Week in review: February 23-27, 2009

It might very well be the most hotly observed earnings week banks have seen in a while. Earlier this week banks were trading at lows not seen in several years, but it appears that Canada’s "Big Five" might be the place to be after all — three, including TD Financial Group, RBC and CIBC, reported positive first quarter earnings in the last few days. While the earnings were down from this time last year, the earnings beat most analyst forecasts and were positive during a period when many of the world’s banks were posting record losses. TD posted a $712-million gain, RBC earned $1.05 billion and CIBC had a $147-million gain.

Overall 2008 numbers from StatsCan and the Investment Industry Association of Canada (IIAC) are also out this week. StatsCan reports that Canadian corporate earnings fell in the fourth quarter of 2008 to $65.4 billion, down 16.3% month-over-month, the largest earnings decline reported in 16 years. The financial services industry pushed that overall average higher, with profits in the sector falling 21.8%, compared to a decline of 14.4% for non-financial sectors.

The IIAC, meanwhile, reports it may have marked the worst period of stock market performance since the Dirty Thirties, but the fourth quarter of 2008 saw a surge in equity issuance — equity financings for the final three quarters totalled $12.7 billion, thanks in large part to the financial sector’s need to shore up balance sheets. The industry accounted for 75% of total issuance with Royal Bank, Manulife Financial, Toronto Dominion Bank and the Bank of Montreal leading the pack.

At the same time, Manulife is downplaying rumours this week that it will return to market and issue more common equity to raise capital, saying it would only do so to fund a strategic purchase.

Investing

Foreign exchange risk hedging and asset-backed commercial paper, among other things, are being blamed for losses that place the Caisse de dépôt et placement du Québec well behind other large Canadian pension funds in 2008. The 25% decrease in reported returns make the Caisse’s losses for 2008 significantly greater than the —18.4% median loss for large Canadian pension funds that have at least $1 billion of assets. Net investment results were down $39.8 billion, 56% of which is unrealized decreases in value. The losses have cancelled out a large portion of returns the Caisse earned in the last five years.

Other pension funds, meanwhile, continued to diversify into direct hedge funds and private equity but were allocating significantly less to real estate at the end of 2008, according to Watson Wyatt Worldwide. Fund-of-hedge-fund mandates fell as a proportion of total hedge fund searches, from 44% to 35%. Mandates for single-manager hedge funds now account for roughly two-thirds of searches — long/short equity and multi-strategy are the most popular. In related news, the largest international hedge fund organization says it wants to work with global regulatory initiatives to improve the transparency of hedge fund activity.

On the commodity front, there might be some hope in sight for other investors, as signs of recovery began showing up in January market numbers — the overall Scotiabank Commodity Price Index gained 1.3%, ending a five-month slide, after the government of China began buying up raw materials, including base metals and grains.

Capital spending, though, is expected to fall in 2009, despite government stimulus. StatsCan says public sector spending is expected to rise 9.5% to $79.6 billion, but that will be more than offset by a 13.1% reduction in private sector spending. Overall, private capital investment is anticipated to be $157.9 billion for the full year.

Your clients

Canadian workers may be more confident than their American counterparts — U.S. consumer confidence sank to new lows in February, thanks to growing fear about staff downsizing and diminishing retirement accounts — but a disturbing number have tapped into their retirement savings to help cope with current economic troubles. According to a report from Sun Life Financial, nearly a third of Canadians are not satisfied with their retirement savings, yet one in 11 have cracked their nest egg, about the same as Americans who have done so.

Similarly, stock market returns and their impact on portfolios, along with job security, are among Canadians’ top concerns in 2009, this according to a poll conducted for Edward Jones. That said, if other polls are to be believed, it could be that declines and unemployment are weighing less heavily on the consumer — or it could be that sentiment among a few is being coloured by "nowhere to go but up" attitudes: A February survey of consumer confidence done for Investors Group found that twice as many respondents (around 27%) felt they’d be better off a year from now, compared to August numbers. Roughly 13% thought they might continue to fall behind in the coming year.

Charities, meanwhile, are almost certainly feeling the pinch, but they got a bit of help this week after the Bill & Melinda Gates Foundation announced it will increase donations, despite investment losses. In Canada, TD Bank CEO Ed Clark announced he will donate $3 million of his compensation to charity.

Planning

Canada Revenue Agency issued a reminder this week about the benefits available to Canadians with a disability, pointing out that filing taxes by April 30 will ensure timely delivery of benefits. More detail is available here. Around the same time, CIBC announced it will join the ranks of other banks that offer registered disability savings plans to eligible customers.

Those interested in group benefit advice, meanwhile, might also be interested in a recent report from the Shepell•fgi Research Group, which found the number of requests for financial counselling and consultation are increasing at twice the rate of all other employee assistance program services (EAP). According to the report findings, the top five financial issues for employees were debt/credit (37.6%), financial planning (15.2%), divorce/finances (8.7%), financial stress (5.5%) and bankruptcy (5.2%).

Industry news

People in the fund manufacturing business are starting to say they are hard pressed to remember a more difficult time. Toronto-based AGF confirmed this week that it is trimming roughly 5% of its workforce. The company says the 42 departures on Wednesday are part of ongoing cost efficiency measures. Many of the jobs were administrative, support or technical back-office positions.

ING Insurance Company of Canada also made news this week after it completed its previously announced private placement and changed its name to Intact Insurance. RiskMetrics Group, meanwhile, announced plans to acquire Innovest Strategic Value Advisors, to enlarge RiskMetrics’ footprint in the environmental, social and governance research space at a time when it says the financial community’s interests in sustainability are growing.

Regulatory

The Ontario Securities Commission can expect to get an earful after the Ontario Legislative Assembly’s Standing Committee on Government Agencies announced it will be asking for submissions on how to improve services; a hearing panel for the Mutual Fund Dealers Association issued its decision in the case of Gerard and Mavis Brake this week, permanently banning the pair from conducting securities-related business; and the Social Investment Organization is calling for additional transparency and disclosure in its report responding to the Canadian Securities Administrators’ request for comments on new regulatory proposals related to ABCP.

The director of the Chartered Alternative Investment Analyst Association, meanwhile, says most investors don’t really know the risks associated with their chosen investments. Craig Asche says some money managers have not taken into account the cost of due diligence in running their mandates.

Products

Despite layoff news reported in other parts of the industry, Mackenzie Financial has been bolstering its lineup of managers. The latest deal signed McElvaine Investment Management to run the Maxxum Canadian Value fund (and its related corporate class). The firm has also hired Jim Thompson to work as senior vice-president, team lead and portfolio manager at its Mackenzie Cundill Investment Management division.

Claymore Investments and Northern Rivers Capital Management were the two companies announcing changes to their product lineups this week. Claymore announced it will add a new corporate bond ladder exchange-traded fund to its product offering, which will aim to track the DEX 1-5 yr Laddered Corporate Bond Index. The firm already offers a government bond ladder ETF.

Northern Rivers, meanwhile, is seeking unitholder approval for a plan to transfer its Monthly Income and Capital Appreciation Fund and Monthly Income and Capital Appreciation Trust Pool to Mavrix Fund Management. Cassels Investment Management will continue to manage both funds.

Finally, if there was any question about whether Canadians know about their Tax-Free Savings Account (TFSA) options, a new survey from TNS Canadian Facts found that advertising campaigns appear to be paying off. The poll found 79% of Canadians were aware of the TFSA. This is just shy of RESP and RRSP awareness levels, which came in at 84% and 94%, respectively. That said, just because Canadians have heard of the TFSA, doesn’t mean they are buying into it. The poll found that so far only 14% have taken advantage of the program and made a contribution. Another 36% said they were likely to open an account this year.

News from Quebec

The drastic 25% decrease in reported returns posted by the Caisse de dépôt et placement du Québec is followed up by another report in Quebec this week, this time from Desjardins Financial Security, which suggests the company’s plan members might actually be contributing slightly more to their RRSPs this year. Our sister publication, Conseiller.ca reports that, despite bonus cuts and the number of layoffs announced earlier this year in the province, the total percentage of RRSP contributions made in January (compared to total contributions overall) rose to 44% in January 2009, up from the 36% reported in January 2008.

For more news from our sister publication, click here/cliquez ici, to subscribe to Conseiller.ca or sign up for our French-language e-mail service.

---

Quick links: Advisor.ca news, February 23-27, 2009.

Falling stocks force banks to market Corporate earnings wane Caisse reports significant losses Capital spending to fall, despite stimulus Bank of Canada PRA to accept corporates No plans for common stock issue: Manulife Central planning boosts commodity prices Canadian pension funds to take action in 2009 Hedge fund industry willing to open up Investment in direct hedge funds, private equity increases Jobs trump markets in list of concerns U.S. consumer confidence reached new low Consumers cheering up: IG poll Retirement funds tapped in tough times Charities call for public displays of philanthropy Financial advice most sought-after staff benefit

Ontario urged to restructure regulatory regime A fresh look at due diligence ABCP needs transparency, disclosure: SIO MFDA puts the brakes on duo’s outside business activities CRA offers disability-related tax tips CIBC offers RDSP TFSA well known, thanks to ads Claymore offers corporate bond ladder ETF Northern Rivers restructures funds Mackenzie adds another PM Creststreet outsources services Fund industry job losses a sign of the times ING Canada now independent ING Canada’s insurance arm becomes Intact Insurance RiskMetrics buying Innovest

---

New features this week:

How to battle market fatigue: Advisors are battling every day, using much of their time and energy to limit redemptions. So it may seem out of touch to consider working on your business at a time like this. But strategic planning is exactly what you need right now. Read more.

CRA review of 10/8 insurance program: The Canada Revenue Agency plans to review leveraged insurance arrangements, also known as 10/8 programs. Why would a policyholder enter into this type of loan arrangement? The answer lies in the fact that if the money is borrowed to earn business or investment income, the interest is deductible against the borrower’s income. Read more.

(02/27/09)