DEAR DOCTOR
Bombardier shares have almost doubled recently. Has the company finally turned the corner?
-Bombarded, Winnipeg
Dear Bombarded
Here's the short answer: no.
True, Bombardier's shares have rebounded. After sliding from $26 in September, 2000, to a low of less than $3 this March, they had climbed back to around $6 by October. Investors like tough-guy CEO Paul Tellier, who took over in January. But you have to wonder if that gain is too much, too soon.
More or less half of Bombardier's revenue comes from aerospace, mainly executive and regional jets. The air travel business has been in the tank since the Sept. 11, 2001, attacks on the World Trade Center. Demand for subway and rail cars, which account for about 40% of revenue, is also slow. So analysts figure Bombardier's revenues will remain relatively stagnant.
To boost profits, Tellier has to slash costs. Bombardier has announced cuts in its aerospace work force of almost 6,000 people, or about 18%, over the past two years. But the company also faces tough competition from its Brazilian archrival, Embraer, which is launching a new 100-seat regional jet. Bombardier considered the 100-seater but, as of 2001, chose to stretch its 50-seat model into 70- and 90-seat versions instead. If Tellier now chooses to develop a 100-seat model, that will add to costs.
Bombardier's finances and ownership are still convoluted as well. A new share issue in April raised $1.2 billion in new equity. Tellier has also ended Bombardier's controversial accounting practice of estimating costs and anticipated sales of a line of aircraft over that line's anticipated lifespan. The company will now record costs and revenues closer to when they're actually incurred. Long term, that means more clarity; but, short term, it's confusing, and will likely reduce reported profits.
The ownership structure came under fire at the annual shareholders' meeting in June. The Bombardier family, including chairman Laurent Beaudoin, has 60% voting control through multiple voting shares that carry 10 votes each. Both Beaudoin and Tellier said that won't change.
Despite Tellier's efforts, a lot of negatives remain. If you buy, you have to assume things can only get better.
DEAR DOCTOR
Foreign stock markets have gained a lot this year, but my mutual funds haven't. My adviser blames the rising Canadian dollar. Are there any funds that hedge currencies?
-Loonified, Victoria
Dear Loonified
Many investors have learned the hard way this year that a rising Canadian dollar can wipe out gains on your U.S. and other foreign investments. "If people didn't know it before, they know it now," says mutual fund analyst Dan Hallett, president of Windsor, Ont.-based Dan Hallett & Associates.
Consider the TD U.S. Equity Fund, a fairly typical example. There are two versions: a U.S. dollar version and one that converts the value of its holdings back into Canadian dollars. The Standard & Poor's 500 Index of U.S. stocks was up by roughly 15% over the first nine months of this year, and so was the U.S. dollar version of the fund. But the Canadian dollar climbed from about 64 cents (U.S.) to 74 cents. As a result, the Canadian dollar version of the fund was down about 2%.
In answer to your question, there are foreign-content mutual funds that hedge their currency exposure. They attempt to smooth out fluctuations through the use of currency futures and other instruments, so you get the same percentage return in Canadian dollars as investors in the relevant countries get in their local currencies.
Yet, Hallett says, there are just a few funds in Canada that do this. TD, RBC and Altamira all offer RSP-eligible index funds that are fully hedged. Talvest hedges selectively in some of its funds. There are some hedged funds at other companies as well, including the Cundill Value Fund.
Why so few? In theory, most investors expect their fund managers to pick stocks and bonds, not manage currencies as well. If you invest abroad, you also have to be willing to assume the currency risk. Given the Canadian dollar's three-decade decline from a peak of $1.04 (U.S.) in 1974, that has been a profitable strategy. Perhaps it's time for a rethink, eh?
DEAR DOCTOR
I would like to switch to a fee-only financial planner. How much will the advice cost?
-Paid the Piper, Markham, Ont.
Dear Paid
Investors who switch to fee-only planners are usually fed up with high fees or biased advice. Is it a coincidence that advisers often recommend house- brand funds or investments that pay them a commission? "Very often what is suggested is what the adviser can sell," says Ron Graham, president of Ron Graham & Associates, a fee-only planner in Edmonton and former president of the Canadian Association of Financial Planners.
In theory, fee-only planners should be more objective because they charge directly for their advice. Many have an hourly rate, or they may have a set fee for developing a standard financial plan that includes a recommended portfolio and basic advice on retirement savings, taxes and other issues. Graham charges $150 an hour, and says other advisers may charge from $75 to $300. A typical financial plan takes him about 10 hours, and you may not need a review for three to five years.
However, like many other fee-only planners, Graham doesn't sell stocks, bonds or mutual funds. For that, you'll have to go to a discount broker or full-service investment dealer, and you'll have to pay commissions. Indeed, you may end up paying twice for advice. Many funds have annual management expense ratios (MERs) of 1% to 3%. The fund pays a portion of that every year to whomever sells you the fund in return for ongoing service and advice.
Graham says fee-only planners often recommend low-cost investments that other advisers avoid. These include exchange-traded funds, which have low MERs; bonds rather than bond funds; so-called F-class shares of mutual funds (stripped of the annual trailer fees paid to advisers); and funds from companies such as Phillips Hager & North, which doesn't generally pay commissions or trailer fees.
Fee-only planners are still rare-there are just a handful in most major cities. Also, don't confuse fee-only planners with fee-based planners. The fee-based variety usually charges an annual fee to manage your portfolio-say, 1% or 1.5% if you have thousands in savings, or 0.5% if you have millions. Again, that fee is often on top of other fees on the investments themselves. Make sure you know what you're paying for and what you're getting.
DEAR DOCTOR
Which stocks do better in a recovering market: small caps or large caps?
-Size Matters, Saskatoon
Dear Size
Small-capitalization stocks often charge ahead in a bull market-and for all the wrong reasons. There is no official definition of a small cap, but for many analysts, it's considered to be a company with a total stock market value of $500 million or less. Since small-cap companies tend to be young and aggressive, they can be quite risky and volatile.
As of mid-October, the S&P/TSX SmallCap Index was up roughly 21% for the year to date, compared with 17% for the S&P/TSX Composite.
That outperformance isn't necessarily a sign of health. During downturns, small companies are often hit harder than large companies. So, if the small companies' revenues and profits rebound, the improvement often looks better in percentage terms. Also, shares in small caps are often less liquid than large caps, so even a small surge in investor demand can result in big gains in the share price. But if a downturn comes, the reversal can be sudden and sharp.
© 2007 The Globe and Mail. All rights reserved.
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