July was a difficult month for Canadian stocks and bonds, outside of Canada most stock and bond markets were positive.

 

July 2017 Market Performance

All index returns are total return (includes reinvestment of dividends) and are in Canadian Dollars unless noted.

 

*Absolute change in yield, not the return from holding the security.

 

The S&P/TSX Composite was down slightly in July at -0.06%, its third negative month in a row.  In the US, the S&P500 was up +2.1% its 9th consecutive positive month. European stocks were up +0.6% in July and emerging market stocks were the bright spot again at +4.4% (now +18.7% YTD).

On the bond side, the broad index of Canadian bonds, FTSE TMX Universe Bond Index was down again in July at -1.9%, the sixth negative month out of the last twelve.  The FTSE TMX Short Term Bond Index was down -0.4% for the month, turning its YTD return negative at -0.2%.  US bonds again performed better, with lower rated credits performing best this time around.  High yield bonds were up +1.0%, while emerging market bonds had their third negative month in a row, finishing July down -2.9%.

Oil ended its four mouth slump with a +9.0% return for July.  Gold was up +2.0% for the month, finishing at $1266.  The broad Bloomberg Commodity Index also ended its four month slump with a +2.2% return in July.

The Canadian dollar was one of the bright spots again, gaining +3.8% against the US Dollar and +0.6% against the Euro in July.

Commentary

In the past few years we’ve seen the beginning of a sea change in Canada’s investment industry.  Up until the launch of online advisors (aka robo-advisors), Canadians could invest for themselves (DIY) or look for an advisor at a bank or brokerage firm.  If you didn’t go DIY, your options depended on how much money you had.  For clients with less than $250K that typically meant going to an advisor at a bank or a mutual fund company, anyone with more than that might be able to work with a portfolio manager licensed to buy and sell stocks and bonds for their account.

When you work with advisors at banks and mutual funds companies you don’t usually pay them directly, they are paid by the mutual fund company from the mutual funds and investment products that they sell you, in the form of an upfront commission and an ongoing trailer fee.  The upfront commission could be up to 5% of your initial investment and the ongoing trailer fee is typically 0.5% to 1.0% of your investments every year.  So if you invested $50,000 with an advisor that invested your account in mutual funds, their firm could receive an upfront commission of $2,500 and then $250 to $500 every year you own the funds.  And, in most cases, you are also paying at least another 1.0% a year to the mutual fund company for running the fund.

In the past those fees were kept hidden as best as possible.  Now thanks to CRM2, investment firms have been forced to disclose those fees, and Canadians have been getting a better sense of what they have been paying for their investments.

Now, the Canadian securities regulators are proposing to ban the sale of investment funds with those embedded commissions.  Since that is how many advisors get paid, you can imagine that they are going to fight that tooth and nail, in fact they’ve already started.  You can find articles in publications like the Globe & Mail and Financial Post that include comments from CEOs of fund companies, directors of wealth management groups, and mutual fund industry groups.

Some of their comments are hilarious: Embedded commissions, particularly trailing commissions, are more efficient because they can be calculated and managed on a large scale by the fund companies.  Seriously?!  Maybe if you’re doing it on paper with an abacus!  With the computing power we have today you can calculate the fees on thousands of accounts in just minutes.  Could it be that if the fees are handled in a centralized way, then consumers can’t negotiate a better deal, protecting high profit margins? With Canadians paying the highest fees in the world, even a 10% discount wouldn’t be enough to change that!

Another common comment by those in favour of keeping the status quo is that advisors will abandon all of their small accounts, hurting consumers and leaving them without access to advice.  Really? And what advice are smaller clients actually getting?  For that $2500 up front and $250 or $500 a year you are unlikely to be getting a complete financial plan from a Certified Financial Planner (CFP).  Most likely you would just be getting “advice” on which of the firm’s funds to buy after the completion of a simple suitability review.

Those commissions may be money well spent if you are getting good financial planning advice, estate planning, tax planning – but if not, what are you getting for those fees?  I don’t think a pair of hockey tickets a year is a good deal!  The commenters speaking out against banning embedded commissions seem oblivious to the existence of online advisors and fee only financial planners.

Now is as good a time as any to consider what value you are receiving for the fees.  Unlike in other areas in life, when it comes to investments, paying more rarely means getting more!

July Economic Indicator Recap

Below are the current readings on the major economic indicators: central bank interest rates, inflation, GDP and unemployment.

Below are the current readings on a few other often followed economic indicators: retail sales and housing market metrics.

A Closer Look at the Canadian Economy

Canada’s unemployment rate ticked down 0.1% to 6.5% in June, as 45,300 new jobs were added, 37,100 of which were part time jobs.

Housing prices across Canada rose +2.6% in June, the largest gain on record for the month of June.  Home prices were up in 10 of 11 major metropolitan areas.  Hamilton (+4.1%, a monthly record), Toronto (+3.7%, a monthly record), and Quebec City (+3.7%) posted gains greater than the national average.  Vancouver was up +2.5%, returning the local index to an all time high.

New housing starts rose +9.1% in June, back above 200,000, after a drop of -8.9% in May.  Building permits rose +8.9% in May.

The inflation rate was -0.1% in June, or +1.0% on an annual basis.  Core inflation which excludes more variable items such as gasoline, natural gas, fruit & vegetables and mortgage interest was +0.9% for the last year, the lowest level since 2011.

Retail sales rose +0.6% in May.  The increase was attributed to higher sales at new car dealers, and electronics and appliance stores. Compared to a year ago, retail sales were up a healthy +7.3%, which was one of the reasons that the Bank of Canada moved their benchmark interest rate up 0.25%

Canada’s GDP rose +0.6% in May thanks to growth in mining and oil & gas extraction; the service sector was flat.  The Bank of Canada increased its benchmark interest rate by 0.25% to 0.75% on July 12, the first increase in over 7 years.  The next meeting is scheduled for September 6.  Given that inflation continues to remain low and the recent strength in the Canadian Dollar, economists and forecasters are not expecting a change to the benchmark rate at the September meeting.

 

 

*Sources: MSCI, FTSE, Morningstar Direct, Trading Economics