Portfolio Analysis

Most people are insecure about their investments. Others seem so confident, and we’re afraid of being ridiculed for our pathetic investment choices. An acquaintance I’ll call Tim was brave enough to show me his holdings for some analysis. Tim has been working full time for about 5 years and has managed to build up some savings in mutual funds.

Tim’s holdings are concentrated enough that I’ll try taking a more detailed look than usual. Keep in mind that I don't do this professionally. I like to give people information so that they can make their own choices.

To keep Tim's personal information mostly private, he has scaled his holdings so that the total is $100,000. His real portfolio may be larger or smaller than this. Here are his mutual fund holdings:

$5000: AGF Global Value - FE
$38,000: AIC Canadian Balanced - DSC
$27,000: AIC Diversified Canada - DSC
$11,000: AIC Global Premium Dividend Income - DSC
$19,000: Fidelity Canadian Balanced - ISC

$100,000 Total

For me, the first step is to figure out what Tim has. My sources of information are Globefund, Morningstar, and the company prospectuses (AGF, AIC, and Fidelity).

Here is my best effort to figure out the key data about these funds. The accuracy of this information depends on the accuracy of my sources and my ability to ferret out the information correctly. I make no promises.

AGF Global Value - FE
-- 100% foreign stocks
-- MER 2.81%
-- Front-end load negotiable to maximum of 6%
-- Trailer commission 1% per year

AIC Canadian Balanced - DSC
-- 50% Canadian stocks
-- 50% Bonds
-- MER 2.50%
-- Deferred sales charge 6% first year, declines by 0.5% each year to 3% in 7th year, then zero after 7 years
-- Trailer commission starts at 0.5% increasing to 1% after 8 years

AIC Diversified Canada - DSC
-- 100% Canadian stocks
-- MER 2.53%
-- Deferred sales charge and trailers same as AIC Canadian Balanced

AIC Global Premium Dividend Income - DSC
-- 100% foreign stocks
-- MER 2.63%
-- Deferred sales charge and trailers same as AIC Canadian Balanced

Fidelity Canadian Balanced - ISC
-- 50% Canadian stocks
-- 50% Bonds
-- MER 2.03%
-- Initial sales charge (front-end load) negotiable to maximum of 5%
-- Trailer commission 1% per year

All the funds are actively managed, which means that they attempt to beat market averages by strategically buying and selling equities, despite the strong evidence that such efforts are fruitless for the majority of fund managers.

Because Tim was unaware that he was paying any front-end loads, I'll assume that he paid the maximum in each case.

The MER is the Management Expense Ratio which is the fees paid by Tim each year to the funds. Because funds tend to underperform market averages by the amount of the MER, Tim can think of the MER as a rough estimate of the cost he pays each year for the privilege of owning the fund and receiving advice from his advisor.

The trailer fees are paid to the dealer (the advisor who sold Tim his funds) and come out of the MER. So, this isn't an extra expense, but it does give some idea of the advisor's motivations.

Here are some fee totals taking into account the dollar amounts in each fund:

Front-end charge:
$1250 (The advisor actually received $5050 with the added $3800 paid by the DSC finds. The funds will recover this money from Tim through MERs or deferred sales charges if Tim sells before 7 years.)

MER paid each year:
$2449

Trailer fee for advisor (paid out of the MER):
$610 to start and growing to $1000 per year

The MER and trailer fees will actually grow (or shrink) as Tim's portfolio grows (or shrinks).

Each of these funds holds various stocks and bonds. Overall, here is Tim's asset allocation:

56% Canadian stocks
16% foreign stocks
28% bonds

The stocks are primarily large cap stocks.

Note that I haven't looked at the performance of these funds at all. Whether stocks and bonds go up or down, these funds are likely to underperform the market averages by about the amount of the fees they charge.

Asset allocation is a personal choice, but I'd say that Tim's is in a reasonable range for a young guy. My choice is always for more stock ownership, but this isn't for everyone. Sleeping at night matters. Selling at market lows out of fear is a disaster.

Overall, I'd say that the MER that Tim is paying (2.45%) is quite high. For a $100,000 portfolio he is paying $2449 per year. If his portfolio is actually $20,000, then this is only $490 per year, and if it is $500,000, the MER is a whopping $12,245 per year. It is up to Tim to decide if the advice he is getting from his advisor is worth the amount he is paying in fees.

For comparison purposes, the next step (in a future post) is to try to build a portfolio with a similar mix of investments using lower cost products.