People in their 50’s and 60’s have been called the sandwich generation. With couples having children later in life, and with many of their parents living well into their 80’s and 90’s, it is not unusual to be dealing with childcare and elder care at the same time. Changes in lifestyle and demographics have affected all of us.
Since its inception, Baskin Wealth Management has focused on families. We manage accounts for people of all ages, from newborn to old age. We recognize that optimal wealth management within families is a long-term process. The TFSA we open for an 18-year-old now may take time to grow, but in thirty years it could be well into the hundreds of thousands of dollars. RESPs start small, but if invested well and added to regularly will pay for higher education when needed. On the other end of the age spectrum, we manage RIFs and retirement funds in a hands-on, individualized environment to ensure that our oldest clients maximize the longevity of their accounts and gain the most benefit possible from their years of saving.
Over our more than 30 years in business we have found that an integrated multi-generational approach to wealth management works very well. No one in our business would manage TFSA or RESP accounts on a stand-alone basis; they are simply too small and too time consuming. Similarly, few portfolio managers are enthusiastic about handling a $400,000 account for an octogenarian. However, when all the accounts required by a two or three-generation family are combined, effective professional management becomes available for even the smallest of accounts.
In recognition of the importance of this approach, Baskin Wealth Management has structured its management fees to treat all members of a family as one entity for billing purposes. Family assets are also combined to meet our minimum account size of $1M. Rather than being loaded down with high administration or management fees, small accounts are combined with other larger accounts and benefit from the lower fees that larger accounts pay. Lower fees can have a significant impact on the growth of an account and slow the depletion of funds being used for monthly living expenses.
Finally, a multi-generational approach assists families in planning the orderly disposition of assets through use of joint accounts, family trusts and similar mechanisms. We are happy to work with lawyers, accountants, actuaries and other professionals to effectuate optimal long-term plans.
We are also happy to talk to prospective clients about managing their family’s wealth. Give us a call.
At Baskin Wealth Management, we will customize your separately managed portfolio to your unique needs for capital preservation, income, growth and liquidity, while also considering your tax situation. Investments will be chosen in accordance with our overall investment team approach. Your portfolio will be monitored regularly and adjusted as necessary by your personal portfolio manager or associate portfolio manager who will keep you informed of key developments.
Our services are available to individuals (personally and through their holding companies) and their families, and to not-for-profit organizations. The minimum investment size for new accounts is $1 million, including related parties. Fees are charged based on the value of the portfolio, measured monthly, and are scaled according to the size of the family’s portfolio. We do not take participation or profit-sharing based fees.
Your separately managed portfolio will contain securities such as stocks, preferred shares, bonds, exchange traded funds and real estate investment trusts or funds managed by us or a combination of both. Specifically, we will build the equity portion of portfolios primarily by investing directly in the shares of companies. For some smaller accounts with a growth objective, we may use the Baskin Growth Equity Pool to ensure full diversification. For the fixed income portion, exposure will be attained for most portfolios using the Baskin Fixed Income Pool. This improves our access to investment opportunities for all clients, allows for better pricing on purchases and sales and ensures each portfolio is fully diversified.
Baskin Wealth Management does not take custody of your portfolio. Our preferred custodian, National Bank Independent Network (“NBIN”), a division of National Bank Financial Inc., holds your assets in a segregated portfolio in your name. You will receive monthly statements for each portfolio directly from NBIN and you can elect to receive trade confirmations.
Baskin Wealth Management will report directly to you on a quarterly basis, or monthly if you request, with a detailed statement including an overview of your portfolio’s holdings and performance, a description of transactions, and a newsletter.
Baskin Wealth Management has created 2 pools that are available exclusively to our clients. The Baskin Fixed Income Pool and Baskin Growth Equity Pool (collectively, “Pools”) were created to largely follow our existing investment management process but provide some additional benefits to clients so may be used as the only investment product in your portfolio or in combination with other securities described below.
The Baskin Fixed Income Pool is the primary vehicle for attaining exposure to fixed income markets as it improves our access to investment opportunities for all clients, allows for better pricing on purchases and sales and ensures each portfolio is fully diversified.
The Baskin Growth Equity Pool is used for portfolios with a growth mandate that have smaller allocations to equities or other situations where the Pool will ensure adequate diversification.
Both Pools have expenses charged within while management fees continue to be charged directly to your account. There are no additional management fees for the pools. As these Pools are exclusively for our clients, they cannot be transferred to another portfolio manager but must first be sold.
Securities that represent ownership in a corporation. Holders of common shares have a right to vote on the election of corporate directors. Dividends on common shares are not fixed but are determined by the board of directors of the corporation; they are generally tied to the profitability of the corporation. There is no fixed income portion of a common share. In the event of bankruptcy or liquidation, common shareholders are on the bottom of the priority ladder, with rights to a corporation’s assets only after secured lenders, bondholders, preferred shareholders and other debt holders including unsecured lenders have been paid in full. This makes common stock riskier than debt or preferred shares.
Different Classes of Common Shares or Dual Class Shares: Corporations can customize the characteristics of common share classes. For example, a corporation may want voting power to remain with a certain group of investors; in this case, different classes of common shares could be given different voting rights. One class of common shares could be held by a select group, which shares are given ten votes per share, while a second class is issued to the majority of investors, which class is given one vote per share. Many investors will refuse to buy shares in corporations that have dual classes of shares due to concerns regarding unequal voting power. When there is more than one class of shares, the classes are traditionally designated as Class A and Class B shares.
Domestic Common Shares: shares in corporations located in Canada. These shares present no foreign currency risk to Canadian investors.
Foreign Common Shares: shares in corporations located in any country other than Canada. If these shares are denominated in other than Canadian dollars (which is most likely), they will carry foreign currency risk for Canadian investors. These shares may also carry political/sovereign risk depending on where the issuing corporation is located. Tax treatment of foreign common shares differs from the treatment of domestic common shares.
Securities that represent ownership in a corporation with a higher claim on the assets and earnings of the corporation than common shares. In the event of bankruptcy or liquidation, preferred shareholders have rights to a corporation’s assets after its secured lenders but before its common shareholders and unsecured creditors.
Preferred shares generally have a fixed dividend (and accordingly less potential for appreciation than common shares). The dividend on preferred shares must be paid before any dividends are payable to common shareholders. Preferred shares usually do not have voting rights. Preferred shares may also be “callable”, meaning that the corporation has the right to purchase the shares from shareholders at any time for any reason (usually for a premium). The attributes of preferred shares are specific to each corporation. However, it is generally correct to think of preferred shares as financial instruments with characteristics of both debt (fixed dividends) and equity (potential appreciation), with market risk somewhere between bonds and common shares.
Cumulative Vs. Non-Cumulative Dividends: If preferred shares have dividends that are cumulative, then any unpaid dividends from prior periods must be paid to the holders of these preferred shares before common shareholders are entitled to receive any dividends. If the dividends on the preferred shares are not cumulative, then preferred shareholders will receive only the latest period dividends before common shareholders are paid their dividends. For this reason, preferred shares with cumulative dividends are higher quality, and are preferred by investors interested in income over those with non-cumulative dividends.
Perpetual Preferred Shares: a type of preferred share that has no maturity date. Issuers of perpetual preferred shares always retain redemption privileges on such shares. Issued perpetual preferred shares will continue paying dividends indefinitely until redemption.
Voting Vs. Non-Voting: Most preferred shares do not have voting rights, but it is possible for preferred shares to be issued with the right to vote to elect board members, and even other rights to vote.
Domestic Preferred Shares: shares in corporations located in Canada. These shares present no foreign currency risk to Canadian investors.
Foreign Preferred Shares: shares in corporations located in any country other than Canada. If these shares are denominated in other than Canadian dollars (which is most likely), they will carry foreign currency risk for Canadian investors. These shares may also carry political/sovereign risk depending on where the issuing corporation is located. Tax treatment of foreign preferred shares differs from the treatment of domestic preferred shares
Securities documenting a loan (the “bond principal”) by the investor to a government or corporation (the “issuer”) for a specified period of time, to be repaid on a specified date (the “maturity date”) at a specified rate of interest (the “coupon”). Bonds are used by governments and corporations to finance a variety of projects and activities.
In the event of a bankruptcy or liquidation, holders of corporate bonds are repaid before preferred and common shareholders and unsecured creditors, but generally after secured lenders.
Two features of a bond – credit quality and term to maturity – are the principal determinants of a bond’s interest rate. Yield and price are inversely related for fixed income bonds.
Government Bonds: debt securities issued by a government, whether federal, provincial or foreign.
Real Return Bonds are government bonds paying a rate of return that is adjusted for inflation as specified by the consumer price index. Unlike bonds with a fixed rate of return, these bonds ensure that purchasing power of the return is maintained regardless of the rate of inflation.
Domestic Government Bonds are bonds issued by the federal or a provincial government in Canada. If they are issued in Canadian dollars (which is usually the case) they carry no foreign currency risk to investors and the lowest amount of credit risk among all classes of bonds.
Foreign Government Bonds are bonds issued by foreign governments. Usually issued in a foreign currency, they carry foreign currency risk, and may entail credit risk and political/sovereign risk depending on the creditworthiness of the government that issues them and the stability of that government.
Corporate Bonds: debt securities issued by a corporation.
Convertible vs Non-Convertible Bonds: Convertible bonds can be converted into a predetermined amount of the corporation’s equity at certain times prior to maturity, usually at the discretion of the bondholder. This is not the case for non-convertible bonds. This gives the holder the opportunity for capital gains if the common shares of the company rise beyond the conversion price.
Domestic Corporate Bonds are issued by corporations domiciled in Canada. If they are issued in Canadian dollars they carry no currency risk for Canadian investors.
Foreign Corporate Bonds are issued by corporations domiciled in a country other than Canada. If they are issued in a currency other than the Canadian dollar, they carry currency risk and may entail political risk, as well as the normal credit risks that all bonds carry.
Real Estate Investment Trusts (Or REITS)
Investment trusts invest in real estate directly, either through properties or mortgages and trades units, similar to shares, on an exchange. Income trusts target holding assets which will generate a steady flow of income, which is largely passed on to the unit holders. The main attraction of income trusts is their ability to generate constant cash flows for investors. REITS are spared double taxation in Canada.
Exchange Traded Funds (ETF)
ETFs bundle a collection of securities that are components of a specified index, for example, Canadian equities or Canadian bonds. ETFs are purchased or sold on an exchange and are subject to the same commission fee as stock purchases. The closing price of an ETF is adjusted regularly to reflect income earned by the ETF, changes in value of its holdings, and fees charged to its unit holders.
Limited Partnerships (LP)
Limited Partnerships (LPs) contain two or more partners. While a “general partner” carries unlimited liability, “limited partners” are liable only to the extent of their original investment. Taxation of LPs differs across various foreign jurisdictions. LPs may be used to carry on a variety of businesses, and are more common in the U.S. than in Canada.
Cash and Equivalents
Baskin Wealth Management uses a number of savings or money market accounts offered by deposit takers covered by the Canadian Deposit Insurance Corporation (“CDIC”).
These money market accounts are offered or guaranteed by a bank or financial institution; the deposits are invested in short term, highly rated government and corporate securities. Interest is tied to current short term (less than 90 day) interest rate.
Each of these accounts is insured by CDIC to an aggregate maximum of $100,000 (inclusive of other amounts held at the same institution).
These accounts carry minimum risk and pay a floating rate income stream that follows the Bank of Canada prime rate.
Clients may also buy three other kinds of instruments which have maturities of less than one year and carry minimum risk:
Bankers Acceptances or B.A.s: credit investments of less than one year created by a nonfinancial corporation and guaranteed by a Canadian chartered bank. Accordingly, the credit quality of the B.A. is the same as that of the bank that backstops it, rather than that of the issuing corporation. B.A.s trade based on yield, which is normally higher than a treasury bill (federal or provincial) of the same maturity due to the fact that the banks have a lower credit rating than the governments. B.A.s are considered to be low risk instruments. They are more liquid than term deposits and G.I.C.s as they are traded in a very liquid secondary market and can be sold before maturity on short notice.
Term Deposits: deposits held at a Canadian chartered bank with fixed terms. These are generally short-term with maturities ranging anywhere from a month to a few years. The money can only be withdrawn after the term has ended or by giving a predetermined number of days notice (and, often paying a penalty in terms of interest earned). Since the money is tied up for a specified period, term deposits generally provide a higher rate of return than a demand deposit or a treasury bill of the same duration.
Guaranteed Investment Certificates (G.I.C.s): deposit investment securities sold by Canadian banks and trust companies. They are often bought for retirement plans because they provide a low risk fixed rate of return. The principal is at risk only if the bank defaults. They are insured by the CDIC for up to $100,000.
G.I.C.s generally offer a return that is slightly higher than T-bills, however, they may not be fully liquid or transferrable.
Note: The foregoing does not include a discussion of tax treatment for each investor. Tax consequences for each investor will depend on individual circumstances. Baskin Wealth Management is not an accounting firm and does not provide tax advice, but we are happy to work closely with your professional advisor on these matters. Please contact your account manager if you have any questions.
What do we mean when we say that an investment is risky? Do we mean that we have a good chance of losing all of our money, or part of our money? Do we mean that the investment will fluctuate in value? Do we mean that things we cannot anticipate or control will impact our investment in ways we cannot anticipate? Understanding risk is an important part of the investment process, and a very important part of our job as portfolio managers.
At the outset, we should differentiate between investment risk and speculative risk. If a person bets black or red on the spin of a roulette wheel, this is not an investment. It is a speculation. The ball will randomly stop in red about half the time, and about half the time, the gambler will in short order lose all his money. Certainly, there are stocks on the stock market that perform like a roulette wheel. These are primarily small mining and energy ventures that speculators hope will find gold or oil and make them rich. More often than not these companies simply dissipate shareholder funds and go bust. In our view, the purchase of shares of companies like these is not investing; it is simply another way of gambling.
In contrast, the purchase, after thorough analysis, of the shares or bonds of a well established company with a track record of revenues and profits is the essence of the investment process. Many things can and will impact the success of such an investment, but pure chance is only one of them, and in most cases, plays a relatively minor role. Unlike the spin of the roulette wheel, the results from an investment are determined over time, sometimes a long time, and are much more nuanced. Rather than red or black, investment outcomes span the spectrum from very successful to abysmal, and everywhere in between.
Even the most thorough analysis and smartest selection process cannot remove all the risk elements in the investment process. Risk arises in a number of ways. Some risks are calculable and can be guarded against. Others are essentially random and can be neither predicted nor fully hedged. A hierarchy of risks is detailed below, and in each case the nature of the risks and the ways in which they may be addressed is described.
Just as we accept the risk of random events such as car accidents and illness in our non-economic life, we have to live with the reality of unexpected crises in our economic life. The catastrophe of September 11, 2001, demonstrated that even the most carefully constructed portfolio will be affected by unpredictable events. These can include terrorism and acts of war, outbreaks of disease and disastrous weather and geologic occurrences such as the tsunami in Japan in March 2011. While it is, by definition, impossible to plan for exogenous risk, experience shows that a diversified portfolio withstands this kind of problem much better than one that is concentrated in a single or a few asset classes.
Records show that the stock markets took tremendous hits after the assassination of John Kennedy, after the start of the first Gulf War, and after 9/11, but in all cases bounced back within three to six months. Similarly, Hurricane Katrina in 2005 and the California earthquake of 1989 had only short-lived impacts on the financial markets. In most cases the market shocks arising from exogenous risk are sharp but short, and mostly hurt those who sell in panic.
In October 2008, the world banking system came close to failing. Only concerted action by the central banks of the world’s largest economies prevented what could have become a major collapse. While the risk of a systemic failure of the entire banking system or of a major stock market is small, clearly it is greater than zero. Of more importance is the emergence, from time to time, of systemic failure in part of the market.
While we prefer to believe that markets are always rational, clearly this is not the case. A good example is the U.S. housing market prior to the 2008 banking crisis, where speculative buying and cheap mortgages moved prices up to unsustainable levels. The subsequent crash was a major cause of the stock market crisis and world recession that followed. The dot com bubble of 1998– 2000 caused the NASDAQ index to rise to 5,132 in 2000; it quickly fell to 1,108, losing 78% of its value over the next 30 months. Both of these market failures exposed investors to substantial risk, and in many case, real losses, and are examples of systemic failure.
The best defenses against systemic risk are fundamental analysis and a staunch refusal to follow the herd. For example, research demonstrates that when house prices rise much faster than incomes, those prices will fall as houses become unaffordable. The rational investor will avoid the temptation to invest in this “hot” sector that clearly must correct. During the tech stock boom, all traditional measures of company worth were abandoned in an attempt to justify stratospheric prices for small and untested companies. Those who relied on time-honoured valuation techniques were not hurt by the crash.
Even the stock market crash from the banking crisis, which saw prices drop by 50% from September 2008 to March, 2009, did not result in losses for investors in fundamentally sound stocks. Shares of the Royal Bank, for example, dropped in half over seven months, but recovered all the losses (and more) within a year. The same can be said for other leading companies such as BCE and TransCanada Corporation.
Investment returns will be affected by economic conditions both in Canada and in the rest of the world. In a recession, corporate profits fall, and as forward earnings become less predictable, the market may pay less for the future, resulting in a contraction of multiples of price to earnings and price to book value. When times are good, both earnings and multiples tend to expand, leading to sharply higher share prices.
Prudent portfolio managers devote considerable time and energy to tracking the macroeconomic environment in order to avoid being blind-sided by events. When it is apparent that interest rates are rising, for example, managers can shorten the duration and average time to maturity of bond portfolios. When the economy seems to be losing steam, equities that are more sensitive to the economy can be switched for those that are generally more recession-resistant. While no one has a perfect forecasting record, much of the economic risk can be dealt with by proper portfolio diversification and timely movement of funds. While short term “market timing” is impossible, long-term economic risk management is not.
Industry Specific Risk
Business conditions within industries can vary sharply from overall economic conditions. While car sales, for example, closely follow economic cycles, prices for commodities such as oil and gold move to different rhythms, which may be very different from the economic cycle. As with economic risk, industry risk cannot be predicted with perfect accuracy. However, through constant monitoring, the careful portfolio manager can usually see signs of trouble before they become critical. By moving into or out of sectors as conditions change, much industry-specific risk can be avoided.
Company Specific Risk
Great companies can surmount poor industry and economic conditions. Poor ones cannot thrive even at the best of times. The most obvious and basic job of the portfolio manager is to distinguish between the two extremes and to invest in those companies that will produce wealth for their shareholders. Companies that are out-and-out frauds, although rare, can usually be spotted through the exercise of caution and diligence.
We believe that much company-specific risk can be avoided by investing in companies with a history of profits, proven management and a solid financial position. Use of fundamental financial statement analysis is the starting point for company selection and eliminates many potential mistakes if rigorously applied.
We also recognize that great companies are not always great investments, since the price at which the investment will be made will have a large impact on the eventual return. Refusing to pay too much, even for a good company, is part of the discipline of portfolio management.
Risk is an unavoidable part of life and an unavoidable fact of investing which every investor must accept. Recognition of the origins of risk is the first step to controlling it.
Fees payable by a client to Baskin Wealth Management with respect to an account are based on the value of assets in the account, measured at month end, and are billed and payable monthly in arrears. The amount of fees, expressed as a percentage of assets on an annual basis, is specified in each client’s individualized Fee Schedule. Fees are subject to sales tax.
Fees payable to Baskin Wealth Management are not increased without 60 days’ prior written notice.
The fees described above are the only fees payable by a client to Baskin Wealth Management: clients do not pay Baskin Wealth Management any success fees, transaction fees, registration or de-registration fees, or any other fees.
Clients of Baskin Wealth Management do not pay custodial fees when using our preferred custodian, National Bank Independent Network (“NBIN”).
The vast majority of clients of Baskin Wealth Management custody their accounts at NBIN, a division of National Bank Financial Inc.. These clients pay trading commissions to NBIN on each trade, equal to the greater of $15 per trade and 2 cents per share. On average over a year, clients of Baskin Wealth Management who custody their accounts at NBIN paid commissions of 5/100’s of 1% per year of the value of assets under management. Other brokers may charge commissions at different rates.
On the purchase and sale of bonds, NBIN may act as principal and make a profit for its own account or may act as agent and charge a percentage of the value of the transaction (“the spread”) as a commission.
On the conversion of currencies, NBIN will buy and sell currencies at rates that may differ from published rates and may make a profit on such transactions.
We are aware that some investment managers and brokers encourage their clients to borrow funds to increase the size of their investment portfolios. This practice is also referred to as using leverage. They argue that the return on investment will likely be higher than the rate of interest paid on the borrowed funds, that the interest on the borrowed funds will be tax deductible, and that a larger account will increase diversification and opportunities. All of these points have merit. However, we strongly discourage our clients from borrowing to invest. Here are the reasons why:
Borrowing increases risk. When the stock market falls 10%, as it does quite regularly, an unleveraged account will fall 10%. However, if the account has been financed with half cash and half borrowed funds, the client’s equity will fall 20%. That’s a very substantial difference. In steeper falls, as for example the market crash of 2008-09, leveraged accounts were wiped out, particularly those invested in lower quality securities.
Borrowing distorts decision-making. The exaggerated effects of leverage on portfolio performance encourage more risk taking when markets are rising and induce panic when markets are falling. These very human psychological responses can result in poor decision making, such as buying at the top and selling at the bottom. Investing is hard enough without adding an additional impediment.
Interest rates can rise. All loans to finance investment are floating rate. Rising rates can become a drag on investment performance.
In extreme cases, forced sales may take place. Borrowing against the assets in a stock account (margin buying) is subject to the risk that if the underlying investment declines in value, then the margin loan will no longer be covered by the value of the stock, resulting in an unplanned, forced sale by the broker. By definition, this sale will occur in the context of a falling market (or at least a falling stock) and will result in a loss, usually wiping out a substantial part of the investment. You may also be required to deposit additional funds to prevent a forced sale causing you to lose more funds that you deposited to the margin account.
Borrowing encourages short-term thinking. In our view, prudent investing is a long-term project, carried out over years, and requiring patience and prudence. The existence of leverage in an account forces the account owner to focus on the short-term since risk has been magnified.
The amount available for a margin loan is based on the current market value of the securities held in your account. Margin rates vary by security, and minimum margin requirements are set by the Investment Industry Regulatory Organization of Canada (IIROC). Your custodian reserves the right to impose more stringent margin requirements at any time without any notice.
While we actively discourage our clients from using leverage in their portfolios, we will open margin accounts upon specific request, provided that the client is fully aware of the additional risks involved.