Posts made in December, 2007

130/30 Funds' Past Performance

Posted by Preet on Dec 31, 2007 | 2 comments

Standard and Poor’s has announced that they will launch index coverage of the 130/30 Strategy. Note that this will be different from the actual universe of 130/30 funds’ performance. (See yesterday’s post on the 130/30 mutual fund structure for more information.) The key word is "Strategy". What the index will track is the S&P 500 as the core of the index plus a 1% overweight to 30 top stocks and a 1% underweight to 30 bottom picks. This is designed to provide a benchmark of sorts for the fund managers to try and beat.

Basically, since there is no real 130/30 index they have attempted to create an index that is derived from the S&P 500 in a manner that is similar for the investment mandate of a 130/30 strategy. Their picks of the top 30/bottom 30 stocks is based on Standard and Poor’s STARS stock ranking system.

Money magazine published a comparison between all 130/30 funds’ performance and the "plain Jane" S&P 500 for a short period (July 19th, 2007 – October 9th, 2007) and found that the market returned 1.7% but the 130/30 funds underperformed by 2.1% for a total return of -0.4%.

For the full year ending November 9th, 2007 the S&P 500 returned 7.5% and again the 130/30 funds underperformed – this time by 1.2% for a total return of 6.3%.

ING Funds has a 130/30 fund and you can look at a Google Finance Chart here. I compared the fund’s (short) performance against Vanguard Fund’s Total Stock Market Exchage Traded Fund – which tracks the S&P 500. There isn’t enough history to make meaningful conclusions – but so far the claims of adding Alpha are not being met (at least for ING).

I’m guessing that you can expect a absolute barrage of 130/30 fund marketing and advertising in the next few years. Personally, I’ll be keeping an eye on which companies are selling them and maybe buy their stock instead!

Have a great New Year’s Eve! 

130/30 Funds Are Coming To Canada

Posted by Preet on Dec 30, 2007 | 1 comment

A new type of mutual fund may be entering the Canadian market in the near future. This particular type of mutual fund is known as the "130/30 Fund". Let me explain how it gets it’s name:

For every $100 invested into the fund, the fund manger will invest the $100 according to an already established mandate (for example Canadian Large Cap Value). The manager will then also short $30 worth of securities (based on the most over-valued securities in his/her mandate). When you short a security, you are selling a security you don’t already own (you borrow the security from inventory). The hope is that the stock will go down and then you can buy the stock at the lower price and "cover the short position". Think of it as selling high AND THEN buying low – so you make money when the stock goes down. When you open a short position, since you are selling a stock you will receive the money you sold it for from the buyer. In this case of 130/30 funds, the manager will take the proceeds from the short sale and add to his long position.

So 130 represents 130% exposure to the long position and the 30 represents the 30% exposure to the short position.

What does this mean for the investor? I don’t have hard data to post (but will dig some up shortly), but all the claims of the fund companies that risk-adjusted performance should be higher seems unsubstantiated SO FAR. I have seen the performance of these funds in the States and they seem to lag the benchmarks and may be too complex for some investors.

Also it should be noted that holding a short position incurs interest costs, and increased turnover will increase brokerage transaction costs. My guess is that the management fees will also be higher…

The 130/30 fund structure will not only ask managers to pick winning stocks, it will ask them to pick losing stocks (to make money on by shorting them). Add this to two different types of leverage built in to the structure and it would seem that these funds might be worth watching for a while first. The leveraging components increase risk substantially. Make sure to seek out the advice of a professional advisor.

I will post some data and links tomorrow, so stay tuned… 

Why are "Dollars" also called "Bucks"?

Posted by Preet on Dec 29, 2007 | 2 comments

The slang "buck" or "bucks" when referring to money is so common-place that no-one really questions it’s oddity. But it turns out that the word "buck" is short for "buck-skin" (from a deer). Buck-skin’s were used as currency once upon a time.

The term "bread" has an origin from the United Kingdom. Specifically the Cockney phrase for money is "bread and honey" which was eventually truncated to just "bread". 

With regard to the $ symbol, seemingly the most popular theory as to it’s origin is that it was created through the superimposition of the initials of "United States" (U and S) on top of each other. So Imagine an "S" with a "U" written right on top of it. The theory suggests that the bottom loop of the "U" was eventually lopped off to give us the more familiar "II".

Don't Qualify for the Lifelong Learning Plan? Who Cares…

Posted by Preet on Dec 27, 2007 | 1 comment

Mike from the Quest for Four Pillars blog commented on a post I had written about the Lifelong Learning Plan. He mentioned that if he were ever considering going back to school, he would be inclined to just withdraw the money from his RRSP since that year would probably be a lower income year and the tax hit not as bad as a "full" income year.

It is an excellent suggestion. In fact, for the LLP, you almost always have to be enrolled in a full-time capacity at a qualifying educational institution. That means it is indeed likely to be a lower income year.

Add to that:

1. You no longer have to worry about what program you take and making sure it qualifies under the LLP.
2. You don’t have a set repayment schedule – you can make your repayments on your own terms, and probably in a higher tax bracket which will afford more tax refunds on your future contributions than tax paid on the withdrawal.

Perhaps this is why most people don’t use the LLP… Thanks for the suggestion Mike!

Mike and Mr. Cheap run the Quest for Four Pillars blog and I suggest you visit their site to find out where the name comes from. I’m a subscriber to their site (it’s free) and visit it daily. 

When Not Paying Back the Home Buyer's Plan or Lifelong Learning Plan Can Make Sense

Posted by Preet on Dec 27, 2007 | 6 comments

If you are aware of the Home Buyer’s Plan or the Lifelong Learning Plan, you know that there are ways you can get money out of your RRSP (temporarily) through tax-free withdrawals. The programs require that you pay money back to your RRSP over time and the CRA will inform you of how much of the loan is required to be paid back in any given year.

There is no rule that says you have to make the repayment - only that if you don’t, then the year’s required re-payment amount will be included as taxable income for that tax year. So if you are in a low income year and you have a repayment required – it might not be a bad idea to skip the payment and add the payment amount to your taxable income – it won’t make a significant impact on your taxes.

So for example, if you contributed to a spousal RRSP for your spouse or common-law partner and used money for the HBP or LLP – if your spouse is a stay-at-home parent with no income – they won’t pay tax on skipping the re-payments. Note that their income deemed to have been received may reduce the spousal credit if you qualify for it.

Additionally, you can make contributions to your RRSP and simply elect to not use the contributions towards the required HBP or LLP repayments IN ADDITION to not claiming the RRSP deduction. You would do this if you wanted to shelter money for long term growth NOW but wait until a higher income year in the near future to use the deduction to reduce taxes. 

As always, make sure to consult with your own qualified financial advisor before engaging in any financial strategies. 

You can make Spousal RRSP Contributions after Age 71

Posted by Preet on Dec 27, 2007 | 0 comments

It is still possible to make RRSP contributions after the year in which you turn 71 – just not to your OWN RRSP. If you have a spouse or common-law partner who is younger than you, then you can contribute to a Spousal RRSP set up in their name. This allows you to claim a deduction on your tax return and reduce your tax bill.

Click here to read about Spousal RRSP’s in more detail.

There are a few catches of course. You must have RRSP contribution room in order to make an RRSP or a Spousal RRSP contribution – and this is generally harder and harder to come by when you are over 71 as you are most likely retired by now. BUT – so long as you generate EARNED income, you generate RRSP contribution room. So, if you work as a part-time consultant and earn salary, commission, etc., then you can generate RRSP contribution room – even in retirement.

To sum it up: you can still generate RRSP contribution room after you turn 71 – you just can’t use that contribution room to contribute to your own RRSP.

The other “catch” is that your spouse or common-law partner must be 71 or younger, as the contribution must be made to their Spousal RRSP. Spousal RRSP’s have to be matured by December 31st of the the year one turns 71 (just like with an individual RRSP).

A final note: if you have unused RRSP contributions carried forward from previous years before you matured your RRSP, you can indeed also use them to make a spousal RRSP contribution after you have matured your own RRSP. The same restrictions apply as above.

You can Claim Unused RRSP Deductions after Age 71 too

Posted by Preet on Dec 27, 2007 | 0 comments

You may remember that you can make an RRSP contribution in a given year but carry forward the resultant RRSP deduction until a future year. This rule still applies even after you have matured your RRSP into a RRIF (or any of the other conversion options).

The RRSP deduction will reduce your taxable income in the year that you use it. So if you think that there will be a significant tax liability a few years into retirement, such as the sale of capital property that would result in a large tax bill, you could make your RRSP contributions but delay claiming the RRSP deductions until that year. In other words, you do not lose the ability claim the RRSP deductions once you mature your RRSP.