacant land, and capital investments, where the investor takes ownership of a portion of the property along with the developer. An economic downturn, however, can result in these properties remaining undeveloped, and potentially tying up your investment for longer than anticipated.

    Income Producing Real Estate – Both commercial property and multi-residential housing units offer an excellent way to reduce risk and earn a steady cash flow. However, for passive investors, it is important to have experienced and well-qualified property managers who understand the day to day complexities of this type of real estate. After all, who wants a call at 2:00am because of a leaky pipe?

    Well-diversified portfolios will include investments in many different properties in many different geographic locations thus reducing the risk associated with any one real estate market. Income- producing residential real estate usually performs very well during economic downturns as those who are unable to afford a home turn to rentals.

    Turn-Around Real Estate – An offshoot of income-producing real estate, these diamonds in the rough offer the potential for both capital gains and income. Purchasing a property that is undervalued due to a lack of capital investment and investing more to bring the units up to current standards can result in higher rental income and a capital gain when the property is eventually sold. Unlike “flipping” a house, however, investing in turn-around apartment units requires more capital and a longer term commitment. In the article,

    Mr. Stenner points to the United States as another example of this category. Areas where property may be undervalued, such as Arizona for example, can present an opportunity to investors. However, investors should understand that employment, economic growth and competing developments will all have an effect on whether these investments ultimately grow in value. In addition, Canadian residents should be aware of the added costs from non-resident taxes, legal and accounting fees from having to file US tax returns if you earn income, and the potential impact of estate tax.

    Mortgages – There is a large secondary market for loans completely unrelated to the big 5 banks. Developers and investors often turn to this market because they need to close faster than a bank is willing to or because the bank is unwilling to lend (for any number of reasons unrelated to the opportunity available). Often, the secondary market proves to be more flexible than the banks are willing to be. These loans are often shorter term and have higher yields and carry the property as collateral in the event that the borrower is unable to make payments.

    For our part, we invest in all four of these categories, with the majority being invested in income real estate. We do so to diversify and enhance our returns.

    While Mr. Stenner points to a number of publicly traded securities or Real Estate Investment Trusts (REITs) as a method for investing in real estate, in my view, this reduces one of the key advantages to real estate: risk reduction.

    While these securities often do not have high correlations with the overall market, they typically still fall in value when public markets undergo periods of volatility. In 2008, the S&P/ TSX Composite Index fell 49.3% from its high. The TSX Capped REIT Index fell 62.66% from its high and that fall began much earlier than the broader market.

    While it is true that REITs distribute significant cash flow, making this category attractive, they are still subject to market volatility. Private real estate investments may offer some advantages in that their value does not bounce around with the stock market everyday and potentially offer more re-development or capital gain potential than public investments. The challenge however is they are typically more difficult to access for individual investors.

    Real estate should be an investment held in every investor’s portfolio. However, it is a complicated asset category and unless you have the expertise, you may want to find professional managers who understand and specialize in this area.

    Digesting the economy


    i-29009350cc26daa99a7bd9da1952286b-economy-blog.jpgWe just returned from a breakfast presentation by our economic advisor, Maureen Farrow who was speaking to some of our clients at an Inside the Tent event in Mississauga. The timing was opportune as equity markets are soaring, Canadian jobless numbers are improving and the US embarks on another round of fiscal stimulus and quantitative easing (flooding the market with cash).

    While the newspapers, evening news and markets seem to concentrate on the silver lining, there are indeed many clouds on the horizon and investors would be right to ask whether all of this is too good to be true. Maureen did an excellent job of reflecting our thoughts that while things are certainly improving, many countries around the world and in particular Europe and the US have a very long road ahead of them when it comes to economic recovery.

    [read more >>]

    IPPs: a better way for entrepreneurs to build retirement capital?

    A few weeks ago, my colleague David Lloyd wrote about how much money is needed for retirement. Most people have a number in their head. Maybe it’s sufficient. The next question is, how do you make sure you meet this number?
    As a business owner, you have a unique savings opportunity you may not even know about. It’s called an Individual Pension Plan.
    Imagine for a moment, the federal government gave you the opportunity to create a corporate pension plan, just for you. A plan that would provide you with dependable income in retirement – much like that enjoyed by teachers or civil servants – funded by your corporation.
    How would you design the plan? Maybe something like this?…