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Treating Cash Value As A Fixed-Income Investment Choice – Forbes

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Though it requires patience, as it takes time for the initial policy creation costs to be recovered and for cash value to accumulate, long-term investors may find that the long-term net returns on cash value accumulation within a whole life policy may be competitive with the fixed-income returns a household could otherwise obtain from traditional bond investments. This fourth role for life insurance focuses on cash value growth, with the postretirement death benefit serving as an afterthought. In this regard, one might even consider whole life insurance as an alternative source for a temporary death benefit instead of term insurance with the intention to build tax-deferred cash value to later surrender as an alternative to buying term and investing the difference in bonds.

Cash value life insurance provides a way for the policyowner and the insurance company to share the benefits of tax-deferral afforded to life insurance. To be comparable with cash value, the net return on bonds would have to be evaluated as the gross return less investment expenses, taxes, and the term premiums required to purchase an equivalent death benefit for preretirement human capital replacement needs.

The ability for cash value returns to potentially outperform other fixed-income investments relates to several factors. First, regarding the underlying portfolio of assets, the general account of the insurance company is better positioned than the household to manage the risks involved in earning higher fixed-income returns by accepting duration, illiquidity, and credit risk. Actuaries at insurance companies generally can make reasonable estimates about their future claims-related expenses. This allows for a longer-term investment focus with assets held to maturity that can offer higher yields than households could otherwise muster within their own fixed-income portfolios.

The general account is highly regulated with respect to the amount of assets to be maintained relative to liabilities and to asset allocation. Assets must be sufficient to fund policy claims, including death benefits, policy surrenders, and loans, after accounting for future premiums and investment returns.

General account investments typically include corporate and government bonds, mortgages, policy loans, a small allocation to equities, and potentially other types of alternative investments. The general account has greater return potential through its ability to invest in longer-term and less liquid assets, and to diversify the credit risk of higher-yielding corporate bonds. Households have less capacity to diversify and manage these risks. Asset values for households are too small, their timeframes are too short, and their liquidity needs are too high. Policyholders do not have individual accounts within the general account. The account value is aggregated across all policyholders.

The general account of the insurance company is using projections about the inflows of premiums and outflows of benefits and surrenders/loans and is using an asset-liability matching framework so that bonds do not have to be sold at a loss. Because insurance companies generally hold the fixed-income assets to maturity, rising rates will not trigger capital losses, but will allow new premiums to be invested at a higher rate. Any policy dividends should generally be more closely related to interest rate movements, slowly rising after interest rates rise and slowly falling after interest rates fall. Because insurance companies use asset-liability matching, a rise in interest rates allow subsequent bond purchases to be made at higher yields. This stable value aspect of cash value is a key motivator for using it in the volatility buffer strategies.

As well, fixed-income returns must be considered net of taxes. For bonds held in a taxable account, taxes must be paid on the annual interest payments, reducing the compounding growth potential of the assets. Likewise, in a tax-deferred account, taxes must be paid when distributions are made. Cash value within life insurance accumulates on a tax-deferred basis while the asset can potentially also be accessed without needing to pay any additional taxes.

Furthermore, cash value accumulation is already reported net of fees. Fees are internal to the policy and loaded into the stated premium. To be comparable, investment and advisory fees charged on bonds must be incorporated so that bond returns are identified on a net-of-fees basis.

Finally, cash value life insurance also provides a valuable death benefit. If we assume that a pre-retiree needs life insurance and is considering between term and permanent life insurance, the net returns on a bond portfolio would also need to be reduced to account for the cost of term premiums as a percentage of the whole life premiums. Bond investments could only be made with remaining funds after paying for the term premiums covering the preretirement life insurance need.

Looking for more information? Click here and subscribe to the Retirement Researcher for my weekly newsletter and receive additional articles, resources, and exclusive invitations to upcoming webinars!

*This is an excerpt from Wade Pfau’s book, Safety-First Retirement Planning: An Integrated Approach for a Worry-Free Retirement. (The Retirement Researcher’s Guide Series), available now on Amazon.

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Poland Belittles Media-Law Impact as US Warns on Investment – BNN

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(Bloomberg) — Poland played down the impact of a draft law ousting U.S.-based Discovery Inc. as a senior Washington official warned that a perceived erosion in media freedom could hit investment sentiment toward the nation.

The ruling party wants to pass legislation that will force Discovery to sell control of its Polish unit TVN, the largest privately owned television group in the country. The media regulator has also for more than a year not extended the broadcasting license for TVN24, the group’s news channel whose award-winning investigative reports have unveiled corruption at various government levels.

The draft law proposes to ban companies from outside the European Union, as well as the associated economic areas of Iceland, Liechtenstein and Norway, from directly or indirectly controlling television and radio stations. That would only impact Discovery, one of the biggest U.S. investors in Poland.

“This law only imposes the obligation to find a capital partner in the European Economic Area, and does not infringe anyone’s freedom of expression,” Marek Suski, a ruling party lawmaker and promoter of the TVN bill, told public radio on Friday. “I think that great American lawyers will find a way to do this.”

The legislation — which the ruling party wants to approve in parliament next month — has already prompted concern from the U.S. and the EU.

U.S. companies have invested more than $62 billion in Poland, second only to Germany, and provide employment for 267,000 people, according to the American Chamber of Commerce.

”This is a very significant American investment here in Poland,” Derek Chollet, a counselor at the State Department, told TVN24 in an interview during his visit to Warsaw on Thursday.

Failure to extend the Discovery unit’s broadcasting permit “will have implications for future U.S. investments. But it’s also a question of values” as “media freedom is absolutely crucial — a free press is important to empowering society,” he said.

©2021 Bloomberg L.P.

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Martin Pelletier: How anti-vaxxers can impact your investment portfolio – Financial Post

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Three things to watch for to gauge the sustainability of the post-COVID recovery

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Equity markets appear to be taking a breather as we move from early to mid-cycle in the post-COVID recovery, with market participants trying to figure out what that means and where we go from here. Many are wondering if we have seen peak earnings and peak growth, and if the rise of the variant will cause another shutdown.

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You can see this in the muted reaction to some recent impressive quarterly earnings reports in the United States, with some high expectations already priced into share prices. And then investors hit the panic button on Monday, taking the S&P 500 and S&P TSX down to 3.5 per cent from its recent high, while the Canadian dollar has now lost all of its gains and is now flat on the year.

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During these times its important to remember that markets don’t always go up and near-term volatility doesn’t necessarily imply that a looming meltdown is on the horizon. For example, did you know that we’ve counted that the S&P 500 has fallen more than two per cent eight times this year alone?

However, market corrections are quite common and can actually be quite healthy as they flush out those participants on the margin (excuse the pun) without the wherewithal to stand by their longer-term convictions. In that regard, looking ahead there are three main factors worth watching, not only as to the sustainability of this post-COVID recovery but also overreactions allowing for the opportunity to rebalance portfolios.

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The bond market

We continue to believe that this very much is still a central bank-driven market environment. Macro policy will weigh heavily as markets react to indications of where the Fed and other central banks are positioning. For example, markets corrected more than 15 per cent when Bernanke signalled tapering back in 2010, and some argue that the tech bubble was burst when Greenspan indicated hikes were coming in early 2000.

That said, this time around central banks are in a bit of a pickle with rising inflationary pressures offset by the need to keep debt servicing costs down for massive government fiscal programs currently being funded by printing money. In addition, we’ve read that there are a record amount of job openings, but wages aren’t high enough to entice those unemployed going off government assistance.

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This is where the bond market can be a good indicator and worth keeping a close eye on, but at the same time recognizing they don’t always get it right. More recently, long-term U.S. Treasuries (20 year +) have rocketed nearly 12 per cent from their May lows, nearly recouping all of their losses this year-to-date. For those overweight bonds, especially longer-dated ones, we wonder if they’re being given a rare second chance?

Oil prices

Don’t kid yourself. Despite the plethora of talk around the transition to clean energy, high oil prices still have a material impact on the economic recovery in the U.S. Five of the last six recessions have been preceded by a spike in the price of crude oil, with the only exception being the recession in 2020 caused by the COVID lockdowns.

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The good news is that WTI oil prices have fallen from last week’s highs of nearly $75.50, down more than 11 per cent to below $67 a barrel on Monday. This couldn’t come at a better time as main street is in the midst of struggling with supply chain shortages causing inflationary pressures in key household staples such as food, clothing and gasoline.

Household spending & anti-vaxxers

We received some good news out of U.S. retail sales last Friday, showing a rebound month-over-month in consumer spending, which is a primary driver of GDP growth. People are tired of being locked up and have now been given a taste of what it’s like to experience a pre-COVID world again. This also appears to be in its early stages, as U.S. households are still sitting on quite the nest egg, having accumulated trillions in excess savings during the pandemic.

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  1. Suddenly, the mighty EV is our path to salvation. Yet in the U.S. 62 per cent of the country's electrical grids run on fossil fuels and are the second-largest contributor of GHG emissions at 25 per cent.

    Want to save the planet? Invest in oil and gas stocks instead of indirectly supporting OPEC and Russia

  2. A recent Abacus Data poll showed Prime Minister Justin Trudeau may finally get the majority government he so very much desires.

    Why investors should get their portfolios in order before an election is called

  3. It appears that investors have forgotten that return and risk go hand in hand.

    Investors want both sky-high returns and the comfort of safety

  4. The U.S. Federal Reserve is extremely limited in its ability to materially raise rates given the massive amount of debt being taken on by its government to fight the COVID-19 pandemic, writes Martin Pelletier.

    Martin Pelletier: Investors are overlooking this key reason why the Fed won’t rush a rate hike

Looking forward, the trillion-dollar question, therefore, is if the stupidity of those choosing not to get vaccinated is greater than many expect, resulting in the rise of the variant this fall and forcing another lockdown. We hate to position portfolios around stupidity, but it is a risk nonetheless and worth keeping a very close eye on.

In conclusion, pullbacks are signs of a healthy market and more so, given they present a great chance to reposition and rebalance portfolios. This can be a rather difficult thing to do in today’s headline-grabbing environment, but it helps to strip out the noise, have a long-term plan and deploy some form of near-term active risk-management.

Martin Pelletier, CFA, is a portfolio manager at Wellington-Altus Private Counsel Inc. (formerly TriVest Wealth Counsel Ltd.), a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax and estate planning.

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In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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Critical Minerals: A New Focus For Foreign Investment Review – Energy and Natural Resources – Canada – Mondaq News Alerts

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The Canadian government has recently signalled that it will use
it national security powers to scrutinize foreign investments in
businesses involved in critical mineral production and
supply chains.

This is an important change, given the number of mining
companies listed on Canadian stock exchanges, including many that
have little nexus to Canada except for the listing.

Critical minerals

The Canadian government’s current views on the significance
of critical minerals have been developed in two recent and
important policy statements:

  • A Critical Minerals List, released on March 11,
    which includes 31 minerals considered critical for the sustainable
    economic success of Canada and its allies1. The list is
    largely consistent with a similar U.S. government list of 35
    critical mineral resources.
  • Updated guidelines on the national security review of foreign
    investments, which were released on March 24. The guidelines
    identify areas that could raise national security concerns, and now
    include acquisitions of Canadian businesses involved in producing
    critical minerals.

Critical minerals are viewed as those that are: essential to the
economy of Canada and its allies; and whose supply may be at risk
due to geological scarcity, geopolitical issues, trade policy or
other factors2. A
key concern is with market dominance by suppliers that are state
owned enterprises and the risk of politically motivated supply
disruption. Canada is not alone in expressing concerns of this
nature3.

Investment Canada Act reviews

Under the Investment Canada Act (ICA), the
government has discretion to review virtually any foreign
investment on the grounds it could be “injurious to
Canada’s national security.” The review jurisdiction is
broad and covers mining businesses with part of their operations in
Canada, even if mines themselves are located overseas.

To date, national security reviews have tended to focus on
Chinese investments involving sensitive technology, critical
infrastructure or personal data. Mining has not been an area of
significant concern under the ICA.

Acquisitions of Canadian-listed mining companies, even by
Chinese investors, have generally been viewed as non-problematic.
For example, Zijin Mining’s acquisition of Nevsun Resources,
Continental Gold and Guyana Goldfields in 2018, 2019 and 2020 and
Endeavour Mining’s acquisition of SEMAFO in 2020 were all
approved under the ICA. Nevsun was involved in critical mineral,
copper, although its acquisition pre-dates the identification of
copper as a critical mineral in March 2021.

The only mining transaction blocked on national security grounds
was Shangdong Gold’s proposed acquisition of TMAC in 2020. But
that investment was likely blocked because of TMAC’s strategic
location and other factors, not its gold mining operations. (Gold
is not on the critical minerals list.)

Other mining-rich countries have also started to scrutinize more
closely Chinese investments in the mining industry. Notably, the
Australian government blocked two proposed investments by Chinese
entities related to critical minerals in 20204.

Practical implications

The vast majority of mining investments will continue to receive
ordinary course approvals under the ICA. However, this new policy
highlights that some investments are likely to face significant
scrutiny.

The highest-risk investments will involve proposed Chinese
acquisitions of Canadian mining companies involved in the
production of critical minerals in Canada.

Lower-risk investments will involve proposed Chinese
acquisitions of Canadian-listed mining companies not involved in
critical minerals, where their assets are located outside Canada,
and/or where target businesses are not material producers of
critical minerals.

Non-Chinese investors should generally expect approvals to be
processed in the ordinary course. Indeed, an added consequence of a
more restrictive policy on Chinese investments will likely be
opportunities for non-Chinese investors and possibly in the
development of new and existing mineral projects in Canada.

Finally, when considering potential investments where national
security issues are expected to arise, investors and Canadian
businesses alike should engage counsel and government relations
advisors as early as possible in the transaction planning process
given the complex and evolving nature of the national security
review regime under the ICA.

Footnotes

1 The list comprises the following minerals: aluminum,
antimony, bismuth, cesium, chromium, cobalt, copper, fluorspar,
gallium, germanium, graphite, helium, indium, lithium, magnesium,
manganese, molybdenum, nickel, niobium, platinum group metals,
potash, rare earth elements, scandium, tantalum, tellurium, tin,
titanium, tungsten, uranium, vanadium, zinc.

2 A Canada-U.S. Joint Action Plan on Critical Minerals
Collaboration
, released in January 2020, which aims to
facilitate development of secure supply chains for critical
minerals that are key to strategic industries such as defence,
aerospace and communications. Canada is considered to be
well-placed to supply the U.S. with many of the critical minerals
due to historically strong political and economic ties; a stable
political, economic and regulatory environment; an extensive
mineral endowment; and a robust metals and mining sector. Of the 35
critical metals identified by the U.S., Canada is a sizable
supplier of 13 of such minerals, including being the largest
supplier of potash, indium, aluminum and tellurium to the U.S. and
the second-largest supplier of niobium, tungsten and magnesium.
Canada also supplies approximately one quarter of the uranium needs
of the U.S.

3 Most notably the U.S., European Union, Japan, South
Korea and Australia.

4 These investments were: (1) Chinese state-owned steel
producer, Baogang Group Investment’s proposed A$20m investment
in Northern Minerals Limited; and (2) Chinese lithium chemical
producer, Yibin Tianyi Lithium Industry Co Ltd.’s proposed
A$14.1m investment in AVZ Minerals Limited.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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