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What you’re paying in investment fees

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You’d think after decades hearing and reading about the long-term impact of high investment management fees on our retirement nest eggs, Canadian investors would have gotten the message by now. Among the more entertaining TV ad campaigns on this topic have been Questrade’s recent commercials about belatedly enlightened individual investors fending off the inane arguments of financial “professionals,” a.k.a. salespeople. “You’ll see the results in the end; it’s a long-term game,” an advisor at a large financial institution says smugly, in an attempt to brush off a client’s questions about high fees and his low returns. The client fires back: “It’s not a game. It’s my retirement.”

All of which makes the new RRSP survey from the same Questrade Inc. of more than usual interest. The survey—released this week by the independent discount brokerage—finds 87% of Canadians either don’t know or underestimate the difference that a 2% or 1% fee has on their portfolios over the long run (of 20-plus years). The survey checked in with 1,508 Canadians in December 2019, using Leger’s online opinion panel. Timed for RRSP season, the survey’s intention is to show that many investors “hold misconceptions that could be costing them money, especially in the long term.”

While the majority think Canadian mutual fund management expense ratios (MERs) are too high compared to the rest of the world, given the increased regulatory climate of greater disclosure, I was surprised by the finding that a whopping 47% still don’t even know what they’re paying for mutual funds.

There are also disturbing generational differences. Retiring Baby Boomers largely seem to have gotten the message on fees and investment returns, judging by the growing popularity of ETFs (exchange-traded funds) and robo-advisor services that package up ETFs for a slightly higher fee.

But just as cigarette makers targeted new foreign markets after their initial “wins” started to die off, fund companies can see a new generation of seemingly fee-oblivious investors coming right up. According to Questrade, 28% of Canadians agree that paying more for an investment will give them better returns. “You get what you pay for” may be a valid principle if you’re buying luxury homes, automobiles or gourmet dinners, but this is an oddly quaint belief when applied to investing. The operative principle behind the surge in indexing and ETFs is that “costs matter,” and the lower the costs, the better.

Yet Millennials and Gen Z seem ripe for the picking here: 42% of investors aged 18 to 34 believe paying more for investments will give them better returns (versus just 18% of the 55-plus cohort).

Questrade estimates that a 1% decrease in fees over a typical 30-year investing horizon could result in 27% to 29% more money in one’s retirement kitty, assuming a 7% to 8% return in a tax-sheltered account and a portfolio between $1,000 and $50,000. But try telling that to the group of investors Questrade polled: 87% either didn’t know or underestimated the difference in impact 2% fee versus a 1% fee would make on the value of their portfolio over the long run. That is, 41% think a 1% cut in fees adds 20% or less to the long-run value of their portfolios. And only 43% of RRSP investors believe cutting fees from 2% to 1% will have a big impact on returns over 30 years.

Sadly, the survey shows the usual amount of inertia about saving for retirement. While Canadians are, indeed, worried about retirement “they’re not doing anything about it,” Questrade concludes, citing the poll’s finding that 59% of Canadians worried about retirement still plan to contribute to their plans the same way they did in the previous year.

They don’t come out and say it explicitly, but I’d guess that accounts for the stubborn entrenchment of the big branch networks, which sell a lot of high-fee “closet index funds.” Those tend to be the banks’ in-house “no-load” mutual funds that purport to be actively managed and charge MERs commensurate with that, but which hold most of the same securities lower-cost index funds hold.

Questrade—which facilitates do-it-yourself investors who buy investment funds or individual securities—takes aim at such high-fee mutual funds. It notes that on average we still are paying 2% or more in fees, which “are some of the highest fees in the world.” It cites this research from Morningstar.com, which looks at fees in 26 countries worldwide.

I find it shocking that a whopping 47% who invest in mutual funds still don’t know what fees they’re paying. A majority (52%) think Canadian mutual fund fees are too high but a third don’t know if a 2% fee for a mutual fund should be considered high. (It’s more than I’m willing to pay, personally, after building wealth for three-and-a-half decades, but for younger investors just starting out, 2% may not be that far out of line).

Clearly, there’s still a long way to go to achieve broad awareness of these issues: 76% of those who don’t know what fees they’re paying for mutual funds agree they are a good way to invest for retirement. Here I’d add that some indeed are: see my recent column in this space on the best mutual fund companies you’ve never heard of.

The Questrade poll finds 95% of Canadians don’t know that most mutual funds have been underperforming the last five years, or underestimate the extent of the underperformance. Questrade cites the SPIVA scorecard to underline the point that active management continues to lag low-cost indexes, which you can find here.

As the bloggers I consulted for my article mentioned above pointed out, when it comes to mutual funds, you need to beware of throwing the baby out with the bathwater. Some excellent fund families charge reasonable fees for active management that can often add value, although there are no guarantees this can be consistent or the funds identified in advance. The better ones tend not to incorporate embedded compensation, which is largely on the way out anyway, as I pointed out in this article.

Still, the Questrade survey indicates that despite the wealth of free expertise on the web and elsewhere, when it comes to raising awareness of fees and the impact of costs, our work here is not yet done. I fear we are bifurcating between a world of savvy financial consumers in which we are essentially preaching to the converted, and another camp of naïve uninformed investors who tend not to seek out such information, aren’t given it if they fall in with the wrong type of “advisor” and will eventually pay the price.

Jonathan Chevreau is founder of the Financial Independence Hub, author of Findependence Day and co-author of Victory Lap Retirement. He can be reached at [email protected]

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Boston Beer founder Jim Koch defends hard seltzer investment after disappointing earnings report – CNBC

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Boston Beer Company co-founder Jim Koch defended its heavy investment in hard seltzer Thursday as shares fell after weak guidance and a per-share earnings miss.

“Sometimes growth, it’s not cheap, particularly in something capital-intensive like beer,” Koch said on “Closing Bell.

Hard seltzer, in particular, demands significant investment because “it’s the biggest thing that’s come into the beer business since light beer,” Koch said.

Shares of Boston Beer Company slid 7.6% to $396 Thursday following its after-the-bell earnings report a day earlier. It posted earnings of $1.12 per share for the fourth quarter while analysts had forecast earnings of $1.47 per share.

It also reported full-year EPS guidance of $10.70 to $11.70. Wall Street consensus had been $11.72.

Boston Beer CEO David Burwick said on the earnings call that margins will continue to suffer as it increases capacity to meet demand around hard seltzer.

“We expect this program to run for two to three years and begin showing margin improvement by the first half of 2021,” he said, according to a transcript from The Motley Fool.

The Samuel Adams brewer said it saw triple-digit growth around its hard seltzer brand, Truly, which helped deliver quarterly revenue of $301.3 million. It represents a 33.8% increase compared with the prior year.

Despite Thursday’s slide, Boston Beer’s stock remains up 47% in the past 12 months as the hard seltzer category exploded.

“Let’s not get distracted by what happens today or tomorrow,” Koch said in defense of the company’s strategy. “Let’s make sure we’re building for the future.”

And that’s a future in which Truly plays a critical role, said Koch, who launched the Boston Beer Company in his kitchen in 1984.

The hard seltzer category experienced significant growth and increased competition in 2019 as big players such as Anheuser-Busch launched products to compete with Truly and White Claw.

Constellation Brands also said it plans to launch a line of Corona hard seltzers this spring.

Hard seltzer makes up 2.6% of the total U.S. market for alcohol, which is an increase from 0.85% a year ago, according to the IWSR.

“We really don’t know how far is up” for hard seltzer, Koch said.

So far, Koch said, the fresh competition from Bud Light Seltzer has not hurt Truly’s popularity among consumers.

“We were actually very pleased with the entrance of Bud Light Seltzer,” he said. “Since Bud Light Seltzer’s been introduced, we’re the only hard seltzer that actually gained market share.”

Koch said hard seltzer’s growth has far exceeded what Boston Beer expected when it launched Truly about four years ago. It’s appealing to a wider range of consumers than they thought, Koch said.

“It kind of presses all the buttons. Great taste. Not much compromise. Health and wellness cues,” Koch said. “We think that the category can double again in 2020.”

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Intel is a good investment and a bad trade, this investor says – Cantech Letter

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Andrew Pyle

US semiconductor name Intel (Intel Stock Quote, Chart, News NASDAQ:INTC) has had a great run over the past few months but is there more upside to come?

Likely in the long term, says Scotia Wealth’s Andrew Pyle, but for short term traders you might want to look elsewhere.

“The tech sector has been on fire, with the NASDAQ hitting another record high [on Tuesday]. I still like Intel right now,” says Pyle, portfolio manager for Scotia Wealth Management, who spoke to BNN Bloomberg on Wednesday.

After staying range-bound for a good year and a half, Intel broke out last fall to post a 25 per cent return for 2019, while so far in 2020 the stock is already up ten per cent and is now hanging around $66-$67 in recent weeks. (All figures in US dollars.)

“We seem to be having a bit of an issue in getting the stock up to the $70 range,” says Pyle. “We’re seeing a bit of consolidation right now which is a little bit different from what we’ve seen from some of the other high-fliers in the tech sector,” he said. “Having said that, I still think the fundamentals for Intel are good for a long-term play.”

“If we’re looking at five years out or more I think these levels are probably still attractive. For a short-term trade, I’d probably say we’re a little bit pricey right now,” Pyle said.

Intel’s share price got a nice boost near the end of January on the company’s fourth quarter earnings which surprised analysts with better-than-expected top and bottom line results.

Intel’s revenue climbed eight per cent year-over-year to $20.21 billion whereas analysts were calling for $19.23 billion, while earnings came in at $1.52 per share excluding certain items compared to the Street’s estimate at $1.25 per share.

The company saw just two per cent growth in its Client Computing segment but posted a whopping 19 per cent increase in its Data Center Group which manufactures chips for computer servers, with the rise being attributed to more business in cloud computing, especially by the big names in the field, the so-called hyperscale companies such as Amazon, Microsoft, Alibaba and Baidu.

Looking ahead, Intel management has called for 2020 revenue of $73.5 billion compared to 2019’s $72.0 billion.

“In 2019, we gained share in an expanded addressable market that demands more performance to process, move and store data,” said Bob Swan, Intel CEO, in the fourth quarter press release. “One year into our long-term financial plan, we have outperformed our revenue and EPS expectations. Looking ahead, we are investing to win the technology inflections of the future, play a bigger role in the success of our customers and increase shareholder returns.”

Intel is facing rising competition across many of its businesses from Advanced Micro Devices, among others, which has been gaining market share from Intel. AMD’s share price rose 148 per cent last year and has kept up the pace so far in 2020 by climbing 27 per cent so far.

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Swensen reaffirms climate change as a guiding factor in investment policy – Yale News

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David Swensen, Yale University’s chief investment officer, this week underscored the importance of environmental sustainability in the university’s investment choices.

In a Feb. 20 letter to the university community, Swensen offered an update on Yale’s approach to incorporating the risks of climate change in investment decisions. The letter follows another letter Swensen wrote to the Yale community in 2016 offering a first progress report on an effort the Investments Office began in 2014 to give climate-change-related guidance to Yale’s external investment managers, who collectively manage nearly all of the endowment portfolio.

Climate change,” Swensen writes in his latest letter, “poses a grave threat to human existence and society must transition to cleaner energy sources. This is a formidable task that requires swift and dramatic action on a global scale. The solution involves a combination of government policy, technological innovation and changes in individual behavior.”

Swensen writes that Yale’s greatest impact in fighting climate change will come through its research, scholarship and education, and notes that the university has committed to reducing its own carbon footprint. Yale President Peter Salovey has led an acceleration of these efforts: Provost Scott Strobel has been charged with convening relevant faculty leadership around a university-wide push for planetary solutions, and a committee charged with finding a way to get the campus to net-zero carbon emissions is due to issue a report soon. Meanwhile, Yale continues to be nearly unique in imposing a carbon charge on all of its buildings.

Yale was one of the first institutions to address formally the ethical responsibilities of institutional investors. In 1969, a small group of Yale faculty and graduate students conducted a seminar exploring the ethical, economic, and legal implications of institutional investments; this led to the publication in 1972 of “The Ethical Investor: Universities and Corporate Responsibility,” which established criteria and procedures by which a university could respond to requests from members of its community to consider factors in addition to economic return when making investment decisions and exercising rights as a shareholder. When in that year the Yale Corporation adopted the book’s guidelines, Yale became, according to The New York Times, “the first major university to resolve this issue by abandoning the role of passive institutional investor.” Swensen has been integral to this approach since his arrival at Yale in 1985.

Within the resulting procedural framework, the board of trustees’ Corporation Committee on Investor Responsibility (CCIR) is advised and supported by the Advisory Committee on Investor Responsibility (ACIR), which is composed of faculty, students, staff, and alumni. In 2014, the CCIR considered the request from some students for divestment from the fossil-fuel industry.  The CCIR decided against divestment, largely on the grounds that assigning blame to the supply side of the carbon problem would distract from the fundamental, and shared, problem of demand.

In response to President Salovey’s challenge to find a way to address climate change issues in Yale’s investments, the Investments Office conceived and executed a plan that would guide the endowment toward increasingly green investments. Beginning in 2014, the university has asked all investment managers to incorporate the full costs of carbon emissions in investment decisions. As Swensen notes in the current letter and in his 2016 letter, the university asks its investment managers to avoid investing in companies that disregard the social and financial costs of climate change and that fail to take economically sensible steps to reduce greenhouse gas emissions.

Yale further asks investment managers to assess the greenhouse gas footprint of prospective investments, as well as the costs to expected returns of climate change consequences and of possible future policies aimed at reducing greenhouse gases.

Yale’s investment approach to climate change contributes to the broader societal goal of transitioning to clean energy,” Swensen writes.

In keeping with this approach, Yale has in recent years, through its investment managers, jettisoned holdings in thermal coal companies and oil sands producers, because they are inconsistent with the university’s investment principles, he reports.

The remaining thermal coal private investments are on their way out of the portfolio,” Swensen writes. Yale’s investment in thermal coal and oil sands has dropped from 0.24% of the endowment’s market value in 2014 to about 0.02% today, according to the letter.

The letter provides examples of successful steps taken by Yale’s investment managers to improve the environmental sustainability of investments for which they are responsible.

For many managers, Yale is often one of the more significant investment partners, placing the university in a strong position to influence a manager to incorporate the risks of climate change into investment decisions,” Swensen writes.

Ultimately, he writes, the result of Yale’s approach is that “investments with large greenhouse gas footprints are disadvantaged relative to investments with small greenhouse gas footprints. When taking into account the full costs of climate change, investment capital flows towards less carbon-intensive businesses and away from more carbon-intensive businesses.”

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