Week in review: January 5-9, 2009 (plus bonus holiday coverage)

At a time when market activity normally slows and offices clear out for the holidays, the end of 2008 and the first days of 2009 were surprisingly busy – firms are merging, well-known fund managers and other investment specialists are retiring and experts are calling the TSX to task over glitches in its trading system that allow ETFs to open with inflated values.

Perhaps most notable, for tax experts particularly, was the decision handed down by the Supreme Court of Canada this week, dismissing the appeal of Earl and Jordan B. Lipson. The ruling upholds an earlier decision by the Tax Court of Canada that the Lipsons’ use of the "Singleton Shuffle" strategy ran afoul of the Income Tax Act’s General Anti-Avoidance Rule (GAAR).

Jamie Golombek has been following developments in this case for the Advisor Group. He discusses the decision and what it means for investors in a commentary piece, available for you to read here. For background and links to Golombek’s earlier coverage, click here.

Market news, sentiment, economic news and predictions

Consumer confidence seems to be in the toilet these days. At the end of December the Consumer Confidence Index from the Conference Board of Canada and a Harris/Decima survey both pointed to lower confidence levels. "Only during the recession of 1981-82 have we seen lower levels of confidence," said Glen Hodgson, senior vice-president and chief economist. "Despite the rapid fall in gasoline prices across the country, consumers continue to be gloomy about their financial situation."

South of the border, 77% of Americans surveyed by the Opinion Research Corporation say the media is making the economic situation worse by feeding consumers a constant diet of bad news.

A Harris/Decima poll found that 64% of Canadians expect 2009 to be a bad year for the overall economy, compared to 32% when the survey was conducted in August 2008. POLLARA also weighed in, saying Canadians have reached a 25-year low in optimism about the economy. That said, all three seem to suggest that Canadians — your clients — remain surprisingly upbeat about their personal financial situations.

So how are advisors feeling about it all? According to Rydex AdvisorBenchmarking, American financial advisors are recovering some of their confidence in the economy and stock market — the index’s reading stood at 83.57, up from 82.46 in November. A reading of 100 is considered neutral, while readings below that are negative.

Economic forecasts

‘Tis the season for economic crystal-ball gazing and the prognosticators are warming up with predictions for 2009, saying the global recession will likely persist until late in 2009. Though some say the U.S. recession will reach Canada before a modest recovery begins in the second half of the year, others are calling for virtually no growth, but say the slowdown in Canada will not be as severe as that suffered in other countries.

Investing

Investors, meanwhile, are becoming more conservative in the aftermath of 2008’s miserable returns. Scotiabank says commodities will likely continue to fall. Those interested in initial public offerings are also a little starved for opportunity in Canada – on the TSX there were only 10 new listings in 2008, all of which happened in the first half of the year.

Firms are reacting in different ways to the fallout. Some are beginning to point out that depressed equity prices are offering a unique historical opportunity to investors (the tax-free savings account is looking more useful today than it did when first announced last year). TD Financial has gone so far as to recruit retired General Rick Hillier to team up with Patricia Lovett-Reid, senior vice-president of TD Waterhouse, to offer five maxims of the military that can be applied to investing.

People

There has been a flurry of high-profile departures announced this week. Most notably, Richard Guay, president and CEO of the Caisse de dépôt et placement du Québec tendered his resignation following six weeks of medical leave that started back in December; well-known industry veteran, global portfolio strategist for BMO Capital Markets Don Coxe retired at the end of the year after four decades in institutional investing and money management; and the head of Mackenzie Investments Ivy team, Jerry Javasky, announced he is retiring from the business in March.

In other news, starting February 1, Jason Storsley takes over as the new CEO of RBC Direct Investing. Finally, the CFA Institute board of governors named John D. Rogers the new president and CEO of the association to succeed Jeff Diermeier.

Industry news

How loyal are Advocis members? The group is looking for a solid financial foundation and believes that intense member loyalty could be the linchpin of its appeal for contributions to the Advocis Century Initiative. The quest to raise $5 million in voluntary contributions from members began back in 2004. Since then, the group has drummed up more than half of that goal.

In actual news and numbers, it was a disastrous year for equity fund performance but fund redemptions finally slowed in December (some numbers are available for you to read here). A relatively new report on performance and mutual fund company revenues from Investor Economics suggests it may be a while before consumers allocate existing savings to mutual funds again.

Those burned by the asset-backed commercial paper (ABCP) market, though, might be a little closer to getting some closure — a new agreement to restructure the $32-billion market plans to swap the illiquid commercial paper for new bonds or cash. Under the new deal, large ABCP investors will be given bonds as early as next month, which they can sell or hold to maturity in nine years. Retail investors, meanwhile, those holding less than $1 million worth of the paper, will receive cash.

On the wheeling and dealing front, firms don’t seem to be slowing down. Perhaps as a sign of things to come, Industrial Alliance Insurance and Financial Services completed its acquisition of DundeeWealth’s Quebec-based mutual fund and insurance advisors, and CI Financial Income Fund completed its transformation back into a corporate structure at the start of the year.

The Bank of America, meanwhile, closed its deal to acquire Merrill Lynch, making BoA the largest wealth management business in the world, with 20,000 financial advisors and more than $2 trillion in client assets. In Canada, Great-West Lifeco closed its previously announced public offering of 28,920,000 common shares, raising gross proceeds of more than $600 million to shore up the company’s current liquidity position.

J.P. Morgan plans to acquire Calgary-based UBS Commodities Canada and the firm’s global agricultural business, including its London-based trading and marketing team.

In other trading news, exchange-traded fund providers have expressed concern about the Toronto Stock Exchange’s "market on open" system, which can have ETF prices open at prices substantially higher than their underlying net asset values (NAV). The net asset value of ETFs normally tracks the underlying value of their constituent securities. The difference in price, or tracking error, is usually very small. As ETF usage has exploded during the market downturn, though, there have been cases where market open prices have been out of whack with the market value. After large discrepancies were discovered in October, ETF providers began calling for market reform. One investment counsellor is seeking the intervention of provincial regulators.

Regulatory

Manulife Securities is the latest firm to settle with the Mutual Fund Dealers Association over referral arrangements in place with Portus Alternative Asset Management. According to a settlement agreement released by the MFDA, Manulife has agreed to pay a $200,000 fine, plus $50,000 in costs.

Mavrix Fund Management, meanwhile, announced it will file an application with the Canadian Securities Administrators, to seek a 90-day extension of the time period it had to reduce the firm’s private investment holdings in the Small Companies Fund after investor redemptions and deteriorating market conditions pushed that portion of the fund’s assets above the 15% limit allowed by regulators.

Finally, an Ontario investment firm is the latest out-of province player to be fined by the BCSC for conducting business in British Columbia without being properly registered. Peter Michael de Auer, the president of Ontario-registered Cluster Asset Management Inc., admitted in a settlement agreement with the BCSC that the firm provided investment advice to two B.C.-based clients without registration under the province’s Securities Act from July 2003 to April 2008.

News from Quebec

In Quebec, our sister publication, Conseiller.ca, reports that London Life and Great-West Life have suspended redemptions on two of the company’s real estate funds. Calling the move a "temporary moratorium," the company says the move was necessary to manage the fund in a way that balances the long-term interests of all participants — real assets are generally less liquid than other assets and difficult to monetize quickly when large numbers of shareholders pull out of the investment. Great-West representatives were not able to comment on the fund’s liquidity levels.

Adding to the potentially explosive situation, Conseiller reports that Quebec advisors were invited to a conference call three days after the companies suspended redemptions, but that the call proceeded in English only – further adding to the confusion and anger over the lack of communication and consideration for the advisory community and its clients.

In a joint news release, Great-West and London Life told advisors with pressing requests about the temporary suspension to inform customers of their right to contact a company ombudsman in writing – at a London, Ontario-based address.

The funds affected include the Canadian Real Estate Investment Fund No. 1 segregated fund and the London Life Real Estate Fund 2.17G.

In other product-related news, the Solidarity Fund QFL, a development capital fund that invests in nearly 1,900 Quebec-based companies, suffered losses of 15.3% during its six-month reporting period ending on November 30. More than 575,000 Quebecers invest in the fund, mainly for retirement.

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.

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Quick links: Advisor.ca news, January 5-9, 2009.

Supreme Court rules against Lipson Advocis fund nearing $3 million ABCP resolution within sight IA closes DundeeWealth deal CI completes restructuring CI completes unit issue CI Financial converts back to corporation BoA completes Merrill buy Great-West closes share offering J.P. Morgan to acquire UBS’s Canadian energy, agricultural businesses Mavrix seeks time to correct fund imbalance ETF providers take issue with market open pricing SEC rule labels indexed annuities as securities Some see value in regulating annuities as securities Manulife settles with MFDA over Portus referral fees BCSC fines Ontario firm for not registering Forecasts for 2009 remain bleak Recovery will come late in 2009 Goodbye 2008; now brace yourself for 2009

Mackenzie’s Javasky announces retirement Caisse’s Guay resigns as president, CEO Don Coxe announces retirement RBC Direct Investing gets new CEO CFA Institute names new president Stakes high for SEC’s next chair Military advice for RRSP investing Don’t rule out equities for the TFSA Investors becoming more conservative Canadians worried about economy Americans blame media for poor confidence Canadian consumer confidence slips Consumer confidence still shaky U.S. advisors cheer up, a little Equity funds suffer "disastrous" year I PO market choked off in 2008 Fund redemptions slow in December Mutual funds take a pause

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New columns and features this week:

Peter Drake: Extreme market volatility and declining portfolio values – trends that are most on the minds of financial advisors and their clients this year – point to the conclusion that 2008 was a bad year for retirement economics. I suggest, though, that some positives have also emerged. Read more.

Michelle Munro: Should clients put their money into a TFSA or a non-registered account? Although the answer may seem obvious, a discussion about why the TFSA is advantageous has its merits. Read more.

Simon Reilly: Now is the time to create a strong start for the year by creating a strong vision for 2009. Without a vision and business plan, stress and exhaustion seep in, contributing to low self-esteem. A vision and a business plan, though, must go hand in hand. Read more.

Features:

Tax brackets, figures and details for your practice (the 2009 edition)
It’s that time of year again – get your downloadable tax bracket, personal amount and federal tax credit information here. Personal income tax amounts are indexed to inflation, using Consumer Price Index data reported by Statistics Canada. This year, changes reflect index increases of 2.5% for 2009. Full story.

Regulated alpha
Hedge funds have more than a trillion dollars under management, and promise an alpha, or excess return over benchmarks on the order of 5% — or some US$50 billion. Is this plausible? And, in these days of scandal, are such promises overstated by lack of regulation? Douglas Cumming, an associate professor at York University’s Schulich School of Business, essays an indirect answer in paper that won this year’s award from the Canadian chapter of the Alternative Investment Management Association for best hedge fund research paper. Full story.

When Goldilocks fed the bears
In a world where short-term interest rates are rapidly approaching zero, with the U.S. Federal Reserve mimicking Japan, and Britain and the European Central Bank expected to follow, the Bank of Canada’s successful approach of inflation targeting has reached a crossroads. Full story.

Stakes high for SEC’s next chair
The arrest of Bernard Madoff serves as a reminder that fraud can lurk in the most respectable of packages. Many of the securities industry illuminati commenting on the case, in fact, refer to Madoff as "Bernie." There was genuine surprise that the former Nasdaq chair could have been up to anything. Not Bernie. No way. Full story.

Related:
SEC rule labels indexed annuities as securities
Some see value in regulating annuities as securities

The very best of Advisor, 2008
Happy New Year! We hope you’ve had a safe, enjoyable and restful holiday season. If you’re looking for a way to ease back into your routine before the madness of tax return season sets in (because — be honest — even if it is "business as usual" at your shop, things are going to be a little busier from here on out), sit back, perhaps grab a cup of coffee, and have a look at some of the best articles the Advisor Group produced in 2008. Full story.

(01/09/09)