Week in review: December 15-19, 2008

A few years ago, hedge fund proponents would’ve suggested it would take a very cold day in hot places for hedge fund managers to agree to more transparency, the need to reveal "trade secrets" and regulatory oversight.

That cold day (in December, it turns out) may have finally arrived. Hot markets everywhere are taking a break for the time being, perhaps making conditions even more favourable for the sort of change the industry is working toward overall.

The global hedge fund industry had already been working to increase transparency and oversight, but the most recent example, the Madoff scandal where Bernard Madoff allegedly bilked investors out of more than $50-billion, has organizations like the CFA Institute urging the industry to adopt a uniform set of ethical standards. See also: Big frauds and small starts, by Scot Blythe.

In other regulatory and oversight news, the Canadian Securities Administrators (CSA) has published for comment a set of proposals reforming the rules governing insider transaction reporting.

Proposed National Instrument 55-104 Insider Reporting Requirements and Exemptions shortens the reporting deadlines dealers have, reduces the number of insiders who are required to report transactions, and consolidates the main insider reporting requirements and exemptions in a single national instrument, to cover all provinces except Ontario. The proposal, still open for industry comment, is available on CSA member websites.

The RCMP’s Integrated Market Enforcement Team, meanwhile, has arrested and charged a Harrow, Ontario, man with two counts of fraud for stock market manipulation. They say Petar Vucicevich was interim president and CEO of Sulja Bros. Building Supplies Ltd., a small lumberyard located in Harrow, between July 31, 2006, and December 31, 2006. The company was traded on the Pink Sheets in the U.S.

Finally, a new self-regulatory organization is set to begin operations in 2009. The Registered Deposit Brokers Association, a reincarnation of the Federation of Canadian Independent Deposit Brokers, says it has garnered "support from the overwhelming majority of financial institutions" that it will regulate. The body will regulate independent financial professionals who specialize in guaranteed investment products such as GICs, term deposits, RRSPs, RRIFs and LIFs.

Industry news

Scotiabank became CI Financial Income Fund’s largest single stakeholder late last week. Shortly after, unitholders approved plans to transform the company back to its original corporate structure.

Mutual fund redemptions slowed in November, relatively speaking, anyway. The Investment Funds Institute of Canada says the industry reported $909.8 million in net redemptions for the month; this compared to the $8.4 billion record set in October. Investors set another record in October as well, pulling $12.3 billion from foreign securities. The sale of foreign bonds totalled $6.2 billion, with U.S. government bonds being the primary target for disposal, and with selling concentrated in shorter maturity bonds.

Numbers from the Investment Industry Association of Canada (IIAC), meanwhile, show the securities industry took a hit, with revenues falling 6% from the second quarter, or 7% from Q3 of 2007. Overall operating profits for the three months ending September 30 hit a three-year low of $1 billion.

The Bank of Canada added a vote of confidence to the industry, saying Canadian financial institutions so far have proven robust, but warned that the companies are still not immune to spillover effects if the U.S. recession should deepen or lengthen into another year of economic retrenchment.

Incongruous news from BMO Harris Private Banking however, perhaps suggests that things are not as dire as they seem — the high-net-worth service group has decided to expand its private banking business into St. John’s, Newfoundland, to offer investment management, estate and trust services, financial planning, philanthropic advice and succession planning.

Economics, investing

The worst might not be over, but more money managers are starting to say they expect positive returns in 2009 — 90% of those surveyed, in fact, say the TSX is either fairly valued or undervalued; 70% say they expect positive returns for the S&P/TSX in 2009.

Value managers discussing conditions at a recent United Financial conference call to advisors actually used the word "opportunity" rather frequently, saying the trillions in cash sitting on the sidelines "presents a historic opportunity for investors."

The same rhetoric is being used, perhaps more convincingly, by those in the mortgage industry: those familiar with the mortgage market say it’s an unprecedented opportunity, to take advantage of historically low rates, and that the majority of clients probably still qualify for more attractive rates.

The hard numbers still need to be digested and overcome, though — a report out of Laurentian Bank is calling for a 0.5% economic contraction. It also says Canadian unemployment is expected to rise to 7.0% from its current level of 6.3%. Canadian household net worth also dropped 3.2% in the third quarter of 2008, the biggest percentage drop in net worth since the Asian financial crisis of 1998. In dollar terms, the stock market drop contributed to a $191 billion decline in Canadians’ net worth.

Products

Most PALTrak users know by now that Morningstar Research has unveiled its new central database for segregated funds; the Bank of Montreal is the first to announce it will offer the new Registered Disability Savings Plans (RDSP), as of December 22, 2008, after the RDSP was introduced in the last federal budget; Guardian Group of Funds (GGOF) announced it has appointed Harris Investment Management Inc. to managed the GGOF American Equity Fund Ltd., taking over for Lazard Asset Management (Canada) Inc.; and Scotia Securities has appointed F&C Management Limited to manage the Scotia Global Climate Change Fund.

A new survey conducted for RBC suggests that the January launch of the tax-free savings account will not materially impact the amount of cash flowing into Registered Retirement Savings Plans — just 8% of respondents said they would reduce their RRSP contributions in order to fund the new TFSA, 33% said they plan to contribute to both accounts and 23% said they would fund their new TFSA with assets from an existing non-registered account.

In the realm of interest-rate-sensitive investing, the U.S. Federal Open Market Committee cut its key lending rate on Thursday, slashing the target range for federal funds to a band of zero to 0.25%. The discount rate has been reduced by 75 basis points to 0.50%. The province of Ontario, meanwhile, adjusted the interest rate paid on variable rate Ontario Savings Bonds (OSBs), slashing it from 3% to 1.75%. The new rate is in effect for the next six months.

Finally, although real estate has been heralded as a fantastic portfolio diversifier, a pair of segregated funds offered by Power Financial subsidiaries has imposed a moratorium on redemptions: Although Great-West Life president and CEO says the funds have performed well over many years, "it is important in today’s difficult economic environment that we continue to manage the fund in a way which balances the long-term interests of all participants." The London Life Real Estate Fund 2.17G and Great-West Life’s Canadian Real Estate Investment Fund No. 1 have both suspended redemptions effective December 15, 2008. The move was announced late in the day on December 16.

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Quick links: Advisor.ca news, December 15-19, 2008.

Is the tide turning? Managers think so Value investors greet market with optimism Net worth hit by stock market tumble Household net worth falls Financial crisis masks long-term demographic risk Spillover but no crisis CI conversion receives unitholder approval Scotia completes purchase of CI stake Redemptions slow in November Industry revenues sag in Q3 BMO offers private banking in St. John’s Hedge funds urged to accept oversight Canadians bring their money home TFSA no threat to RRSP habits: Survey

BMO offers Registered Disability Savings Plan Rate cut on variable rate Ontario Savings Bonds Fed funds nearly free at 0.25% Morningstar adds seg fund database Scotia names new manager on climate change fund GGOF appoints new U.S. subadvisor Real estate funds lock the exits Toronto CFA Society names executive director CSA seeks to simplify insider reporting New SRO to oversee deposit brokers RCMP’s IMET arrest Harrow man

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New columns and features this week:

Scot Blythe: Big frauds often start small. Unforgivably, they often start with small omissions. Read more.

Sandy Cardy: The psychological fallout of the whipsawing markets has continued to drive down the value of both good and bad stocks, so just about everyone is facing sizable losses in their portfolios. While nothing makes up for losing money, the tax system can offer some relief, and your clients may even get a refund of taxes paid in prior years. Full story.

Peter Drake: With the markets still falling, your soon-to-be retired clients are no doubt panicking. While there’s a lot you can do to ease their worry, there’s one surefire way to take their mind off things. Read how a retirement can outlast any market downturn. Full story.

Kim Poulin and Art Schooley: With all the time and effort you dedicate to helping your clients plan for the future, it’s also beneficial to do the same for yourself. To help you execute your business plan, we have developed a tool that’s divided into three sections: a review of the previous year, goal-setting and monitoring. Full story.

John Page: Investment performance is obviously part of the financial planning equation, but it’s the part that we least control. Fortunately, more advisors are recognizing that there is a way to keep clients happy with the services they provide, despite erratic investment performance. It’s about changing the benchmark by which you are measured. Read more.

Shawn O’Brien: Let’s face it – no investor has escaped the troubles caused by recent market turmoil. Quality blue-chip equity buyers, "core and explore" proponents and balanced portfolio fans alike are grappling with deep client disappointment. The question is whether there is a governing philosophy that you adhere to through thick and thin when managing client assets. Full story.

Features:

From LMD to EMD under NI 31-103: The way business is done in the exempt securities market will change if National Instrument 31-103 is implemented as proposed. Read more.

Transitioning your business, part 3: The deal with the buyer or seller of your business has been signed. Now comes the hard part: letting clients know about the changes and ensuring continuity. What’s the best way to approach these nuances? Advisor.ca ventured to find out. This special report is the last of our three-part series on buying and selling a book of business. Read more.

Last chance – read this article, earn free CE credits: If you’re still a few credits short of meeting your continuing education requirements this cycle, a relatively simple place to turn is Advisor.ca’s new continuing education section and the Advisor’s Edge CE Corner. Read more.

Regulators require justification for fee-based accounts: IIROC has indicated it will ask questions about why clients are placed into fee-for-service arrangements, which it generally defines as any account in which advisor compensation is derived from fees based on a percentage of client assets as opposed to commissions. Read more.

Filed by Kate McCaffery, Advisor.ca. kate.mccaffery@advisor.rogers.com

(12/19/08)