An investment is hardly the kind of gift that puts wide smiles on the faces of children, eliciting squeals of ecstatic glee.
Big kids -- those young at heart -- are a different story, especially if they have a predilection to browse the investment pages in their free time on a Saturday.
And what money-minded adult wouldn't want a "stock"-ing stuffer this holiday season?
So if you prefer giving/receiving gifts that can keep on giving instead of sparkling trinkets or toys with a satisfaction half-life of six weeks or less, a few investment elves have some golden ideas that may put a smile on your inner capitalist not just for this holiday season but possibly for many more.
(A note of caution before proceeding: All that glitters today may lose its lustre later on down the road making it seem more like a lump of coal.)
Festive fun with mutual funds
Given all the bad press -- not to mention their legions of disillusioned investors -- finding mutual funds under the tree might seem as if Santa thinks you've been naughty instead of nice. But if you pick the right funds, a Christmas-morning frown will soon be turned upside down. The trouble is finding the gems among the costume jewelry, says Uri Kraut, senior wealth manager at Assiniboine Credit Union.
Kraut is going to save you some hassle if you're looking for a good fund that invests in Asian markets. BMO's Guardian Asian Growth and Income Fund is not the high-risk, high-flying emerging-market equity fund you'd expect it to be. "I particularly like it because it's a counterintuitive investment," he says. "When people think of buying an Asian equity fund, they think of buying a high-risk investment, but as it turns out, in that portion of the world, taking less risk is a more profitable long-term investment than taking more risk."
Like all great mutual funds -- this one has a five-star Morningstar.ca rating -- the BMO fund has great management. San Francisco-based Matthews International Capital Management specializes in Asian markets and runs the fund for BMO. Kraut says what makes this fund special is its flexibility and the fact it's designed to provide a steady return.
"It focuses on buying exclusively dividend-type stocks in Asia and has a mandate to buy fixed income if there's something to buy," he says. And because it has a fixed-income component, similar to a balanced fund, only with more flexibility, it can seize investment opportunities in bear markets.
"When Asian stock markets are down, they can shift from fixed income into equities precisely when, of course, no one else is prepared to do so," he says. As for performance, the fund has been around since 2004 and has, for the most part, outperformed its peers and benchmark index, especially since 2008. According to Morningstar.ca figures, $10,000 invested in the fund since 2004 would be close to $20,000 today after fees. Still, the fund isn't cheap. Its management expense ratio (MER) -- what you pay in fees annually -- is 2.88 per cent, but the extra cost is worth it, Kraut says.
"This is one of the examples of why exclusively eliminating funds based on the MER results in eliminating managers who command higher premiums for their expertise," he says. "There are studies that show specialty products with higher MERs are often the byproduct of more due diligence."
The gift exchange
If mutual funds seem a little like last year's hot gift -- costly and probably broken -- exchange-traded funds (ETFs) may be more your speed. These days, they come in many styles. ETFs allow investors to buy a piece of an index, such as the Toronto Stock Exchange, but you can also buy ETFs that track indices for technology companies, financial firms, oil and gas producers and even commodities. Most are passively managed. You're buying the index. No manager is picking stocks trying to outperform it. Alan Fustey, managing principal and portfolio manager with Index Wealth Management in Winnipeg, says the theory supporting ETF investing is most actively managed mutual funds do not beat their underlying benchmark -- often an index -- over the long term.
And yet, actively managed funds -- a.k.a. mutual funds -- chargeinvestors much more in fees. A managed Canadian equity mutual fund often charges an MER of two per cent or higher, whereas an ETF that buys a sample of the S&P TSX Composite Index -- the underlying benchmark for the Canadian equity mutual funds -- charges a small fraction of that amount.
The Horizons S&P/TSX 60 Index ETF is likely the lowest-cost fund of them all, Fustey says. Its MER is 0.08 per cent. That's about half the cost of its leading competitor, the iShares S&P/TSX 60 Index Fund, which has an MER of 0.15 per cent.
Fustey says he prefers the iShares product to Horizons for clients because when you buy the iShares ETF, you are actually buying shares in the 60 companies listed on the index. In contrast, the Horizons ETF uses swaps to replicate the performance of the index. If derivatives give you the willies -- and who can blame you? -- you might want to pay a little more for the iShares product. But swapping strategies do have an upside -- at least with the Horizons product -- besides the ultra-low MER.
"There is some interesting tax efficiency in it because the underlying agreement is a total return agreement, so essentially what you're doing is converting dividend income into capital gains and you don't realize those profits until you sell the units."
Warren Buffett! You shouldn't have!
He's the Wayne Gretzky of stock-picking, the Michael Jordan of value investing, and unlike these two greats of their respective sports, the octogenarian Oracle of Omaha has yet to fully retire from the game. Warren Buffett may not be the granddaddy of value investing -- finding great companies at a discounted stock price -- but he is certainly the discipline's most revered and successful sensei. His holding company, Berkshire Hathaway -- co-founded with longtime associate Charlie Munger -- is the sum of all Buffett's greatest investment ideas.
If you're looking for a valued gift for that special someone this holiday season, you can't go wrong with a stake in Mr. Buffett's intoxicating mix of capital growth and cash flow, says Tony Demarin, president of Winnipeg-based BCV Financial. Berkshire Hathaway's A shares, however, may be a little pricey for most folks. One share costs about $130,000, but the company also offers B shares that will set you back about $85 to $90 apiece.
Besides a piece of Buffett's business, equity ownership also has another little perk. "It gets you a ticket into its annual meeting in Omaha every year," Demarin says.
"Everybody who has gone tells me it's just a fantastic day of presentations." Another benefit is instant diversification. Owning Berkshire is like owning a mutual -- only it's managed by some of the best brains in the business. Unlike a mutual fund, only a limited number of units are available, traded as shares on the stock market. This means it's a closed-ended fund instead of an open-ended fund.
"You buy units on the market, and if you want out, you sell your shares to another buyer."
One drawback for fans of income, however, is Berkshire Hathaway -- a money-generating machine -- doesn't pay a dividend. All the cash flow goes back into the company to grow its market value. Considering it's almost doubled in value in the last decade, it's hard to argue with its strategy.
Still, this investment isn't without its concerns. For one, it's traded on the New York Stock Exchange, so you have to buy it in U.S. dollars. This makes a rising loonie a concern that could eat up the stock's future increases in value.
Second, Buffett and Unger are in their 80s. Let's hope they live a long time. But a prudent investor should always be aware that, as with the speculation about Apple's future after Steve Jobs died last year, Berkshire Hathaway's future could be subject to the same discussion when its captains are no longer at the helm.
Income... maybe the best gift of all
If earning an income and protecting hard-earned money are a concern, fixed-income investments (bonds, preferred shares, convertible debentures, etc.) may be just the gift for you. Although interest rates are low, usually a bad omen for bond aficionados, good investments are still to be had in this asset class, says the investment advisory team of David Derwin and Joseph Alkana at the PI Financial Corp. (which recently acquired Union Securities' Winnipeg office).
They say value can still be found in medium-term corporate bonds -- those about five to eight years until maturity. But picking the right sector is crucial. Government bonds, while arguably the most secure, have paltry yields (the interest payment), but certain corporate bonds still offer a handsome return with a fairly modest risk profile.
Most corporate bonds easily beat the returns on GICs. Unlike GICs, the principal isn't guaranteed, but barring an economic calamity, most good-quality corporations pay their debts.
Derwin suggests looking at the energy services, consumer goods and utility sectors, which all tend to produce steady cash flows -- a must for investors in debt expecting a regular interest payment.
"One good example is Kruger Products," Derwin says. "You may not recognize the name, but it's a leading manufacturer of tissue paper, napkins and toilet paper. Its main brands are Scotties and Purex." This company is not yet trading shares on a stock exchange, but it has been selling debt. Its medium-term bonds yield 6.25 per cent a year.
Two energy-services firms are also paying good yields. Savanna Energy Services pays a 5.7 per cent yield and Western Energy Services yields 6.4 per cent on medium-term bonds (figures as of Nov. 27). Of course, as with all the other investments, bonds have their own unique risks. Do your research beforehand. "Good investing is really about educating yourself," Derwin says. "Building up your investment knowledge is probably one of the best gifts you can give yourself."