Week in review: February 16-20, 2009

The biggest news this week comes from British Columbia and Oregon, where Ian Thow was arrested by U.S. Marshals outside his condominium in Portland. The former Berkshire Investment Group senior vice-president is accused of stealing between $10 and $30 million from clients by selling non-existent investments to fund an extravagant lifestyle that included private jets and luxury automobiles. Most of Thow’s victims were in or near retirement and had little knowledge about investing.

While Thow faces 25 counts of fraud, there is some good news awaiting him in British Columbia. On February 13, 2009, Thow won an appeal to have a BCSC administrative penalty dramatically reduced, from $6 million to $250,000. The Court of Appeal for British Columbia ruled that the securities commission overstepped its regulatory bounds by imposing such a large penalty, which far exceeded the maximum penalty spelled out in the B.C. Securities Act (1996).

Until his arrest it was unlikely that he would ever actually pay either amount.

In overseas regulatory news, the U.K.’s Serious Fraud Office (SFO) is working with U.S. authorities who are conducting a similar probe, to investigate the American International Group’s (AIG) financial products unit for possible criminal conduct. AIG is widely blamed for the company’s brush with bankruptcy through bad bets on credit default swaps. Investigators are looking at the sale and valuation of financial instruments linked to toxic U.S. subprime mortgages and other potentially fraudulent activities at the division.

Industry news

KingsGate Wealth Management Services is closing up shop after amending its lawsuit against Industrial Alliance Securities Inc. The court battle, launched in October 2007, alleges Industrial Alliance unlawfully terminated contracts that were critical to KingsGate’s survival. The smaller firm is seeking damages in excess of $3 million, plus punitive damages.

The insurance companies, meanwhile, reported earnings this week — the rapid sell-off on equity markets in Q3 and Q4 of 2008 took a heavy toll on Canada’s top insurance carriers, but Sun Life, Manulife and Great-West Lifeco still managed to eke out reduced full-year profits.

While other businesses are feeling the pinch, TD Waterhouse is joining the likes of Scotiabank and RBC, albeit in a smaller way, by expanding in Europe. The firm increased its stake in Internaxx Bank, a Luxembourg-based online bank for international investors and U.K. expats. Internaxx started in 2001 as a joint venture between TD and a Luxembourg partner, BGL. TD Waterhouse has increased its stake from 25% to 75%, with BGL retaining the remainder. Internaxx will be managed through TD Waterhouse U.K.

Investing

Everyone is having a bad year; even the CPP Fund ended its fiscal Q3 of 2009 with assets of $108.9 billion, down $8.5 billion from the previous quarter. The fund posted an investment loss of $7.9 billion, or 6.7%. David Denison, president and CEO of the CPP Investment Board, says sharp declines in global equity markets negatively impacted results for the quarter, but adds that beyond short-term results, steady cash inflows and the board’s broadly diversified portfolio will generate the longer-term results necessary to deliver on its multi-generational mandate.

Alternative investment specialists focusing on infrastructure say the prevalence of public-private partnerships may prompt institutional and private investors alike to significantly increase their allocations to this sector, particularly as federal and provincial governments prepare to pour money into Canadian infrastructure projects to boost the economy and make up for several decades of infrastructure neglect.

The news might be cold comfort or too late for some — investments in Canada’s venture capital market reached a 12-year low in 2008. According to a statistical report from the Canadian Venture Capital & Private Equity Association (CVCA), venture capital investment dropped 36% last year, from $2.1 billion in 2007 to $1.3 billion in 2008. The fourth quarter, which represented the worst of the stock market downturn, coincided with a big drop in venture capital financing. Between October and December, only $302 million in investments was doled out, a 43% reduction from the $526 million invested in the fourth quarter of 2007.

In other parts of the world, the U.S. Congress may have passed its stimulus package, with another plan in the works for homeowners, but a new report from Merrill Lynch suggests it is renewed optimism about China’s economic growth that is most exciting to fund managers. The majority of managers surveyed recognize that the global economy is in recession, but the percentage who expect the next 12 months to be worse has declined to 53%, from 62%.

Curious about energy price predictions? Two of the most outspoken commodity commentators on the continent went head to head on a discussion panel on oil at the Calgary Petroleum Club this week. Dennis Gartman, a hard-nosed commodity trader and publisher of The Gartman Letter, and Jeff Rubin, the outspoken chief economist for CIBC World Markets, were brought together by Horizons BetaPro, presumably to highlight how radically views can clash on a commodity like oil.

Gartman and Rubin were not far apart in their near-term oil forecasts — both see oil prices staying low while the global economy remains in crisis. In the long term, however, Rubin forecasts oil to hover as low as $32 a barrel while the global economy starts to recover. That recovery, he says, may come sooner rather than later. Gartman, meanwhile, predicts the price of a barrel of West Texas Intermediate will hover at around $40. He’s unsure how much of a supply crunch there will be, as OPEC countries will have little choice but to keep the taps wide open — oil is their primary income source.

Your clients

One in five Canadians, looking for ways to improve savings, are planning to cut back on purchases. This is good news, but the BMO Savings Monitor Survey also found that, unfortunately, one-third are planning to reduce their RRSP contributions as well. Roughly 25% said they will not make any RRSP contributions at all as job loss concerns start trumping more distant concerns about retirement.

The stability of institutions doesn’t seem to be in question. According to a report by PricewaterhouseCoopers, repeated press reports on the stability of the Canadian banking system appear to have convinced the public that the system is rock solid. The firm’s Annual Banking Survey found 85% had confidence in the system, and 84% said it was one of the best in the world.

Investor confidence and risk appetite, measured based on the amount allocated to equities in investor portfolios, also appears to be on the rise. According to State Street’s Global Markets’ Confidence Index, confidence numbers rose to 72.9 points this month, up from 60.2 in January. The numbers have jumped for a second month in a row, but are still coming in lower than average level numbers recorded in 2008.

Sentiment among average Canadians, meanwhile, appears to be split almost perfectly into three camps. According to an Angus Reid poll conducted for Franklin Templeton Investments, 33% of Canadians are feeling opportunistic and willing to take risk in their investment portfolios ahead of the RRSP contribution deadline, 34% said they were suspicious or timid regarding risky assets at this time and 32% were unsure how to define their current investment outlook.

See also: Mutual funds face paradox of thrift, by Scot Blythe.

All that aside, it’s still worth noting that more than one-third (37%) of boomers who own their own business say they are planning to put off their retirement due to the current economic situation.

Products

The positive sentiment numbers might be showing up in fund sales data again. According to the Investment Funds Institute of Canada’s (IFIC) monthly tally of fund sales, investors dipped their toe back into the mutual fund market in January, but maintained their risk-averse stance. The industry as a whole reported net sales of $1.17 billion in January, compared to industry-wide net redemptions of $792 million in December, and $977.2 million in November. Net sales in January 2008 were $844.5 million. Total mutual fund assets reported to IFIC were $491.1 billion at the end of January, down $15.9 billion (or 3.1%) from December. Market volatility is blamed for wiping out about $17 billion in asset value in the first month of 2009. Investors generally focused on capital preservation, pouring their cash into money market funds, which gathered $1.01 billion in assets. A closer look reveals that RBC alone sold nearly $1.4 billion in money market investments.

Not surprisingly, given current conditions, companies are starting to close certain funds. This week, closures include two funds from Webb Asset Management — the company announced it will not renew prospectus and annual information for the company’s Enhanced Growth or Income funds. Webb says it plans to continue managing their remaining assets and may renew the fund prospectuses in the future, but for now will only accept redemption orders. The company’s only other fund, the Webb Canadian Performance Fund, distributed via offering memorandum rather than prospectus, is not affected by the decision. Unitholders will not be required to pay any redemption fees or sales charges. AGF Funds also announced that it will terminate the AGF World Opportunities Fund on April 20, 2009. Effective immediately, the fund is closed to new purchases.

As of February 23, meanwhile, the Mackenzie Maxxum Canadian Value Fund and the Mackenzie Maxxum Canadian Value Class will be managed by sub-advisor McElvaine Investment Management. Finally, Mavrix Fund Management announced it has filed a preliminary prospectus for the Mavrix Explore 2009-I FT Limited Partnership. The offering will invest in a diversified portfolio of flow-through shares, largely issued by energy exploration firms.

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Quick links: Advisor.ca news, February 16-20, 2009.

Thow gets penalty reduced Ian Thow arrested in Oregon British prosecutors investigate AIG unit "Can’t regulate good judgment" for hedge funds TD Waterhouse expands in Europe Equity markets pummel insurers’ earnings CPP Fund posts 6.7% loss in Q3 Aging infrastructure offers investment opportunities Fund managers look to China Venture capital money continues to dry up Rubin and Gartman spar over commodities

Mutual funds face paradox of thrift Canadians plan RRSP cutbacks Canadians evenly split on markets Investor confidence rises Boomers seen delaying retirement Public sees banks as solid Fund sales turn positive in January Webb closes sales for two of three funds Mavrix offers new flow-through LP Mackenzie hires McElvaine’s firm KingsGate closes the gate AGF closing World Opportunities Fund

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New features this week:

Ravaged small caps may offer opportunity: Small caps fell harder and faster than large cap stocks in 2008. In fact, the definition of small cap itself is in question as valuations have plummeted to extreme lows. Yet, history suggests small caps usually have good performance during the early stages of a stock market recovery. Read more.

Running on empty: Avoiding debt in today’s troubled times: If there was ever a time for advisors to be on top of their clients’ affairs, it’s right now. With more Canadians losing jobs, the markets regularly bouncing around and home prices more volatile than ever, advisors have a perfect opportunity to show their value by helping clients deal with all this uncertainty. With that in mind, we’ve put together an in-depth debt package to help you and your clients navigate these turbulent times. Read more.

Doctors’ retirement plans on life support: While few Canadian physicians have a totem of the financial collapse right outside their door, they do have vivid reminders of it as close as their nearest investment statement. According to Manfred Purtzki, a Vancouver financial advisor, the average physician-held portfolio has shrunk by approximately 30% in the last year. Read more.

(02/19/09)