A multi-million dollar private investment will see a little touch of Hollywood brought to a small southern Manitoba town.
ETFs and DIY mutual funds that made notable changes to their defensive-sector exposure over 2022.
The year is off to a great start for equity investors, with most equity indexes posting single-digit gains on a year-to-date basis, perhaps fuelled by investors’ reinvigorated confidence that the world’s central banks have inflation under control. That said, a new economic environment of higher interest rates might prompt some investors to have a look at their sector exposures, perhaps allocating more to defensive sectors for risk-reduction purposes, or to more cyclical sectors if they’re bullish on market prospects. To help identify potential candidates, I thought to analyze funds that have made noticeable moves over the course of last year. To start with, I screened the Morningstar Direct database for Canadian-domiciled equity ETFs and DIY mutual funds for those that have a reasonable track record, denoted by their Morningstar Rating for Funds or “star” rating of three stars or better, implying that the initial universe performed at least as well as category peers.
I then looked at the sector allocations of each fund as they appeared at the end of 2022 and 2021. Specifically, I used Morningstar’s “super-sector” definitions to determine which funds have the largest changes in exposure to defensive sectors. Recall that Morningstar’s classification structure for stocks divides global companies into three “super sectors”: (1) cyclicals, which include basic materials, consumer cyclical, financial services and real estate stocks; (2) defensive, which includes consumer defensive, health care and utilities stocks; and finally (3) sensitive, which includes communications services, energy, industrials and technology companies. I used the change in exposure to the defensive sector over the 2022 calendar year as the sole metric to rank the list of three-star-or-better funds.
The accompanying table includes 10 funds that have shifted their exposure toward defensive sectors the most, and the 10 funds that have shifted the furthest away from defensive sectors. The table also displays fees, trailing performance, ratings and inception dates. It is worthwhile noting that the three funds that have moved most into defensive sectors (XMTM-T, FCIL-T and IQD-T) are “smart beta” products, which are rules-based in nature and do not follow the discretion of a portfolio manager. Interestingly, the three funds are exposed to quite different factors. Also noted is the fact that several smart beta products that look for exposure to dividends (such as FCUD-T, XHU-T and VIDY-T), have shifted away from defensive sectors, while RBC’s actively managed mutual funds have increased their exposure to defensive sectors.
This article does not constitute financial advice. Investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.
A multi-million dollar private investment will see a little touch of Hollywood brought to a small southern Manitoba town.
“There is a great deal of excitement, and a lot of people asking, ‘How does something like this come to Niverville of all places?,’ ” Niverville Mayor Myron Dyck said over the phone on Friday, one day after it was announced that a $30-million private-sector investment will see a state-of-the-art, full-service film and television studio village built in Niverville.
“We’re all still kind of wrapping our heads around it.”
The studio village, which will be dubbed Jette Studios, will “leverage the latest technology and include 18,581 sq.-ft. of studio space,” according to Volume Global and Julijette Inc., the two companies that will develop the project.
Dyck said there were several reasons Niverville was chosen for the project, including its location, because he said some filmmakers and crews want to avoid the much busier streets in Winnipeg if they can.
“We heard some say it’s easier not to have it in Winnipeg just with the amount of trucks and people they have to move around. It’s easier to not have to move all those vehicles around in downtown Winnipeg.”
He also credited the province’s Manitoba Film and Video Production Tax Credit that was introduced in 2017, and the extra 5% rural tax credit currently offered to projects developed outside of Winnipeg.
“If a community seems attractive to work in, and then you factor in that extra rural tax credit, that can really be the deciding factor,” Dyck said.
According to the province, in the last year 122 film projects have benefitted from the tax credit program, and it has supported $525 million in production in Manitoba over a 30-month period.
The province said in a media release they have also been working recently at making Manitoba a destination for the film industry by helping the Winnipeg Airports Authority with expenses to improve direct flights to and from international destination like Los Angeles.
On Thursday, Sport, Culture and Heritage Minister Obby Khan was in Niverville, and spoke about moves the province has been making in recent years to bring more film and TV projects to Manitoba.
“Manitoba’s film industry is thriving, in the last year generating $365 million,” Khan said. “Whether it’s the Manitoba Film and Video Production Tax Credit, our new direct flights between Winnipeg and Los Angeles, or infrastructure improvements that propel growth, we are taking concrete steps to support Manitoba jobs and grow the economy.” Khan said.
Dyck said the town, located about 40 kilometres south of Winnipeg off of Highway 59, has seen large and continuous population growth for years, and he expects the studio project, which is expected to create 300 new jobs over the next three years, will see that growth continue.
“What we’ve seen with the last three census periods has been basically 6% growth every year, so that’s 30% every five years. We are one of the fastest growing communities in the province, and this will push that further we believe.
“It will be a significant economic driver for the community as a whole.”
Construction on Jette Studios in Niverville is expected to begin this summer, and those developing the project say they plan to first erect a 20,000 square foot pop-up soundstage that could be operational as early as this fall, and then work to build the permanent studio village facility.
— Dave Baxter is a Local Journalism Initiative reporter who works out of the Winnipeg Sun. The Local Journalism Initiative is funded by the Government of Canada.
Rowan, 78, wonders whether he and Willow, 58, have enough resources that she can fully retire and they can enjoy their planned lifestyle.
“I have good genes and based upon family history I anticipate living to 100,” he writes in an e-mail.
Willow is interested in continuing to work part time from home, “but not so much that it impinges on our desire to travel extensively,” he adds.
Their income comes from Rowan’s registered retirement income fund (RRIF), his government benefits and Willow’s contract work, for a combined $101,450 a year. Rowan wants to pay off their line of credit this year and wonders whether he should take the money from his tax-free savings account, his non-registered investment account or his RRIF. They also want to buy a used car.
They have substantial savings and investments and a mortgage-free house north of Toronto, all of which adds up to about $4.2-million. Their retirement spending target is roughly $96,000 a year after tax.
“We are currently 100-per-cent invested in the stock market in primarily Canadian dividend-paying stocks,” Rowan writes. “Should we be more conservative?” They also ask about establishing education trusts for their four grandchildren.
We asked Ian Calvert, vice-president and principal at HighView Financial Group of Oakville, Ont., to look at Rowan and Willow’s situation.
Rowan is retired and living off his RRIF withdrawals and government benefits, Mr. Calvert says. Willow is working part-time making $14,500 a year and planning to retire shortly.
Rowan is withdrawing $6,000 gross each month from his RRIF accounts, about $17,000 higher than his annual minimum withdrawal, the planner says. He does not recommend adjusting this amount when Willow retires. Instead, Willow should draw on the assets in her registered retirement savings plan (RRSP) when she retires fully.
“With no pension income and her Canadian Pension Plan and Old Age Security still five or six years away, the only income she will be reporting is the investment income in her non-registered portfolio, putting her in very low marginal tax bracket,” Mr. Calvert says. He suggests she withdraw $25,000 a year. Before making the withdrawal, she should convert her entire RRSP to a RRIF to avoid fees associated with the RRSP.
Under this scenario, their income in 2024 would be $72,000 from Rowan’s RRIF, $25,000 from Willow’s RRIF, $15,000 from Rowan’s CPP and $8,900 from his OAS, leaving $15,000 needed from their non-registered savings, of which $13,000 will go to their TFSA contributions. (Total income of $135,900 a year, less $25,500 for income taxes and $13,000 for TFSA contributions, leaves about $98,000 for after-tax expenses.)
Adding in $25,000 from Willow’s RRSP/RRIF would be an ideal figure for both managing longevity of their retirement assets and managing their tax brackets, keeping them both near the top of the 29.65-per-cent combined marginal tax bracket.
Under this plan, and after splitting Rowan’s RRIF withdrawal ($36,000), they are expected to have income of $84,000 for Rowan and $77,000 for Willow. Rowan’s income is higher because he is receiving CPP and OAS, and has a larger non-registered portfolio.
In 2029, when Willow turns 65 and starts to receive her CPP and OAS, their income will rise to the point there is some clawback of their OAS, Mr. Calvert says. “At this age, they could simply trim their RRIF withdrawals, which are well above the mandatory minimums each year,” the planner says. OAS benefits start to be reduced when net income reaches $86,912 a year. This amount is expected to increase each year.
The total withdrawal from their $2.7-million portfolio is about $100,000 – about 3.7 per cent of their portfolio value, Mr. Calvert says. “If they can manage this rate of withdrawal and maintain on average a 5-per-cent rate of return on their portfolio, longevity of their investment assets won’t be a major long-term concern,” he says. This is before Willow begins collecting government benefits, which are expected to add a combined $18,500 per year. Long term, inflation is forecast to rise by at least 2 per cent to 3 per cent a year.
This rate of withdrawal has several advantages, the planner says. First, they are both reducing their RRIF assets at a strategic rate, which will have a significant impact on the taxes payable on the transition of wealth to their beneficiaries, the planner says. Second, the withdrawal requirements from their non-registered portfolio are minimal, giving them long-term flexibility if their lifestyle changes and they need to make larger withdrawals, he adds. Last, they are building up their TFSA for a more tax-efficient balance sheet that will also enhance the transfer of wealth.
Rowan and Willow have a line of credit for $82,500 at 6.5 per cent. They should consider paying this off entirely, Mr. Calvert says.
Their portfolio is entirely invested in stocks, of which 85 per cent are Canadian stocks with an average 4-per-cent dividend yield. “The 4-per-cent dividend yield is great and will substantially help the longevity of their assets by funding and smoothing the withdrawals from both their RRIFs and non-registered portfolio,” the planner says.
This strong allocation to Canadian dividend stocks is intuitively appealing but comes at the expense of proper global and asset-class diversification, Mr. Calvert says. “Rowan and Willow should consider an investment strategy that balances income generation and capital appreciation – and generating this performance from a wider variety of investment assets.”
If they choose to maintain their current all-stock strategy they should keep two things in mind, he says.
First, any U.S. dividend stocks should not be held in TFSAs because non-resident withholding tax is applied and cannot be recovered. Second, they need to take an honest look at the sustainability of their strategy because it needs to fund their expenses for the rest of their lives. “There is an abundance of academic research showing that individuals make poor decisions with individual stocks,” Mr. Calvert says. As well, one spouse usually takes the lead in do-it-yourself investing decisions. As that decision-maker grows older, sustainability can become questionable, the planner says.
If they decide to increase their U.S. exposure with some U.S. dividend stocks, their RRIFs would be the best location for these new holdings for three reasons, Mr. Calvert says. They could rebalance without triggering any capital gains. This would leave the Canadian dividend stocks in their non-registered portfolio to continue to receive preferential tax treatment. “Finally, and very importantly, U.S. stock dividends paid into an RRSP/RRIF are free from withholding taxes for Canadian residents,” the planner says.
For Rowan and Willow, leaving funds for their grandchildren is top priority. They should start by setting up registered retirement education plans for each grandchild and making an annual contribution of $2,500 each. The RESP is a terrific account for several reasons, he says. It will allow the funds to grow with a tax deferral and will be eligible for a $500 annual education savings grant on contributions of $2,500, up to a maximum of $7,200. “When establishing this account, they should consider setting it up as a joint subscriber account and appointing a successor subscriber in their will for estate-planning purposes,” Mr. Calvert says.
They also ask about establishing a trust for the grandchildren. A testamentary trust can be an effective estate-planning tool under the right conditions, he says. This type of structure, typically established upon death, would allow them to control the timing and distribution of their assets after their passing, he says. Before exploring this option, they should consult with an estate-planning specialist to fully understand not just the benefits, but also the complexities and costs of maintaining the trust.
The People: Rowan, age 78, and Willow, 58.
The Problem: Can they afford for Willow to retire now and to travel extensively while still leaving some money for their grandchildren? Should they invest more conservatively?
The Plan: When she retires fully, Willow taps into her RRSP. They split Rowan’s RRIF income to keep their income roughly equal and below the OAS clawback range. They take steps to diversify their investment portfolio both globally and by asset class. Open RESPs for the grandchildren and contribute the maximum.
The Payoff: All their financial goals achieved.
Monthly net income: $8,100.
Assets: Cash $4,000; his non-registered $707,600; her non-registered $459,000; his TFSA $214,000; her TFSA $75,000; his RRIF $877,300; her RRSP $305,300, residence $1,500,000. Total: $4.2-million.
Monthly outlays: Property tax $400; water, sewer, garbage $30; home insurance $275; electricity $155; heating $135; maintenance, security, garden $235; transportation $350; groceries $750; clothing $90; line of credit $415; gifts, charity $225; vacation, travel $2,500; travel insurance $90; dining, drinks, entertainment $375; personal care $50; club memberships $130; golf $75; sports, hobbies $100; subscriptions $50; health care $115; communications $370; TFSAs $1,085. Total: $8,000.
Liabilities: Line of credit $82,500 at 6.5 per cent.
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Some details may be changed to protect the privacy of the persons profiled.
Death and taxes are, as Benjamin Franklin famously declared, two of life’s certainties.
Investment fees may be a worthy addition to that list in the modern era — though not all investors are aware of this near-universal fact.
The fees financial services firms charge can be murky.
One-fifth of consumers think their investment services are free of cost, according to a recent Hearts & Wallets survey of about 6,000 U.S. households. Another 36% reported not knowing their fees.
A separate poll conducted by the Financial Industry Regulatory Authority Investor Education Foundation similarly found that 21% of people believe they don’t pay any fees to invest in non-retirement accounts. That share is up from 14% in 2018, the last time FINRA issued the survey.
The broad ecosystem of financial services companies doesn’t work for free. These firms — whether an investment fund or financial advisor, for example — generally levy investment fees of some kind.
Those fees may largely be invisible to the average person. Firms disclose their fees in fine print but generally don’t ask customers to write a check or debit money from their checking accounts each month, as non-financial firms might do for a subscription or utility payment.
Instead, they withdraw money behind the scenes from a customer’s investment assets — charges that can easily go unnoticed.
“It’s relatively frictionless,” said Christine Benz, director of personal finance at Morningstar. “We’re not conducting a transaction to pay for those services.”
“And that makes you much less sensitive to the fees you’re paying — in amount and whether you’re paying fees at all.”
Investment fees are often expressed as a percentage of investors’ assets, deducted annually.
Investors paid an average 0.40% fee for mutual and exchange-traded funds in 2021, according to Morningstar. This fee is also known as an “expense ratio.”
That means the average investor with $10,000 would have had $40 withdrawn from their account last year. That dollar fee would rise or fall each year according to the investment balance.
The percentage and dollar amount may seem innocuous, but even small variations in fees can add up significantly over time due to the power of compounding. In other words, in paying higher fees an investor loses not only that extra money but the growth it could have seen over decades.
It’s relatively frictionless. We’re not conducting a transaction to pay for those services.Christine Benzdirector of personal finance at Morningstar
The bulk — 96% — of investors who responded to FINRA’s survey noted their main motivation for investing is to make money over the long term.
The Securities and Exchange Commission has an example to demonstrate the long-term dollar impact of fees. The example assumes a $100,000 initial investment earning 4% a year for 20 years. An investor who pays a 0.25% annual fee versus one paying 1% a year would have roughly $30,000 more after two decades: $208,000 versus $179,000.
That dollar sum might well represent about a year’s worth of portfolio withdrawals in retirement, give or take, for someone with a $1 million portfolio.
In all, a fund with high costs “must perform better than a low-cost fund to generate the same returns for you,” the SEC said.
Fees can have a big financial impact on common decisions such as rolling over money from a 401(k) plan into an individual retirement account.
Rollovers — which might occur after retirement or a job change, for example — play a “particularly important” role in opening traditional, or pretax, IRAs, according to the Investment Company Institute.
Seventy-six percent of new traditional IRAs were opened only with rollover dollars in 2018, according to ICI, an association representing regulated funds, including mutual funds, exchange-traded funds and closed-end funds.
This annual fee structure isn’t necessarily the case for all investors.
For example, some financial planners have shifted to a flat-dollar fee, whether an ongoing subscription-type fee or a one-time fee for a consultation.
And some fee models are different. Investors who buy single stocks or bonds may pay a one-time upfront commission instead of an annual fee. A rare handful of investment funds may charge nothing at all; in these cases, firms are likely trying to attract customers to then cross-sell them other products that do carry a fee, said Benz of Morningstar.
Here’s the good news for many investors: Even if you haven’t been paying attention to fees, they’ve likely declined over time.
Fees for the average fund investor have fallen by half since 2001, to 0.40% from 0.87%, according to Morningstar. This is largely due to investors’ preferences for low-cost funds, particularly so-called index funds, Morningstar said.
Index funds are passively managed; instead of deploying stock- or bond-picking strategies, they seek to replicate the performance of a broad market index such as the S&P 500 Index, a barometer of U.S. stock performance. They’re typically less expensive than actively managed funds.
Investors paid an average 0.60% for active funds and 0.12% for index funds in 2021, according to Morningstar.
Benz recommends 0.50% as a “good upper threshold for fees.” It may make sense to pay more for a specialized fund or a small fund that must charge more each year due to smaller economies of scale, Benz said.
A higher fee — say, 1% — may also be reasonable for a financial advisor, depending on the services they provide, Benz said. For 1%, which is a common fee among financial advisors, customers should expect to get services beyond investment management, such as tax management and broader financial planning.
“The good news is most advisors are indeed bundling those services together,” she said.
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