Making sense of the markets this week: August 31

Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors. 

Risk ratings: what are they good for?

It appears that the risk ratings for mutual funds and ETFs turned out to be almost worthless in many cases in the recent stock market correction. If you hold a fund and check the fund fact sheet, you’ll see a risk rating that ranges from Low Risk to High Risk. 

Dan Hallett, vice-president and principal of Highview Financial Group, has long been a critic of these risk ratings. Hallett has suggested that the risk ratings have set up investors for a rude awakening in a major market correction. And that’s certainly what happened in the violent stock market correction in March. 

In The Globe and Mail, he offered:

“The ‘low to medium risk’ category contains an awful lot of funds holding nothing but stocks—which is nonsensical. More than 35% of the 1,200 funds in this category lost more than 15%, of which 38% saw declines of more than 20%. Ouch!”

From my training (I was an advisor with Tangerine Investments), a low to medium risk fund or portfolio should hold a fixed income component in the range of 70% to 80%. Those bonds can work as portfolio shock absorbers. 

As I see it, the asset allocation models used in the one-ticket ETF portfolios and by robo-advisors do a good job of aligning portfolios with the risk ratings. Those portfolios will contain a mix of Canadian, U.S. and International stocks and bonds designed at various risk levels. 

That said, I’ve seen some weirdness in the robo space as well in regards to portfolio risk ratings.

I agree with Hallett wholeheartedly: This area needs to be cleaned up, and in a hurry. Canadians deserve and need to see and understand the true risk levels of their investments. 

Ordering up Canadian bank reports, hold the dividends

There is perhaps no category of stocks in Canada that gets more attention than the big Canadian banks. They can drive our stock indices. And many Canadians count on those big juicy dividends for retirement. A common question or concern these days is this:

“Are the bank dividends safe?” 

For now, it appears so. All of the big Canadian banks are reporting earnings this week and there are many tea leaves to read. The results are mixed, but mostly encouraging. 

The first bank to report on Monday, August 24, was Scotiabank. And perhaps we got the “bad news” out of the way first: Scotia missed earnings estimates. Their South American operations are under great pressure due to COVID-19 outbreaks. 

BMO picked up the slack on Tuesday with earnings that beat estimates. Revenue was up 3.8% year over year. National Bank also had very solid numbers. 

And then on Wednesday came a blockbuster from big blue—RBC. The Royal Bank of Canada increased revenues by 12% year over year. That is to say, revenues in the second quarter of 2020 were 12% greater than the third quarter of 2019. Crazy. That bank just seems to find ways to make money, even during a pandemic. 

TD bank and CIBC also delivered positive numbers trends. TD bank beat estimates on earnings and revenues, with the latter increasing 1.6% year over year. 

On the dividend front, all of the Big 6 Canadian banks announced they will maintain their dividend payment level (quarter over quarter) with their next payments. 

The banks saw some nice stock price gains as well, into Thursday, August 27. As an example, Royal bank was up over 4% from Monday to Thursday. 

What we will be watching are the non-performing loans. Only Scotiabank set aside more monies for the potential of loan losses in this quarter compared to the last quarter in May of 2020. If you read a quarterly report you’ll see them listed as PCL—provisions for credit losses. 

For the record, I hold the Big 3 of Royal Bank, TD and Scotiabank. 

Perhaps we’ll get a replay of the financial crisis of 2007 to 2009. In that recession, the big Canadian banks did not cut dividends. They all held, and then got back on the dividend growth train within a year or two. 

Global dividends crushed

Continuing on the dividend watch, it was the worst quarterly fall for Global dividends since 2009. Total shareholder payouts fell by $108 billion to $382 billion, the lowest second-quarter total since 2012, according to Janus Henderson’s index of global payouts, published on Monday, August 24. The 22% decline was the worst since the asset manager launched the index in 2009, and the UK and Europe were the most affected. Almost half of the dividend cuts in Europe are courtesy of the banking sector. 

Dividends fell in every region of the world except for North America. 

And the best performing market according to Janus Henderson? Those true north dividends held up strong. The Canadian market has increased its dividends over 4%, year-over-year. 

Checking the iShares TSX 60 ETF (ticker XIU), I see its August 2020 quarterly dividend payment is 4.4% larger than the 2019 payment.

Billionaires: “heads, we win!”

As we have touched on previously in this space, the economic effects of COVID-19 have discriminately hit lower-income Canadians and Americans. 

Meanwhile, five months into the pandemic, the total wealth of billionaires has ballooned. A recent communication from Americans for Tax Fairness and Institute for Policy Studies, a left-leaning think tank, notes: 

“Billionaires kept getting richer as the rest of America struggled through multiple crises over the past five months: combined billionaire wealth has grown by $792 billion, or 27%, since the rough start of the coronavirus lockdown on March 18…. President Trump wants to cut the top capital-gains tax rate by one-quarter—dropping it from 20% to 15%.

“The U.S. can scarcely afford to lose public revenue during a national emergency in which up to half of American households are going hungry, roughly 40 million families face eviction, 30 million workers are collecting unemployment.”

It will be interesting to see if the Democrats play the “eat the rich” card in November’s U.S. election. 

ETF sales almost double up on mutual funds for July

And we continue to see the dominance of low-fee ETFs over traditional mutual funds that often come with outrageous fees. For the month of July, ETF sales totalled $6.1 billion, according to the Canadian ETF Association. That compares to $3.4 billion for mutual fund sales. 

Canadians now hold some $230.6 billion in ETFs, but there’s still a long way to go for the ETF industry, with some $1.64 trillion still sitting in mutual funds. 

As a proponent of low-fee investing, I’m more than happy to see that trend continue and accelerate. 

And to be fair, not all mutual funds are bad. 

Projected GDP growth around the world

Attention-grabbing tweet of the week. Where’s Canada? 

Dale Roberts is a proponent of low-fee investing who blogs at cutthecrapinvesting.com. 

About Dale Roberts

Dale Roberts is a former investment advisor and proponent of low-fee investing. He created the Cut The Crap Investing blog in 2018. Find him on Twitter for market updates and commentary, every day.

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