Outstanding Financial Pornography

[George$]

By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when "dumb" money acknowledges its limitations, it ceases to be dumb.

Bylo, any chance you can give me a link or reference for this quote so I can use it in a future Newsletter? Thanks.

[Bylo Selhi]

Bylo, any chance you can give me a link or reference for this quote so I can use it in a future Newsletter? Thanks.

Well here's where I found it http://www.bylo.org/aphorisms.html

[Bylo Selhi]

Past performance?

You'd have to ask Bruce Cohen or one of his colleagues at the old Financial Post because that's how I discovered PH&N ~1990

And they would be?

Frankly I don't pay much attention to "conventional" mutual funds any more, however, I'd venture that many of the smaller, no-loads would as would Fido, Trimark (dunno post-AIM), et al.

What would be?

An overt change of direction by PH&N, e.g. a decision to sell out to a larger fundco in which I didn't have confidence.

A lot of the outperformance comes in the past 10 years. For the longest time, an investor would have been better off with the index and not PH&N.

Thank you for reinforcing the point that you can't reliably chose funds (or managers) based on their 10-year performance numbers

Have a closer look at the chart. It's quite possible that PH&N was the better bet for those with a wonky stomach. The PH&N graph is smoother as you'd expect from a dividend fund.

And you're ducking the fact that re-balancing into a cold wind blowing in your face is a tough act.

No, I'm simply pointing out that, according to my asset allocation plan, I'm still "on course" although being blow to one side by that cold wind I'm in no immediate danger of running aground.

If you have a tough time, imagine what they're up against.

Agreed. It's not easy being an indexer, let alone a green one

[jiHymas]

Managing by committee has risks as well - group think.

But it's less likely that the star manager will up and leave.

I wonder.

If one were to be a fly on the wall at each major fundco and were able to achieve a full understanding of how portfolio decisions were made .... I wonder what differences of substance one would find in the decision making processes of funds-advertised-as-by-committee vs. funds-advertised-as-by-star.

[Bylo Selhi]

The August 7th edition of Maclean's has an article, headlined Paying the price for merger maniacs, by Steve Maich. It's a good article that discusses how CEOs are now bidding against each other to buy out their competitors. They end up paying premium prices that destroys EPS, adds massive debt, etc. He uses the bidding war for Inco and Falconbridge as an example. All of this is good stuff. He makes valid points. And he cautions readers who might want to buy into this mania that paying top dollar at the peak of a business cycle often leads to extreme pain when the cycle ends and markets correct.

So, how does the Maclean's headline writer tout this article on the front cover?

STOCKS:
SELL!
SELL!
SELL!
P.36

[AltaRed]

They end up paying premium prices that destroys EPS, adds massive debt, etc. He uses the bidding war for Inco and Falconbridge as an example. All of this is good stuff. He makes valid points. And he cautions readers who might want to buy into this mania that paying top dollar at the peak of a business cycle often leads to extreme pain when the cycle ends and markets correct.

And the amount of the premium that gets stuffed into goodwill, aka purchase accounting adjustment, etc., as articulated by Rosen in Canadian Business is even more ominous because it isn't necessarily reflected in reported EPS data. A (potentially) false sense of performance. Even though Rosen's focus was on Income Trust funds, the same issue applies in corporate structures. I've seen it, been there in the oil business during the 80's.

[WishingWealth]

Since the thread title refers to pornography, the selling of the Laffer curve may have been a bit of that too.

If memory serves me right, the curve was jotted on a napkin during a lunch. Perhaps this helped associating the curve to a 'free lunch'


[url=http://www.slate.com/id/2146868/]The Last Laffer
Bush's Treasury admits that tax cuts aren't free.
[/url]

In Washington, as in fairy tales, be careful what you wish for. In a February speech, Vice President Cheney said, "It's time to re-examine our assumptions and to consider using more dynamic analysis to measure the true impact of tax cuts on the American economy." Calling for "dynamic analysis" or "dynamic scoring" can be supply-side code language for the view that tax cuts pay for much or all of themselves through stronger economic growth. Cheney proposed creating a new unit within Treasury to conduct this dynamic analysis and confidently predicted that it would find that tax cuts increase government revenues.

Six months later, Treasury's first dynamic analysis of the president's policies is out. It belies the claim that the Bush proposal to make his tax cuts permanent will either pay for itself or galvanize the economy.

.....

In Slate mag.

WW

[Dennis]

gasp......you mean, you mean there is no Santa Claus?????

[ModeratorA]

Moved two posts to this thread. Starts here.

[YogiBear]

From our learned and objective, research-oriented friends at M*:

Two pieces of conventional "wisdom" that are steering you wrong

A look at some misguided statements that get passed off as facts.

In the world of finance there is no shortage of investment axioms. Some of these pieces of so-called wisdom have merit while others are either questionable or flat out wrong. Often false conventions are accepted because they appear to be beyond reproach. Just remember that at one time it seemed unquestionable that the world was flat.

...

Index funds are better because most actively managed funds do not beat the index

Wow, where do we begin with this one? It misses the mark on so many levels. This doozy gets rehashed in the media every time a new study is done measuring the performance of actively managed mutual funds. Most of these studies claim that the overwhelming majority of actively managed funds are not able to beat their benchmark. [emphasis added]

Er, so, um, are the claims of these studies true or not? Since there is no rebuttal, they must be, so we move to the next step, which is (if you cannot attack the fact) to attack the conclusion drawn from the admitted fact ...

Many people conclude from this, mistakenly, that passive management -- namely index funds and ETFs -- is better than active management.

There are several problems with this conclusion. First, all the studies we've seen to date are incomplete at best. They measure a fund's absolute performance versus a benchmark rather than measuring its risk-adjusted returns. In doing so, they ignore the significant value that many fund managers are able to add by mitigating risk through various measures. [emphasis added]

Nice assertion, but what measures would those be, and do you have any studies of your own to back up the assertion about "many fund managers" adding "significant value"? Er, no, there don't seem to be any claimed or forthcoming, so, uh, would this claim qualify as, what did you just call it, one of those "misguided statements that get passed off as facts"?

Index funds and ETFs that track the S&P/TSX Composite Index are unnecessarily risky. The energy, materials and financials sectors account for over three-quarters of the index. This isn't proper diversification, nor was it proper diversification back in 2000 when Nortel (NT/TSX) accounted for over 30% of the index. Investors should think twice before sinking their life savings into an investment that mindlessly tracks the S&P/TSX. [emphasis added]

Why would anyone do something as stupid as "sinking their life savings into an investment that mindlessly tracks the S&P/TSX"? What does that have to do with constructing a well-diversified portfolio of index funds, in which an index product tracking the TSX is a reasonable portion of an overall asset allocation that includes other asset classes with a low degree of (or even negative) correlation with the TSX? Where is indexing as an investment strategy defined as "sinking" "life savings" into a single index ...?

More importantly however, these studies suffer from a common problem. When they separate the actively managed funds from the passively managed ones, they simply take the fund companies at their word as to which camp their fund belongs to. Considering that actively managed funds can charge a premium fee, the fund companies have a vested interest in labelling their funds as actively managed.

A disquieting number of funds look a heck of a lot like the index but claim to be actively managed. It comes as no surprise that these funds fail to beat the index when they charge an MER of more than 2%...

When we exclude these index-like offerings from our performance measurements, the numbers look far more encouraging. Preliminary research we've done shows that over half of the true actively managed funds are able to beat their benchmark. That's far better than index enthusiasts would have you believe. [emphasis added]

Great- but, just 2 tiny questions ... First, in your "preliminary research", "over half of the true actively managed funds are able to beat their benchmark" over what time period exactly, and within what asset classes? What was the frequency of beating the benchmark as the relevant time period got longer (most investors don't buy mutual funds for 3 years, but for retirement- 10, 15, 20 years away)?

And second, how do you propose that investors determine which funds are "true actively managed funds", as opposed to the closet indexers? Ah, yes, I forgot, this is M* ... so, just maybe, we might have here a- what do the fund companies have ... yes, that's it, I believe it was a "vested interest"- none of that around now, eh? Oh, and say, can you guarantee that the true active managers will always stay loyal to that philosophy ... no style drift, no manager changes or fund company buyouts, no asset bloat? No? Pity ... 'Cause, you see, if something is called an "Index fund", and it says in the prospectus that its mandate is to attempt to track X index, well, it's kinda hard to start off doing something different without the unitholders getting wind of it ...

This garbage should be labelled with a XXX warning- "dangerous for your financial health" ...

[IdOp]

Where is indexing as an investment strategy defined as "sinking" "life savings" into a single index ...?

And not only that, the index fund mimicks the non-indexed part of the market, and that is exactly what the average actively managed investor has chosen to "sink" their "life savings" into! I guess O'Leary would counter "Yabbut, the average investor is a little bit pregenant."

[Bylo Selhi]

From our learned and objective, research-oriented friends at M*... This garbage should be labelled with a XXX warning- "dangerous for your financial health"

Thanks Yogi. I've linked to your comments over at www.bylo.org. Saves me from having to do a proper Bylo Rebuts

[YogiBear]

From our learned and objective, research-oriented friends at M*... This garbage should be labelled with a XXX warning- "dangerous for your financial health"

Thanks Yogi. I've linked to your comments over at www.bylo.org. Saves me from having to do a proper Bylo Rebuts

Most welcome. After 6 years or so reading www.bylo.org glad I could contribute!

[WishingWealth]

I just love this comment:

....
The board, it said, did everything right to determine a proper pay level for the executives, whose pay had fallen well below what was anticipated because the stock portion of their compensation was likely to be worthless.
....

In the NYT. Pay Plan at Dana Ruled Illegal

On the same level as the lawyer begging forgivenesss for his clients who had murdered their parents. Forgiveness on account they were poor orphans.

WW

[parvus]

yogi asked:

Great- but, just 2 tiny questions ... First, in your "preliminary research", "over half of the true actively managed funds are able to beat their benchmark" over what time period exactly, and within what asset classes? What was the frequency of beating the benchmark as the relevant time period got longer (most investors don't buy mutual funds for 3 years, but for retirement- 10, 15, 20 years away)?

Depends on how you define active management. O' Leary is using Industry Sector Concentration to screen out closet benchmarking (and perhaps minimize the momentum-grief effect of cap-weighted indexing).

Morningstar’s ISC measure gauges how concentrated a fund’s equity holdings are in terms of industry sector weightings. The higher the ISC value, the more “different” a fund’s equity holdings are (on an industry-sector basis) to a particular benchmark. When measured against a market index, this difference will measure relative sector concentration. This may or may not reflect a portfolio’s absolute sector concentration, given the market index itself may itself be quite concentrated in a few sectors. However, in this application, the benchmark is an equal-weighted
portfolio among 12 industry sectors. Therefore, this version of the ISC is a useful measure for absolute industry sector concentration; the more different a fund is from an equal-weighted portfolio, the more concentrated it must be in one or more sectors.

Some momentum investors are still waiting for their money back, oh, six years on, suggests Mark Hulbert.

What would it mean for the Dow Jones Wilshire 5000 total return index to eclipse its March 2000 high? It would in effect signify that the 2000-2002 bear market was officially old news -- that the total combined losses of the 2000-2002 bear market had been overcome by the total gains the market has produced since then.

Or, to put it another way, it would mean that the average investor who bought into the stock market at the worst possible moment -- the March 2000 high, but who has faithfully held onto stocks ever since, and who has reinvested all dividends he has received along the way, has almost made it into the black.

yogi wrote:

And second, how do you propose that investors determine which funds are "true actively managed funds", as opposed to the closet indexers? Ah, yes, I forgot, this is M* ... so, just maybe, we might have here a- what do the fund companies have ...

Try How Active is your Fund Manager?:

To quantify active portfolio management, we introduce a new measure we label Active Share. It describes the share of portfolio holdings that differ from the portfolio's benchmark index. We show that to determine the type of active management for a portfolio, we need to measure it in two dimensions using both Active Share and tracking error. We apply this approach to the universe of all-equity mutual funds to characterize how much and what type of active management they practice. We test how active management is related to characteristics such as fund size, expenses, and turnover in the cross-section, and we look at the evolution of active management over time. We also test how active management is related to fund performance. The funds with the highest Active Share significantly outperform their benchmark indexes both before and after expenses, while the non-index funds with the lowest Active Share underperform. The most active stock pickers tend to create value for investors while factor bets and closet indexing tend to destroy value.

Now, if you're interested in how active your index provider is, there's this.

Things are heating up in the index industry. Every day seems to bring a new innovation, a new way of doing things, and new competition. To capture this unique moment in the industry—and to lay out the groundwork for the discussions we'll be having on the pages of this journal over the next twelve months—we invited some of the leading lights of the indexing industry to answer a few questions about the hottest topics du jour. We tried to ask both "establishment" and "innovator" indexers, although in truth, that is a false divide, as some of the most innovative developments these days are coming from the most established names. Some indexers responded by writing, some by phone, and others not at all. The sample is utterly unscientific, but we hope, insightful and thought provoking nonetheless.

[YogiBear]

yogi asked:

Great- but, just 2 tiny questions ... First, in your "preliminary research", "over half of the true actively managed funds are able to beat their benchmark" over what time period exactly, and within what asset classes? What was the frequency of beating the benchmark as the relevant time period got longer (most investors don't buy mutual funds for 3 years, but for retirement- 10, 15, 20 years away)?

Depends on how you define active management. O' Leary is using Industry Sector Concentration to screen out closet benchmarking [emphasis added]

How active management is defined is irrelevant- the question about the specifics was asked with respect to the results from the research cited as authority for the assertion that

Preliminary research we've done shows that over half of the true actively managed funds are able to beat their benchmark.

Some momentum investors are still waiting for their money back, oh, six years on, suggests Mark Hulbert.

What would it mean for the Dow Jones Wilshire 5000 total return index to eclipse its March 2000 high? ...

Or, to put it another way, it would mean that the average investor who bought into the stock market at the worst possible moment -- the March 2000 high, but who has faithfully held onto stocks ever since, and who has reinvested all dividends he has received along the way, has almost made it into the black. [emphasis added]

Who cares? How many investors bought their entire exposure to the W5K in one shot in March 2000 at exactly the high point of the index? Maybe 1/ 1000 of 1%??? This is mental accounting masturbation ...

yogi wrote:

And second, how do you propose that investors determine which funds are "true actively managed funds", as opposed to the closet indexers? Ah, yes, I forgot, this is M* ... so, just maybe, we might have here a- what do the fund companies have ...

Try How Active is your Fund Manager?:

This is a M* article I was critiquing- not an article in the Financial Analysts Journal! It was directed at Joe Sixpack investors- or more likely their advisors- to try to sell them on actively managed funds (for which coincidently, M* happens to sell assessment software and data) rather than indexing. How likely do you think it is that these people are going to research SSRN and read a paper by two profs at the Yale School of Management? What planet are you on?

[parvus]

yogi wrote:

How active management is defined is irrelevant- the question about the specifics was asked with respect to the results from the research cited as authority for the assertion that

Note that he said preliminary.

Who cares? How many investors bought their entire exposure to the W5K in one shot in March 2000 at exactly the high point of the index? Maybe 1/ 1000 of 1%??? This is mental accounting masturbation ...

I could be mistaken but I thought I heard echoes of dissing risk-adjusted returns.

This is a M* article I was critiquing- not an article in the Financial Analysts Journal!

Well, you were asking for proofs. I supplied some takes that might provide help for O'Leary.

It was directed at Joe Sixpack investors- or more likely their advisors- to try to sell them on actively managed funds (for which coincidently, M* happens to sell assessment software and data) rather than indexing.

Actually, the Mstar data package includes index funds and ETFs. Apart from that, neither you, nor I, nor Bylo is JoeSixpack, and while I would welcome more Joe Sixpacks, they're not on this thread (they're probably in group RRSPs, or, if they're lucky, DB plans).

As for the commercial interest on Mstar's part, I think you're quite wrong. Advisors can get free fund software from some fundcos, but they have to pay for the Mstar stuff. So that at least demonstrates a commitment. The software is indifferent to indexing.

How likely do you think it is that these people are going to research SSRN and read a paper by two profs at the Yale School of Management? What planet are you on?

Good advisors will. Smart investors will. I hope you will. My planet. Hmm, same as yours. Different neighbourhood, perhaps, and maybe just a little bit more inquisitive.

[YogiBear]

yogi wrote:

How active management is defined is irrelevant- the question about the specifics was asked with respect to the results from the research cited as authority for the assertion that

Note that he said preliminary. [emphasis added]

Irrelevant. If the research was too "preliminary", then he should not have relied upon it as authority for his statement- yet he did so.

This is a M* article I was critiquing- not an article in the Financial Analysts Journal!

Well, you were asking for proofs. [emphasis added]

No, I wasn't. Reread the passage- he accuses fund companies of having a "vested interest" in their funds being labelled actively managed- to collect higher fees. I pointed out in return that M* has a "vested interest" of its own in muddying the fund classification waters as much as possible- since that benefits their commercial interests in selling fund evaluation software. I apologize most humbly if my feeble attempt at irony directed at M* was not, er, intellectual enough for your sensibilities- but then the target hardly deserved better ...

It was directed at Joe Sixpack investors- or more likely their advisors- to try to sell them on actively managed funds (for which coincidently, M* happens to sell assessment software and data) rather than indexing.

Actually, the Mstar data package includes index funds and ETFs.

Irrelevant. The hatchet job on indexing had already been done earlier in the article (with the reference to the "preliminary"- but apparently not quite so "preliminary" it can't be cited- research)- it was the turn to sell the replacement paradigm, i.e., "true actively managed funds", with the unspoken implication, since we are at the M* site, that M* can help you uncover which ones those are ...

As for the commercial interest on Mstar's part, I think you're quite wrong. Advisors can get free fund software from some fundcos, but they have to pay for the Mstar stuff. So that at least demonstrates a commitment. [emphasis added]

Uh, yeah, that's the point, isn't it???!!! I couldn't have put it better myself- thanks!

The software is indifferent to indexing.

Completely irrelevant, as noted.

How likely do you think it is that these people are going to research SSRN and read a paper by two profs at the Yale School of Management? What planet are you on?

Good advisors will. Smart investors will.

Irrelevant. Whether certain "good" advisors and "smart" investors will make the effort to find and read the article you cited or not, most advisors and investors will not know or care. The M* article was not directed at the "good" and "smart" people- it was far too pornographic to have any effect on them. As for everyone else- well, if the best suggestion you have for Joe Sixpack to read is from the Yale School of Management ...

I hope you will. My planet. Hmm, same as yours. Different neighbourhood, perhaps, and maybe just a little bit more inquisitive.

My my, aren't we just swimming in non sequiturs. My intentions are not- and have never been- the subject of the comments here. The subject was the M* article, remember? I realize that may be a lot less interesting to you than displaying the intellectual fruits of your inquisitiveness- and please pardon me if my cloddish lack of curiosity dooms me to eternal ignorance- but you sure do lose focus easily. Go reread your first post at 9:55 PM ...

[parvus]

yogi wrote:

but you sure do lose focus easily

It's been known to happen.

If we go back to 9:55, I was trying to make a series of interconnected points with each of the links (which isn't to say I would have written the MStar piece that way).

1) If you're going to find an active manager to beat the index, then at least find one that's active.

(MStar has tried to do that with the Industry Sector Concentration Score — I don't have acces to PalTRAK, so I don't know how far along they are — and that will help to define the new set of fund categories that measure what managers are doing, rather than what they say they are doing. I think that complements style-box analysis.)

2) You may want to find an active manager because on a total return basis, you're still underwater on the DJ/Wilshire.

(It surprised me too, on a total return basis. On the other hand, I keep track of failed former investments. In the late 1990s, I started cashing in index-linked GICs, and since I had a regular paycheque, I also went on a PAC program. All bank funds. I'm still underwater on the one-time investment Scotia Can-Am Index and up modestly on the dollar-averaged, currency neutral RBC U.S. index fund, theoretically, since I sold everything in 2004, to move to a discount broker. I had active funds too, and they mostly beat the index funds, but not the European or Pacific Rim ones.)

3) American research suggests a similar method for determining how active a manager is and whether they do, in fact, beat an index.

(Following from my earlier parenthetical comment, I'm interested to know why some of the active funds I picked from the banks were dogs. Was it management fees, index-hugging, a blended investment style?)

4) Index purists are having a knockdown debate about "active" management, or maybe just "active bets." I'm interested to know which active bets might work and why.

(I'm not convinced I want to own "growth" or "momentum" stocks, and I have no great faith in "random walks." I think "reversion to the mean" is more significant — I was lucky enough to read Dow 36,000 and Shiller's Irrational Exuberance back to back in 2000 — but I'm certainly willing to be challenged on that.)

Now, I may have been too hasty on Joe Sixpack. Maybe he wants to know the same things as I do. Insofar as I control my investment decisions, I don't want to buy on a neighbour's or an advisor's hot tip.

I know I don't want to chase performance or time the market; but I do want to understand the performance drivers, and, for example, the causes of the massive U.S. drawdown. (And, would I have done better if I hadn't bought capped index funds, but total-return ones, since, over time, reinvested dividends account for 40% or more of your total return?)

I can't say I'm religious about SSRN, but if Mark Hulbert writes about the lack of benefits of international diversification in the Sunday Times (which he has done a couple of times) I'll go look up the paper. And I try to see what Fama-French are up to, e.g., why value and small-cap investors beat blended indexes over time. Beats financial porn, which is what I find sometimes in the Canadian papers (e.g., marking out the best five-year performance in an asset sector without explaining the underlying investment philosophy).

BTW, since MStar is publicly traded, and subject to SOX, I suspect that bias in its products (for or against ETFs) wouldn't go over all that well. That isn't to say that they don't profit from selling information to advisors and investors, just that they have to be offering something different from investment fund flackery.

(One positive consequence of reading MStar — both its U.S. and Canadian versions — is that I'm dubious about LA funds being able to beat their benchmark. What I haven't made up my mind on is whether I want a diversified EM fund, or an ETF, or both, to split to the passive exposure and the active bet, or whether I should be in emerging markets at all. )

I do confess that I'm puzzled by your response — that most of my points are irrelevant — or that only the MStar article, and not its implications, are under discussion. Sounds like a col bleu approach.

[JohnL]

http://www.thestar.com/NASApp/cs/Conten ... 9907615738

Mutual fund fees are the price of a coffee per day..

[George$]

Tom Bradley takes a swipe at ..
It’s called the ‘CIBC Total Premium Yield Deposit Notes’
in part ...

The article was written by Hugh Anderson and it was so amusing (to my sick mind) that I thought it was a spoof. But when I went to www.cibcppn.com I determined it wasn’t.

How would you like your advisor to sell you a product that has these attributes?

The return on the note will be variable, but you are guaranteed to get your money back in 3 years.
Income (if any) will be paid out once a year based on the performance of 10 Canadian stocks
The annual return, however, can’t be determined by simple math (i.e. how did this 10 stock portfolio do?), but is based on a formula that includes the following elements:
if a stock is up, it is deemed to have a 10% return, no matter how much it rises
if a stock is down, the decline is factored into the formula, but the loss is capped at 25%
As Mr. Anderson said in his piece, “the offering advertisement may leave the investor with the impression they are being offered 10% income a year with no risk.” In fairness to CIBC, it does say that the return is variable, but the “up to 10%” is bolded for all to see.

[kcowan]

Tom Bradley takes a swipe at ..
It’s called the ‘CIBC Total Premium Yield Deposit Notes’
in part ...

The only thing misleading is the name Premium (unless they mean for CIBC).

[George$]

The only thing misleading is the name Premium (unless they mean for CIBC).

Not sure what you mean. Tom's point was that the promotional text with this product was confusing and misleading. Here is a longer version of his blog ...

The article was written by Hugh Anderson and it was so amusing (to my sick mind) that I thought it was a spoof. But when I went to www.cibcppn.com I determined it wasn’t.

How would you like your advisor to sell you a product that has these attributes?

The return on the note will be variable, but you are guaranteed to get your money back in 3 years.
Income (if any) will be paid out once a year based on the performance of 10 Canadian stocks
The annual return, however, can’t be determined by simple math (i.e. how did this 10 stock portfolio do?), but is based on a formula that includes the following elements:
if a stock is up, it is deemed to have a 10% return, no matter how much it rises
if a stock is down, the decline is factored into the formula, but the loss is capped at 25%
As Mr. Anderson said in his piece, “the offering advertisement may leave the investor with the impression they are being offered 10% income a year with no risk.” In fairness to CIBC, it does say that the return is variable, but the “up to 10%” is bolded for all to see.
In reality, the maximum return of 10% will only be realized if all the stocks are up for the year. To get a 10% annualized return over 3 years, all the stocks would have to be up every year. Simple math tells me that the return drops pretty quickly with every down stock. In the marketing piece, they lay out a “positive example”, which yields 7.36% per annum over 3 years. In the example, the stocks are up 25 out of 30 times (10 stocks x 3 years) and the 5 negative events are only modest single-digit declines. That’s a pretty positive scenario for the stocks. As you can see, there is almost no chance that this product can produce a 10% annualize return. You’ve got a better chance winning the lottery.

With principal-protected products, it used to be that the holder would forego a fixed yield in return for a chance to participate in the equity market. With this CIBC product and many others like it, the client is foregoing a fixed yield in exchange for a chance at achieving a slightly higher yield. I’ve never thought the former was a good value proposition. I think the latter is even worse.

As far as GICs go, the standard version with a guaranteed yield of 4.25% is looking pretty good about now!

my emphasis inbold/red

[IdOp]

Trust performance lags index.

OK, so let's see, the S&P/TSX Capped Income Trust index lagged the Composite, 4.3% to 9.3%. Somebody remind me why these are supposed to be the same? Oh, and add back in the distributions, and the trusts may be ahead by about 13.3% to 11.85%. Gotta love that negative lag.

[pitz]

Trust performance lags index.

OK, so let's see, the S&P/TSX Capped Income Trust index lagged the Composite, 4.3% to 9.3%. Somebody remind me why these are supposed to be the same? Oh, and add back in the distributions, and the trusts may be ahead by about 13.3% to 11.85%. Gotta love that negative lag.

Yeah but pay the taxes on those distributions, and you end up pretty much even