Playing market defence, bankruptcy common sense and an RRSP housing offence

Good morning. Skittish investors have understandably been moving money into safer places as market turmoil continues to take its toll on confidence, even if returns in general seem to be improving lately. For example, fixed-income exchange-traded funds (ETFs) in 2022 attracted $19 billion, its highest-ever annual inflow, out of the $35 billion Canadian investors put into ETFs last year, according to National Bank Financial. More than 30 per cent of the fixed-income total was in December, indicating investors were getting pretty tired of stock losses as the year ended.

Generally, ETFs attract more funds in periods of uncertainty, says Michael Cooke, head of ETFs at Mackenzie Investments, because they’re a comparatively cheap investment vehicle, easy to understand (it’s simply a tradable security that tracks an index, sector or other assets), transparent and there are plenty of choices — 1,299 as of the end of 2022, a 9.3 per cent increase from a year earlier and 135 per cent more than five years ago. Want to play it safe: there are inflation-protected funds that contain real return bonds and even cash alternatives. Feel like taking more risk: there are funds containing cryptocurrencies and other more volatile investments.

One area Canadians haven’t jumped into wholeheartedly yet are those funds that focus on environmental, social and corporate governance (ESG). In that regard, we’re a bit different than our European counterparts, who funnelled 65 per cent of all net ESG inflows into ESG funds in 2022 even though ESG strategies did even worse than the market. “I guess it tells us that investors are taking the long-term view,” Jose Garcia-Zarate, associate director of passive fund research at Morningstar Inc., tells the Financial Times, noting that a more sensible near-term approach might have been to focus on fossil-fuel companies or weapons manufacturers.

But Cooke points out that ESG is now the largest thematic ETF category in Canada, with $8 billion of assets under management, though inflows into that category declined in 2022. The ESG investment movement is more mature in Europe than it is here, but even flows there declined from a record 2021. “A key consideration was underperformance given that ESG strategies generally have lower energy exposure than other strategies such as capitalization-weighted,” he says. “Issues of politicization and regulation also may have impacted ESG ETF demand in North America in 2022. But ESG investors are often driven by values, hold for the long term and are willing to endure periods of underperformance.”

Nevertheless, Cooke expects ESG funds to grow as disclosures improve and Canadians get more comfortable with the idea themselves. Investors can also turn to active ETF managers that add value in terms of managing the risks involved in funds focused on themes — such as ESG, specific sectors or covered calls — as well as active fixed-income and dividend ETFs, and generating returns above the typical benchmarks.

One of the primary reasons for the overall popularity of ETFs is their low fees, with more than 80 per cent of Canadian inflows going to ETFs with management fees of 0.3 per cent of less. The majority of those were passive funds, though some actively managed funds (typically those handling cash and multi-asset strategies) have similar fees. “Flow trends in Canada suggest that management fees are as or more important than considerations of active versus passive strategies,” Cooke says, adding that passive ETFs can be “precision tools” in effective portfolio construction.

Detractors of passive investing will point out you could make more money by watching where ETF inflows are going and betting on the reverse. That is, going long on those ETFs with the largest outflows and short on those with the biggest inflows. That would likely require some active management, which is something many investors don’t have time or money for.

But that doesn’t mean investors should just take the old standbys such as an index fund. Up-and-coming ideas include all-in-one and objective-oriented ETFs, which Prerna Mathews, vice-president of ETF Product and Strategy at Mackenzie Investments, says can feature drawdown solutions that can help retirees remove money from their portfolios, and buffer ETFs that focus on downside protection while taking advantage of growth opportunities.

If you want something less correlated with equities and bonds, infrastructure is making a comeback. “Companies have long-term contracts with private-public partnerships, and oftentimes contracts are inflation-linked,” Matthews says in a recent report. “Infrastructure is an exciting opportunity in periods where defensiveness is more attractive.” Sometimes the best offence is the best defence, to flip that adage on its head.

Andy Holloway, editor of the FPI and Financial Post Magazine, and senior features editor of the Financial Post. If you have any quips, queries or comments, get in touch at [email protected]

5 things to remember when the company you invested in goes bankrupt

One company or another you’ve invested in will likely go bankrupt at some point, or already has. It’s just part of any business cycle, but don’t beat yourself up about it. Plenty of other people made the same mistake and they had access to better information. That’s just one bit of advice veteran investor Peter Hodson offers to investors who are experiencing some bankruptcy-related trauma now or will in the future.

RECOVERY IS A PROCESS

Where investors might want to look if interest rates and inflation persist

Most experts think inflation is receding, so central banks will first pause their rate hikes and then begin to cut rates if and when a recession takes hold. But portfolio manager Martin Pelletier wonders what will happen if the global economy does not enter a deep recession or even a recession at all, and inflation moderates but stays in the four-to-five-per-cent range.

SWITCH TO VALUE MART

Big tech’s job cuts spur rallies even as an economic slowdown looms

The share prices of big tech companies including Alphabet Inc. and Salesforce Inc. rose 5.6 per cent on average after massive job cut announcements, according to data compiled by Bloomberg. But beyond the short-term pop in stock prices, there is some risk that the layoffs won’t be enough to offset the drop in earnings from a weakening economy.

COLD HEARTS, RICHER PORTFOLIO

FP 500 — The most authoritative survey of corporate Canada: The 2022 FP 500 is the only national ranking of the country’s public, private and Crown corporations, making it an indispensable research tool with vital data on Canada’s top companies across all sectors. Order your copy here.

The inflation dragon has been slain

Economist David Rosenberg took his Breakfast with Dave newsletter on the road to Financial Post HQ last week. If you didn’t attend the event in person or via livestream, we’re offering National Post subscribers an opportunity to relive The Year of the Rabbit: Hopping out of the Hole! Rosenberg took an in-depth look at global financial markets and the economic outlook for 2023, exploring such topics as the end of inflation, what will happen to interest rates and when investors should turn bullish.

WATCH THE VIDEO

Why passive investing makes less sense now

Investors enjoyed big returns for many years without paying too much attention to their individual investment selections. But adviser Mohamed El-Erian says those days are over and investors must now pay more attention to the details since smart portfolio structuring and dynamic asset allocation will trump the lower fees of passive indexing.

PARTICIPACTION. DO IT

What should I do if I’ve missed three years of repayments to my RRSP Home Buyers’ Plan?

Whoops. A reader borrowed $15,000 from his registered retirement savings plan (RRSP) under the Home Buyers’ Plan and then missed three years’ worth of repayments. Certified financial planner Brenda Hiscock says he’ll have to include that money as RRSP income on his tax return, and has some advice on what to do in the future.

GET THE ANSWER

If you have an investing or personal finance question, hit us up at [email protected].

The Bank of Canada on Wednesday increased its policy rate 25 basis points to 4.5 per cent, but signalled it will pause further hikes if the economy pans out the way it believes it will and the year-over-year increase in the consumer price index drops to 2.6 per cent by year-end. But Stephen Brown, senior Canada economist at Capital Economics Ltd., believes the central bank is still underestimating how quickly core inflation will decline, and thinks headline inflation will hit the coveted two per cent level by the second half of this year. 

CRA taken to court after denying spousal support payments as tax deductible

Spousal support payments are tax deductible to the payor, and taxable to the recipient, in general, but a taxpayer discovered the Canada Revenue Agency didn’t agree that the written agreement he had with his ex was valid after a certain point. In court, the judge called their agreement “flawed,” but was it ultimately valid? Tax expert Jamie Golombek details who won the case and why.

WRITTEN IN STONE

The pros and cons of a reverse mortgage to help pay off your debts

A reverse mortgage gives you money today in exchange for your home later, which could be seen as a way to pay off existing debts or help stop you from running out of retirement savings. Debt counsellor Sandra Fry, however, cautions that reverse mortgages have many costs, conditions and potential cons so it pays to carefully consider your options.

GOING IN REVERSE

Here’s what you need to know about picking an executor for your will

The most important decision when drafting a will is to name the executor, who will be responsible for ensuring your wishes are followed. That may seem simple, but it isn’t. Certified financial planner Jason Heath examines some of the key considerations in making that decision and what those chosen need to know about carrying out their obligations.

LAST RIGHTS

Good news if you like investing in emerging markets: China’s reopening spurred investors to pour a record US$12.7 billion into emerging-market debt and equity funds in the week to Jan. 18, according to BofA Global Research data, as everything from commodities and mining stocks to currencies and equity markets in popular tourist destinations enjoyed a boost.

Bad news if you’re a Canadian National Railway Co. shareholder: The Montreal-based railway after hours Tuesday reported fourth-quarter earnings growth of 23 per cent year over year to $1.42 billion, but its stock slumped as much as 4.7 per cent on Wednesday as investors digested its warning that 2023 could be significantly more challenging since a recession would lower shipment volumes. 

Good news if you own Metro Inc. shares: Canada’s third-largest grocer hiked its dividend by 10 per cent to 30.25 cents per share while reporting its first-quarter profit increased by about 11 per cent from a year earlier. Metro shares rose by as much as 2.8 per cent on Tuesday after the results were released.

Bad news if you buy food: Another round of price hikes will start hitting grocery stores in the coming weeks, says Metro chief executive Eric La Flèche, as holiday price freezes come to an end and grocers deal with “thousands” of price increase requests from suppliers.

Good news if you like shareholder activism: There were 26 new activist campaigns against Canadian companies in 2022, down from 30 a year earlier, according to Bloomberg, but activity is expected to increase as investors turn up the pressure on management teams for better returns.

Bad news if you’re a millennial: More than three-quarters of those between the ages of 26 and 41 say high inflation has left them “with a pit in my stomach,” according to Meridian Credit Union research, compared to 58 per cent of baby boomers. Inflation peaked at 8.1 per cent in June, the highest level since the 1980s, so millennials have not really experienced it before.

Good news if you’re a telecom shareholder: Rogers Communications Inc.’s stock rose more than one per cent, as did that of takeover target Shaw Communications Inc., immediately after the Federal Court of Appeal on Tuesday rejected the Competition Bureau’s attempt to overturn the Competition Tribunal’s approval of the deal. A Parliamentary committee met on Wednesday to review the deal, but has not commented yet.

Bad news if you live in Ontario: That’s the only provincial economy Royal Bank of Canada expects to shrink in the coming year, forecasting a 0.1 per cent decline in real gross domestic product as the quick deflation of the housing boom takes the wind out of a major contributor to the economy.

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