Where Smart Money Is Invested

Transcription

1 Where Smart Money Is Invested An Executive Summary of Winning With Integrity: A Powerful Guide to Successful Investing with Individually Managed Accounts / Separately Managed Accounts Effectively managing your investments requires in-depth knowledge of economic conditions, market forces, and the complex financial environment. If you re like many investors, the demands on your schedule don t allow you to dedicate as much time to the management of your financial affairs as you would like. Today, even experienced investors are finding it difficult to keep pace. Increasingly, those investors are turning to professional investment managers for help. These professional investment managers assume responsibility for the day-to-day management of your portfolio, buying and selling individual securities in order to help meet your overall financial goals. There are thousands of professional investment management firms around the world all with different investment philosophies, minimum investment thresholds, and performance records. Finding an investment manager that best meets your individual needs requires a systematic, objective approach. Verus Wealth Management fully utilizes the benefits and features of ScotiaMcLeod s Summit Program, which offers a disciplined approach to personalized investment management. Verus Wealth Management helps you develop a personal profile; establish your investment objectives; define your time horizon and tolerance for risk and identify the best asset mix and investment manager(s) for you. We evaluate your portfolio on an ongoing basis to ensure you remain on track toward reaching your long-term investment goals. Exclusive Benefits for Discriminating High-Net-Worth Investors The Summit Program provides you with access to investment managers from Canada, the U.S., and around the world firms not normally available to individual investors due to the high minimum asset levels typically required. Some of these managers have sub-advisory roles, but unless an investor has $2-5 million, direct access is not possible. The following list illustrates a few examples of the minimum requirement to access these managers on an individual basis: Adding Value Since 1985

2 Foyston, Gordon & Payne $2,000,000 Jarislowsky Fraser $3,000,000 KBSH Capital Management $3,000,000 Phillips, Hager & North $2,000,000 McLean Budden $2,000,000 Burgundy Asset Management $5,000,000 Genus Capital $2,000,000 Source: Ken Gordon, Winning With Integrity One needs to know that to properly diversify between different managers and different styles of investing (i.e., growth and value), an individual investor would have to have somewhere between $8-10 million to build the ideal portfolio. Most individually managed account / separately managed account platform minimums are between $100, ,000 and are a phenomenal opportunity to access managers of superior quality. However, to construct a well-diversified portfolio in individually managed accounts requires a minimum of $500,000, which is the starting point an investor must have in investable assets to work with Verus Wealth Management (of ScotiaMcLeod). Understanding Fees Individually managed accounts / separately managed accounts are a fee-based approach to professional money management. Instead of paying a commission for each transaction, the investor pays a fee based on the assets held in the program. At ScotiaMcLeod, these fees are charged to the account on a quarterly basis. Individually managed accounts / separately managed accounts, unlike mutual funds, have no front/back end loads or early exit penalties. The following chart best depicts the allinclusive fee. IMA/SMA Mutual Funds 1. Up front fees None 0 to 5 % 2. Deferred sales cost None 5 to 6% first year Declining to 0% after years 6 to 7 on average 3. Early withdrawal penalty None Varies from company to company 2% if not held for 90 days 4. Switch fee from fund to fund or strategy to strategy None 0 to 2% 5. IMA/SMA Management Fee or Management expense ratio Management Fee of 2.00 to 2.75% Average MER of 2.73% 6. Tax deductibility of fee Potential (in non-registered) No Source: Ken Gordon, Winning With Integrity

3 Another benefit of individually managed accounts is that the fee is tiered on the total assets held in the program. Total Individually Managed Account / Separately Verus Wealth Management Fee Schedule Managed Account Assets (CA$) $0 $499, % $500,000 $999, % $1,000,000 $1,999, % $2,000,000 - $4,999, % $5,000, % Sample for illustration purposes only, Source: Ken Gordon, Winning With Integrity As the fee on individually managed accounts / separately managed accounts is fully transparent, many investors believe they are paying more to have their money managed under this structure than with mutual funds. Well, let s make a comparison. Although management expense ratios of mutual funds are comparable to the management fees of IMA/SMAs, a portion of the IMA/SMA s account charge may be deemed to be a counseling fee by Canada Revenue Agency and potentially deductible in non-registered accounts. Therefore, an investor in the top marginal tax bracket could be looking at a net MER of approximately 1.425%, which equates to a reduced fee of approximately 43%. With individually managed accounts / separately managed accounts, there is no fee for hiring or firing a manager. With mutual funds, you can fire a manager within the given fund family and move to another manager; however, only within that family. Therefore, an investor s choices are limited to that family of funds. If an investor wants to hire a manager outside that particular family of funds and the fund was bought on deferred sales charges, then a redemption fee will be levied against the sale. Individually managed accounts / separately managed accounts allow investors to customize their portfolio. Investors may choose not to hold a particular company or sector in their portfolios for personal, ethical or financial reasons. For example, some investors may not wish to hold shares in companies that produce tobacco or manufacture weapons. There are also situations where investors, because of their personal business, already have a high exposure in one particular stock and/or sector and do not wish to increase their exposure in these areas. Mutual funds cannot offer this flexibility, whereas IMA/SMAs can tailor your portfolio to any social, economic, moral, or environmental concerns. Individually managed accounts / separately managed accounts are structured as individual accounts where the investor actually owns the underlying shares of companies and, as such, allows the investor to establish their own adjusted cost base. Mutual funds on the other hand are structured as pooled investments so an investor automatically inherits the adjusted cost base of the underlying assets. Today, it s estimated that the average U.S. mutual fund has a 20% imbedded unrealized capital gain. Although the stat is difficult to substantiate in Canada,

4 I would fully expect a relatively similar or even higher number with Canadian mutual funds. This would be due to Canadian banks accounting for approximately 30% of the S&P/TSX and their relative strong performance over the years. Consider the following example of an investor buying Ivy Canadian Fund. On the date of purchase, Bank of Nova Scotia BNS (one of the fund company s top holdings) is trading at $52/share (Nov 2006). However, if the fund manager had purchased the bulk of the Bank of Nova Scotia shares in 2000 at $14/share the investor now has the unpleasant problem of a $38/share unrealized inherit gain. Now, say that BNS runs into some rocky times with their significant presence in Latin America and the portfolio manager decides to trim its weighting in the bank. Whether or not the investor held the fund for a year, a month, or a day for that matter, the investor will pay all the capital gains tax back to the original cost base of Bank of Nova Scotia within the fund. Sounds bad? That s because it is. This can never happen with Individually Managed Accounts / Separately Managed Accounts. Turnover ratios on individually managed accounts / separately managed accounts are substantially lower than those on mutual funds, this gives the investor greater tax efficiency. Portfolio turnover is expressed as a percentage and measures the trading activity of a portfolio; how often securities are bought and sold. The turnover rate can fluctuate widely between portfolios. IMA/SMA IMA/SMA IMA/SMA IMA/SMA Canada U.S. International Global 26% 30% 25% 28% Mutual Funds Mutual Funds Mutual Funds Mutual Funds Canada Domestic Canada International Canada Global 111% % 127% Mutual Funds Mutual Funds Mutual Funds Mutual Funds US Domestic US International US Global % 78% N/A Source: Ken Gordon, Winning With Integrity With individually managed accounts / separately managed accounts, investors can instruct money managers to take gains or losses as available to manage their tax liabilities more effectively. Most mutual funds are managed for pre-tax returns and investors pay a proportionate share of taxes on capital gains. Identifying high-quality investment managers is no easy task. There are over 20,000 managers worldwide today. Northern Trust, is responsible for the identification of the investment managers available to you through Summit. The due diligence committee employs a rigorous screening process to identify managers from around the world whose investment strategies and proven track record make them the right candidates for our clients. Only investments managers who meet their screening criteria are selected and retained for the Summit program.

5 Source: Ken Gordon, ScotiaMcLeod Summit Program An investment manager must pass a stringent review process before they are accepted into the Summit program. The due diligence screening process includes the following steps: An examination of the investment manager s stated investment approach and an analysis of how well they have adhered to that style over time and through various market cycles; A measure of risk-adjusted performance vs. relevant benchmark indices; Standard Deviation, Sharpe Ratio, Alpha, Beta, R-Squared On-site interview with the investment managers;

6 An analysis of the stability of the investment management firm, including a review of the ownership structure, continuity of key personnel, administration, and systems; An evaluation of the firm s commitment to client service. Continual, objective monitoring is vital to the ongoing success of an investment plan. With Summit, you have the assurance of knowing that Verus Wealth Management and the Summit due diligence team are looking out for your best interest, today and tomorrow. We continually monitor the investment managers participating in our programs to ensure they continue to meet the objectives for which they were hired. Verus Wealth Management at ScotiaMcLeod meets with their selected managers several times a year both in our offices and theirs. We have built up not only an understanding of what makes them so successful, but also a rapport that allows us a pipeline to the key executives in these investment firms. If any given manager deviates from their stated investment approach or falls below our standards of excellence, their continued participation in the program is assessed. Ultimately, the investment manager may be removed from the program. Individually managed accounts / separately managed accounts within the ScotiaMcLeod Summit program provide the investor with detailed performance reporting in a convenient easy-to-understand format. Today, most investors simply want to know, rightfully so, just a few simple things: How much money did I invest? How much money did I take out? What is my absolute return in dollars and cents? What is my percentage return on an annualized basis? What is my total return since inception? What are my fees? With Summit all the above reporting details are provided. Each calendar quarter, you receive a consolidated Summit Quarterly Portfolio Review. This review contains consolidated individual investment manager reporting that includes: Year-to-date and since inception portfolio performance figures Beginning and ending market values Easy-to-understand graphical representations of your portfolio s performance, with comparisons to the appropriate market indices

7 Your current asset allocation, based on the market values of your securities A review of investments selected by each investment manager Also, each quarter, on your monthly statements you will see any and all fees that have been charged to manage your account. They are fully transparent. Returns are reported net of fees. In addition, an annual summary of fees paid by your Summit account during the previous calendar year is generated (including GST). On an annual basis, all Summit account holders will receive a gain/loss report for each of their strategies (or a consolidated summary of all portfolios) to aid in the filing of their income tax returns. Customized reports can also be prepared for corporate or trust accounts, etc. with an offcalendar year-end. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of ScotiaMcLeod, a division of Scotia Capital Inc. ( SCI ), but the data selection, analysis and views expressed herein are solely those of the author and not those of SCI. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor SCI can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your investment advisor, who can assess all relevant particulars of any proposed investment or transaction. SCI and the author accept no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice. Registered trademark used under authorization and control of The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member CIPF.