High Noon with High Interest

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In this spring-fresh edition:

  • Feature: High Noon with High Interest
  • Market Guy Mailbag: High interest in Italians; Penn West; Gold; TD Real Return Bond Fund
  • Trading Notes: Futuremed Healthcare, Dundee REIT, Superior Plus, TransCanada Corporation, RBC O’Shaughnessy International Equity
  • The Market Guy’s Closing Bell: My kingdom for a pomegranate

Feature: High Noon with High Interest
If you’re like me, you appreciate having a decent place to park your cash. Maybe you want a temporary spot for your profits before deploying the money elsewhere in the markets; maybe you’re putting money aside just in case of an emergency; or maybe you’re saving up for a big ticket item and don’t want to use credit. Whatever the reasons, a high interest savings account can be a useful tool for your financial life. A few years ago, the choice was clear: ING. Remember when ING used to be cool? Who could forget the commercials with the ING Guy holding an orange, displaying the ING colours and using the indelible catchphrase, “save your money!” Here was a character that made me feel that, at least in terms of high interest savings accounts, ING was kicking ass and taking names.

The ING Guy was the Clint Eastwood of the financial services sector and we respected him for it. No-nonsense. Groovy suit. What’s not to love? Speaking of Clint, the other night I was watching his Oscar-winning turn as William Munny in the western classic, Unforgiven. At the end of the movie, Munny kills tyrannical sheriff Little Bill (Gene Hackman) in order to avenge the death of his good buddy Ned (Morgan Freeman). However, in trying to get out of town, Clint was in danger of being picked off by Little Bill loyalists. So while leaving the saloon, he screams out the following:

  “All right now, I’m comin’ out. Any man I see out there, I’m gonna shoot him. Any sumbitch takes a shot at me, I’m not only gonna kill him, but I’m gonna kill his wife. All his friends. Burn his damn house down.”

I’ve always appreciated a man who knows how to make an exit. Anyway, the town was put on notice and nobody did anything to stop Clint; and for a time, no financial institution did anything to reasonably compete with ING. They had the easiest ways of moving your money, the best customer service, and most importantly, the highest rates around. However, gradually other players realized that perhaps the ING Guy was just a man in a suit, holding an orange. That’s not intimidating…it’s just weird. This was reinforced by the fact that more recent commercials have employed the use of a new, generic spokesperson and occasionally some stock footage of the ING Guy. In other words, they can’t even get him to show up or have decided to use other people in the lead role. Now we have an increasing number of players in the high-interest savings arena. Again, all that I’m looking for is a parking spot for my money. So, when searching for such an account, I want a decent rate of interest, ease of moving my money around, and I don’t want to pay any fees.

In terms of rates, ING has been offering 3% since the beginning of the year. The Bank of Canada has raised rates several times, but ING has not followed suit. What gives, ING Guy? Meanwhile, numerous other players have been quite responsive and have raised their rates several times. For example:

However, ING has not traditionally compared itself with this group of players. Rather, they always seem to compare themselves to the big banks. OK, so we’ll play by ING’s rules and see how they are doing against this group:

  • It beats BMO’s Premium Rate Savings at 2.6%. 

  • CIBC’s Bonus Savings pays 3.05% and TD’s Guaranteed Investmentaccount pays 2.9%. However, these rates apply only on balances over $5000. 

  • Royal’s account page was too cryptic, but I didn’t see any options that were competitive. 

  • Scotiabank’s MoneyMaster account is now paying 3% on every dollar. 

  • PC Financial’s Interest First pays 3.05%. Even though PC Financial is not technically one of the big banks, its services are provided via a division of CIBC.

In other words, there is some real competition here. In fact, ING is even starting to fall behind some of the old, boring, supposedly unresponsive big banks. Oh, the humanity. Sure, but ING would trumpet how easy they’ve made it to move your money around. True, they make it considerably more convenient than Achieva or Outlook. However, Altamira, Dundee, Scotia, and PC Financial have made it just as easy. Everything can be done online and its simple to move money back and forth between the high interest account and your external chequing account (see the webpages for specifics). This leads me to conclude that there is something rotten in the state of ING, and it may be that damn orange. However, I still have faith in the ING Guy and will watch for his redemption. Everyone loves a good turnaround story and we all want him to get back to pushing the other guys around. Do it for Clint.

  The Market Guy doesn’t want an orange. He wants more cash…unless of course it’s a really good orange. It’s hard to find a really good orange.

The Market Guy Mailbag
In the last edition of the column, I used my experience of winning the Carleton University Department of Psychology Olympic Hockey Pool to illustrate the principles of portfolio diversification. The pool commissioner ruled that we had to draft at least one member of the Italian team. I drafted forward Tony Iob, and noted the following:

This pick was like a high-interest savings account: you don’t want to rely on it for very long and you wish there were better alternatives.

Well, that portion of text led to the first letter in the Mailbag.

Letter #1: Tony Iob of the Italian Olympic hockey team writes:
Getting two goals and two assists at the olympics and tying the oh so mighty Canadians in points. You should be happy.

Hey, I’m thrilled. Your four points beat or tied three of my other selections and given that we’re talking about an Olympic pool, helped me earn bragging rights for the next four years. That being said, you have to admit that your outscoring Simon Gagne and tying Joe Thornton was a bit of a surprise. In any event, you should know that people involved in pools and fantasy drafts develop a peculiar attachment to their players…and it seems to override team loyalties. For example, I wanted Canada to beat Italy…but I wanted the score to be something like 10-5, with you scoring 3 goals and adding 2 helpers. Without the pool, I would have preferred Canada dealing a shutout.

Other strange behavious start coming on-line. For example, you start obsessing over boxscores that previously wouldn’t have been on the radar. For example, I never would have cared about Italy vs. Germany…but you were on my team, so I scanned over the stats and pumped my fist when you scored two points on Kolzig. What’s more is that you never forget how your players performed. I see Joe Thornton playing well during the NHL playoffs, but I can’t forget how he almost screwed my chances of winning the pool. In the world of pools and fantasy leagues, this sort of thing can stick to a guy. Thornton can win the MVP, enter the Hall of Fame, solve the problem of world hunger…it doesn’t matter because all of that will be followed by, “yeah, but he almost screwed my fantasy team.” We also never forget the guys who get the job done. You could never score another goal, get busted for a vice crime, and beat up a Ukranian player after he sucker-punched you twice during the world championships (oh wait…that last part actually happened), and those picking you in a pool would still follow your career with great interest.

All of this being said, I’d love to know what guys in your position think when they line-up against the traditional powers in the game. How do they treat you? What’s it like to play hockey in Italy? Instead of throwing caps on the ice after a hat trick, do they throw gnocchi? Dick in Edmonton wants to know if they have Italian “puck bunnies” and if so, would you care to comment? Perhaps more germane to the column, can a guy make a decent living playing in non-traditional hockey markets such as Italy and Austria? Do you invest at all? Does anyone provide financial advice for the players? Are there opportunities to supplement your income with endorsements, etc? I could go on for days. Anyways, thanks for writing in and don’t hesitate to stay in touch.

  Here’s hoping that“Bloggin’ about Iob” will become a regular feature of The Market Guy.

Letter #2: Jennifer in Saskatchewan writes:
Penn West is my largest holding and I see that you’re also an investor. Do you still like it?

I’m still a holder and like the conservative payout ratio, large undeveloped land base, etc. However, I recently pared back on my position. The units ran up this spring, owing much to a sharp increase in the price of oil and the announced merger with Petrofund Energy Trust. Everytime I take profits in the patch, Market Dad gives me the “I didn’t raise you to do stupid things like that” look. He’s waaayyyy overweighted in energy and whenever we speak of investing alternatives, he always brings up the energy names. It’s like the classic Saturday Night Live sketch with John Belushi working in a diner. Customers would order all sorts of different items, to which Belushi would always reply, “cheeseburger, cheeseburger.”

In any event, it seems that with many of the recent trust mergers, unitholders receive units of the combined trust plus shares in a new junior exploration company. Acclaim and Starpoint merged into Canetic and gave us shares in TriStar Oil and Gas. Penn West and Petrofund will merge and we’ll receive shares in some ExploreCo to be named later. The annoying thing about it is that in order to receive any shares of consequence, you have to own tens of thousands of dollars of units in one of the trusts. Otherwise, you end up with a pittance of shares that are hardly worth trading once you figure in the commissions. Of course, there are worse problems to have.

Letter #3: Paul in London writes:
You really blew it on gold. You didn’t like it at $500 and now its $700. Glad I held on.
 

First off, this illustrates how silly it would be for anyone to make decisions based on what I write. Second, I hope that you’re taking a few profits, cracking open a top-notch bottle of wine, and toasting the wonder of the markets. It’s good to be alive. However, the way that I invest often means missing out on the latest trends and the hottest sectors. In keeping with the principles of diversification, I should be investing a small portion of the portfolio in precious metals. However, I just can’t seem to do it. The other day, there was a portfolio manager being interviewed on ROB-TV and he was asked about the demand for gold. He mentioned that gold was going up mainly because of investor demand. In other words, it’s going up because people want to make money on it going up. He also said that one of the most important drivers of demand is the wedding season in India . When making investment decisions, I just can’t bring myself to factor the numbers of Indians getting hitched or bring myself to Google “wedding predictions India gold.”

Trying to have a rational conversation about gold is nearly impossible. The gold bugs are curious creatures, many of whom regard bearish talk on the metal to be a form of sacrilege. Gold was a great buy at $800 a few years ago, it was a great buy at $400, it will be a great buy before, during, and after the apocalypse…the time for gold is always now. I’ve received quite a few emails from this group, much like I’d expect to receive email from the religious right if I commented on Jesus. Those in the anti-gold camp can be equally dogmatic about their position, looking upon gold bugs as kooks and zealots, the sum of which is that I just can’t get a handle on this sector…and I’m not investing in what I don’t understand.

Letter #4: Greg in BC writes:
My current allocation is about 12% in bonds at the moment (mostly in the TD Real Return bond fund). I chose a bond fund because I don’t have much experience in the bond market, so I figure its worth leveraging a fund manager’s knowledge in this market. The MER (1.62%) seems fair and the performance has been good for a bond fund (10 year annualized return = 8.77%). I like the stabilizing influence this fund has had on my portfolio.

I’m also a holder of the TD Real Return Bond Fund and share your desire to use a professional manager’s experience. I am looking at the new Canadian iShare that’s based on real return bonds (XRB on the TSX). At 0.35%, its MER is considerably lower, so I’ll be tracking the fund for a while to see if TDs extra expenses are worth it. I’m not sure which brokerages allow you to reinvest the income from the XRBs, but it sure is easy doing it via the actively managed fund. I should mention that I’m also a holder of TD’s Canadian Bond Fund and have been for many years, but use the real return fund as a hedge against inflation.

Letter #5: Marcus in Toronto writes:
I read the article about you in Moneysense and went to your blog. You’re more interesting than I thought.

Actually, I’m decidely less interesting…but thanks for lying! And congratulations on submitting the “backhanded compliment” of the month.

Trading Notes
Futuremed Healthcare Income Fund (FMD.UN on the TSX)
I neglected to mention in the last edition of the column, but earlier this year I participated in the initial public offering of Futuremed Healthcare Income Fund. The position was acquired at the IPO price of $10.00 and an original yield of 9.25%. The company was founded in 1985 and is Canada ‘s leading distributor of consumable nursing supplies (incontinence aids, gloves, wound care items) and specialized furniture (patient beds, diagnostic equipment) to the nursing home sector. Without my writing another word, you know that any business related to the long-term care market is the type of demographic play that gets investors whipped into a lather. In fact, I was only able to get 40% of my requested allocation and the units have performed nicely since the IPO.

Here are some points of interest :

  • One of the first elements that I look for is market share. Futuremed has 80% market share in Ontario, 73% in Alberta, roughly 23-26% in the prairies and 31% in BC. They currently supply 815 nursing homes and 9 of the 10 largest nursing home operators. 

  • Their growth plans include expanding the selection of higher-margin private label products, capturing some of the dental and physician nursing supply market, and hinting that via an acquisition, they could capture market share in Quebec. 

  • Guess who contributes a fair amount to the purchase of specialized equipment? The government! The company acknowledges that governmental expenditures in this area are very unpredictable. This is hardly surprising and adds an element of uncertainty.
  • The company has a supply arrangement with Retirement Residences REIT and Extendicare Canada, nursing home operators that are in play. Should these firms be acquired, it’s possible that exisitjng supply arrangements could be put in jeopardy. However, the company points to the fact that changing suppliers is not an easy task and they have faith in their 20-year relationship with Retirement Residences and 18-year association with Extendicare. Fair enough. I should mention that I also hold shares in Extendicare (EXE.SV on the TSX) and like everyone else, can hardly wait for them decide what to do with the company (outright sale, conversion to trust…who knows?). 

  • The prospectus listed a target ratio of 85%, which is a bit higher than I’d like to see. However the first quarter saw the fund come in at 60% and I breathed a sigh of relief. In fact, the quarter led to a rather dull conference call during which several analysts used words and phrases such as, “congratulations” and “great!” Quite boring, actually. 

  • The trust has a bit of debt on the balance sheet. This gives the fund less room for error and can really squeeze the cash if there is an unexpected turn in the business.  
      Some of us have to lie down…but theMarket Guy stands for distributions

All of this being said, I like the business and was reasonably satisfied with the terms of the IPO. What about new money? As of this column, the units are trading at a yield of under 7%. I look across my other business trust holdings and am concerned when I see this little new offering commanding a yield that’s barely above that offered by Yellow Pages, one of the top dogs in the whole yard. The units are certainly trading at a premium, so I’m not inclined to add to the position at this time. When discussing the rise in unit price with Market Dad, he suggested I take profits and plow the money back into the energy sector. Cheeseburger, cheeseburger. My natural tendency would be to pare back the holding and raise some cash. However, I only received 40% of the requested allocation and didn’t buy any units in the after-market. Therefore, my position is extremely small and won’t influence the performance of my portfolio by a great amount. I’ll hold the units for now and will be very interested in how the next quarter bed-pans out.

Update (subsequent to column being published): Upon further consideration, the premium became too much for me to handle, and so I took the advice of Market Dad and booked some profits. However, I did not put the money back to work in the energy sector! I’ll keep the cash for now.

Dundee Real Estate Investment Trust (D.UN on the TSX)
I participated in the equity offering of Dundee Real Estate Investment Trust at $28.10. The original position was established in the fall of 2003 (seeMG#14). This REIT has been in turnaround mode for the last couple of years, attempting to lower its payout ratio and achieve a focus on the office market. Thus far, its efforts are paying off with a healthier balance sheet and property profile. The REIT is in acquisition mode and is using much of the proceeds from this offering to pay for 800,000 square feet of office space in Calgary . I’m pleased to see Dundee adding to its presence in the high-growth regions of Western Canada. My REIT holdings continue to be Dundee, Primaris, and Calloway, although I have several indirect holdings via a number of actively-managed funds.

Superior Plus Income Fund (SPF.UN on the TSX)
Early last year I cut my position in the trust by one-half at $31.53 (seeMG#26). Well, that proved to be a good move. One very warm winter and two distribution cuts later, the fund is now trading just above $10 and several analysts have begun writing about issues related to debt covenants, the poor outlook for its various businesses, a lack of management credibility, and the potential for more distribution cuts. I’m not waiting around to see what happens, and have eliminated the position entirely. I’m grumpy about the whole thing and don’t feel like determining how I made out. The profit-taking and distributions may have helped me to break-even. When the bile goes away, I’ll figure it out. If I lost money, I’m going to take it out on the weeds on my front lawn.

  Freud might regard this as a harmless form of the defence mechanism, displacement. Thanks for the solid, Sigmund!

TransCanada Corporation (TRP on the TSX)
I have increased my holdings in TransCanada Corporation in the low $30-range. The original position was established several years ago at prices under $20, and I’ve added to it periodically. With the recent uptick in interest rates, many of the dividend-paying stocks have been in the penalty box. I’m not trying to call a bottom here and I’m not breaking the bank to make this purchase…I’m just nibbling on a high-quality company with decent growth prospects, predictable dividend increases, and a yield of around 4%. Due to increases in the dividend, the yield on my originally-invested capital is roughly 7% a year. I’ll take it. My other holding in this space is Inter Pipeline Fund (IPL.UN on the TSX).

RBC O’Shaughnessy International Equity Fund
Some of my energy profits were diverted into beefing up the porfolio’s exposure to international markets. Given that I’m not smart enough to learn about such markets, I use mutual funds. I allocated some of the cash to my holdings in the now capped Mac Cundill Recovery “C” fund, with the rest increasing my position in the RBC O’Shaughnessy International Equity Fund. I first mentioned this fund last year (see MG#25) and also have holdings in each of the O’Shaughnessy offerings. The quantitative strategy used by the team has been very successful and removes human psychology from the investing equation. I expect to continue adding to these funds from time to time (note: the US growth version is being capped in June). These funds are worthy of their own column. Using only a few lines would be like going to Arby’s and ordering nothing but a shake…there’s so much more to enjoy!

The Market Guy’s Closing Bell
I’ve made a list of things that I’d like to accomplish over the summer. Some of the items on the list are rather involved, such as “revise first-year psychology class” and “attend a Jays game in Toronto.” I also have a huge number of teaching books that I’d like to read. However, other entries are less complicated, but still worthy of my attention. For example, I’ve never eaten a pomegranate. Upon learning of this fact and my desire to remedy the situation, most people give me one of two looks: the “you’re an idiot” look or the “I can’t believe you’ve never eaten one before” look. The first seems to outnumber the second. In any event, it is what it is.

  Here’s hoping your portfolio bears fruit over the summer.

The Market Guy is an Instructor with the Department of Psychology at Carleton University. He’s not a professional advisor. He’s just a guy who loves investing and talking about the markets…so do your homework before making any investment decisions. Basing any decisions on his column would be really, really stupid. In looking at the cast of characters for the upcoming Miami Vice film, he noticed “Aryan brother,” “Powerboat operator,” “Miss Jamaica,” “Salsa dancer,” and “Drug cartel operator.” Clearly, they’re trying to cover all of the bases. Recharge your 80s classics over at mail@marketguy.ca