Canadian Investment Funds Course¶

- regulatory environment
- registrant responsibilities
- suitability
- economic factors and financial markets
- types of investments
- types of mutual funds
- portfolio management
- mutual fund administration
- retirement
- taxation
- making recommendations

DNCL: do not contact list

FINTRAC: financial transactions and reports analysis centre of Canada

users of capital: borrowers

the secondary debt market: dealers bring together buyers and sellers of securities

the supploy curve: the behaviour of sellers and slopes upward to the right

GDP: a measure of the sum of the market value of all the final goods (goods and services sold to their final users) and services produced in the economy in a year.

investment capital:
- sensitivity: influence degree by changes in financial markets and the overall economy
- scarcity: the limited supply of investment capital
- mobility: the ability to move around the globe very quickly

yield curve: demonstrate the relationship between bond yield and term to maturity
- a normal/positive yield curve: short-term interest rates lower than long-term rate
- a inverted/negative yield curve: short-term rates > long-term
- flat yield curve: short = long term rates

OTC: over-the-counter market

Canadian securities administrator (CSA):
- achieve notional consistency in the area of securities law
- produce Canada's notional instruments

- fiscal policy (by the government): 
    - taxes; increasing -> contracting
    - transfer payments; eg. unemployment benefits -> expensionary
    - spending ; deceasing -> contracting
expansionary 

- monetary policy:
    - change the bank of canada rate; decreasing -> simulate the economy

both: 
    - have expiry dates
    - attract speculators and hedgers

futures contracts: 
    - commodities such as wheat, meats, currency, interest rates, and securities
    - both parties are obliged to perform their part of the contract

option:
    - the buyer of a contract is not obliged to perform his or her part of the contract except paying the option premium
    - the buyer can let the option contract expire worthless

- investors determine the mix of cash, fixed income, and equities
- rebalance when deviation is significant after market values of assets changed overtime

- chesapeake fund is an asset allocation fund

- invest in a combination of cash, bonds and stocks
- required to hold minimum percentage of each type of investment
- a range specifying the minimum and maximum limits for each asset category

- guarantee the annuitant a lifetime income
- the annuitant can't increase his/her withdrawals
- the annuity is not convertible to a RRIF

global equity fund:
- long term capital appreciation
- significant potential for gains and losses due to currency fluctuations

ETF:
- lower management fees (MER) than mutual funds
- broker commissions are payable at the time of trading
- returns tend to lag returns of the indexes they track (tracking error)
- no principal protection

low -> high
money market funds
fixed income funds
    - mortgage, bond
balanced funds
    - balanced, asset allocation, target date
equity funds
    - Canadian, global, international sector
specialty funds
    - labour-sponsored, real property, commodity pools

international equity > Canadian equity (added currency risk)

emerging market funds > dividend funds
- dividend funds invest in large, established companies with a history of steady dividend payments
- emerging markets: additional currency risk, political risk and business risk

money market funds < labour sponsored investment funds (LSIFs)
- money market funds are the least volatile; hold a protfolio of short-term fixed income instruments

real property funds
- specialty funds; specialize in real property -> can be highly illiquid
mortgage funds

fixed income fund < balanced fund < equity fund < specialty fund

terms to maturity of 1 year or less

lowest -> highest risk:
    - T-bills guaranteed by the Government of Canada
    - municipal short-term papers
    - bankers' acceptances (BAs)
    - commercial papers

when T-bill receive interest: at maturity of redemption
- not pay a stipulated rate of interest
- sold at a discount (less than face value)
- interest = price at maturity - purchase price

quoted yield = (((face value - price) ÷ price) x (365 ÷ term)) x 100
eg. (100,000 - 97645)/97645x(365/360)

- highly liquid; can be traded on the secondary market
- not issued with MFDA IPC (investor protection corporation), but guaranteed by the Government of Canada
- yields are usually lower than long term bonds
- shorter term and less risk
- subject to inflation risk

maturities greater than 1y
    - principal protected notes (PPNs)
    - corporate debentures
    - government of canada bonds

- market price tends to be less volatile as typically having a fixed dividend attached to their offering
- have a preference as to assets when a company goes bankruptcy

risk:
    - may be redeemed when market conditions are favourable for the issuer; eg. in a low interest rate env
    - the issuing company has the right to force the investor to see the shares back to the company at a pre-determined price

participating preferreds:
- have rights to a share in the company's net profits over and above the specified dividend rate

cumulative preferred
- most preferred shares are cumulative; dividend is not paid
- accumulates and must be paid in full before made to common shareholders

- retractable preferreds
    - investor can demand the company buy back the shares on/after a specified date
- convertible preferreds
- straight preferreds

- holder has the right to vote at shareholders' meetings or by proxy
- has the right to receive dividends, but not fixed, guaranteed, or in cash
- preferred shareholders have priority over common shareholders in the payment of dividends

- no principal guarantee
- variety of mutual funds available
- offer less risk; eg. money market funds
- diversification results in reduction of volatility and averaging of return
- majority redemption proceeds on the third business day (T+3 rule)
- convenience
- liquidity
- low cost

open-end:
- investors can redempt on a daily basis; directly through the mutual func company
- continually issue and redeem units with the number of units fluctuating from day to day
- not exchange traded

closed-end:
- issue a fixed number of shares
- subsequently traded on a stock exchange
- can be bought and sold through the day during trade hours
- NAVPS (net asset value per share): not necessarily equal to market price

- invest heavily in equities in the early years
- gradually rebalanced by reducing equity and increasing fixed income securities
- investors of the same age have different investment objectives and risk tolerances
- not for low risk tolerance irrespective of age
- no guarantee of principle at maturity
- appropriate for investors having a time horizon that matches the target date of the mutual fund

- employ a multi-manager approach
- suited for investors have no time/expertise to customize own portfolio
- based on pre-set investment portfolios
- offer a series of low risk to high risk managed porfolios
- management fees of the fund of funds + MER of mutual funds

Latimer Canadian Index Fund
Thornton Canadian Large Cap Fund
Hale Canadian Dividend Fund
Bell Canadian Equity Fund

mortgate fund:
- monthly income; fairly conservative

blanced fund/Canadian dividend fund:
- more riskier

retained earnings:
- the amount of profits retained wafter dividends are paid to shareholders
- can be used as reserve, to finance growth, or repay debt

growth

technical
- based on studying past trends in market activity, prices, and volume

value

fundamental
- looking at the fundamentals of a company: revenues, asets, profits and competitive position

value investing
- based on evaluating the investing in good companies undervalued

technical investing
- based on studying past treands

active investing
- through the skill and research of the portfolio to find the not properly priced security because of market inefficiency

passive investing
- choose the security according to a chosen benchmark

dollar-cost averaging
- reduce the risk with the timing of a mutual fund
- investing the same amount at regular intervals, monthly or quarterly

- no duration for the plan
- free to change the contribution or stop at anytime
- subject to minimum amounts per mutual fund
- free to allocate pre-determined amount to any number of mutual funds
- encourage a disciplined investing approach
- help to avoid the temptation of market timing

systemic risk
- the risk of a single event; eg. failure of an institution

systematic risk = market risk (risk of bad weather)
- increase in unemployment
- unanticipated inflation
- interest rate increase
- recession and wars
- affect everyone; and can't be avoided

beta:
- measure the systematic risk relative to a benchmark index

oversee the potential conflicts of interest in decisions involving the investment fund manager

- management fee; eg. admin, advisory service, marketing, financing costs
- trailer fees
- operation exp.; eg. agency fees, safekeeping, accounting, filing etc
- interest charge and tax

brokerage commissions and fees
other protfolio transaction costs

- guarnteed for a lifetime income
- the annuitant can't increase withdrawals
- is not convertible to RRIF

- $500 max grant per year for $2500 contribution ($2500x20%)
- lifetime maximum contribution limit of $50,000 per beneficiary
- no annual limit
- CESG (Canada Education Savings Grants); low income receive higher amount

maximum age to contribute
- 71

home buyers' plan (HBP)
- repay minimum / year = withdrawl amount / 15 
- has until Oct.1 year2 to purchase home
- first HBP repayment must be made before Mar.1, 3rd year
- has until 60 days into year17 to repay the funds

registered annuities
- registered life annuities
    - steady stream of income; will not outlive 
    - no longer control over the investment
- registered term certain annuities

- growth of investment in RRIF is tax-sheltered
- RRIF accounts has a minimum but no maximum withdrawal limit
- RRSP can be transfer to RRIF, but no in-cash contribution allowed
- withdraw from RRIF need to pay tax
- no minimum age for openning RRIF
- can postpone RRIF until the end of year reaching 71

pension money

OAS (old age security) pension
- must be 65 or older
- canadian citizen or legal resident
- meet residency requirements
- subject to a means test
    - income above a specified threshold, reduce $0.15 per $1 above
- considered taxable income
- can defer until 70; increase 0.6% per month of defer to max 36% at age 70

GIS (guaranteed income supplement) benefits
CPP (canada pension plan)
- can be applied between 60 to 70
- if wait until after 65, the benefit amount rises by 0.7% per month past 65
- not subject to any clawback 

allowance
- between age of 60 and 64
- sponse is eligible to receive both OAS and GIS
- self must also meet criteria
    - income test
    - residency qualification
    - citizenship
    - legal resident status

- can be financed solely by the employer, or through contributions made by both employee and employer
- the employer assumes the investment risk as guarantees a defined benefit at retirement
- benefit amounts may be calculated based on a flat rate, best, or last years, or average career methods
- taxable

mutual fund trust: T3

- switch within mutual fund corporation, do not immediately trigger a deemed disposition
- tax is deferred until the shares are redeemed from the corporate structure
- switch within mutual fund trust structure, triggers deemed disposition

- 10% free redemption limits: investor can redeem a portion without incurring deferred sales charge

- does not receive preferential tax treatment
- may deduct any withholding tax paid to foreign government (avoid double taxation)
- same percentage rule; eg. 50% for capital gain

- reduce the adjusted cost base of units owned
- increase the capital gain when redeemed

interest income -> registered account
dividends, capital gain -> non-registered

5 year bond
- face value: 10000
- price: 9700
- coupon rate: 5%

actual rate = face value x coupon rate / price = 10000x5%/9700 = 5.15%

first purchase + 2nd purchase = (1000/14 + 1000/12)
distribution / post-distribution NAVPS = [(1000/14 + 1000/12)x4] / (12-4)

front-end load of 5%
NAVPU = 10
price = NAVPU/(1-front-end sales charge) = 10.53

NAVPU price
- redempt after 4PM EST/EDT -> next day price
- before -> redempt date price

NAVPU = (total assets - total liabilities) / number of outstanding shares
assets:
- the fund's investment portfolio
- cash
- near-cash investments
- accounts receivable from dealers

liabilities:
- expenses incurred
- dividends paid to investors
- redemption amounts

1. determine purchase price 
= NAVPU@purchase / (1 - front-end sales charge pencentage)
= 10/(1-4%)

2. determine the number of units purchased
= total cost / purchase price
= 100,000 / [10/(1-4%)]

3. determine the number of units redeemed
= number of units purchased * ratio withdrawal percentage
= {100,000 / [10/(1-4%)]} * 8%

4. total amount withdrawal
= number of units redeemed * NAVPU@redeem
= {100,000 / [10/(1-4%)]} * 8% * 11.75

all Canadian companies residing in Canada paying taxable dividends are eligible for the dividend gross-up and credit mechanism

The amount of the gross-up and credit is different depending on whether the paying company is a Canadian-controlled private corporation or a Canadian public corporation

dividends paid from Canadian mutual funds are grossed up by 38% and then receive a credit of 15.02% on the grossed-up amount

Foreign dividends do not qualify for this favorable tax treatment

taxable dividend = divident received x gross-up = 550x138% = 759
tax = taxable dividend x (income tax rate - dividend tax credit)
= 759 x (22% - 15.02%)

taxable income = 
total income - RRSP - childcare

income taxed at marginal tax rate = 
taxable income - pre bracket

registration process:
- NRD (online national registration database), only file one application
- under NI31-103, no renewal requirement
- remain effective until suspended or terminated
- if leave employer, registry is suspended which can be reinstated
- unacceptable past employment history can make objections to registration

- confirming to the approved standards
- safeguard client interests and maintain the integrity of the firm

main disclosure documents:
- fund facts for every class or seriers of a mutual fund
- the simplified prospectus
- the annual information form
- annual and interim financial statements
- annual and interrim management reports of fund performance

fund facts must be received within two days of buying; others upon clients' request

- provides full, true, and plain disclosure of the material facts relating to the mutual fund
- material facts are those having a significant impact on the market value
- fund facts replaces the simplified prospectus
- not mandatory to deliver, but available upon request
- a prospectus must be approved by the provincial securities commission before fund can be offered for sale

- supplement the info in the simplified prospectus
- info can be found:
    - investment restrictions
    - the description of units
    - methods to value the securities in the portfolio
    - details of service providers

- any communication induces the public to invest in the mutual fund
    - printed material, autdo, visual displays
    - personal endorsements

not include:
- prospectus
- the annual information form
- financial statements
- trade confirmations
- statements of account

gather client data and identify objectives
clarify client status, problems and opportunities
identify strategies and present the plan
implement the plan

- a self-regulatory organization for the distribution side of the Canadian mutual funds industry
- all mutual fund dealers, except Quebec, are required to be members of MFDA
- dealing representatives are registered directly with the provincial or territorial regulatory authority not the MFDA
- not all unethical actions are punishable; nor all reported to MFDA

- rules on client communication include only written communication
    - trade communications
    - account statements
    - not include: advertising and sales communication

- admin members
- perform compliance reviews
- enforce rules through a transparent disciplinary process than can result in fines, suspension, or termination of membership

rules:
- Conduct Rule 2: standard of conduct for ethical behaviour
- national instrument 81-102 (NI 81-102): standard fund performance data
- NI 81-101: prospectus disclosure
- NI 31-103: registration rules

regulates 
- insurance companies
- federally regulated deposit-taking institutions
- federally regulated private pension plans

- an independent and impartial organization 
- an alternative to civil litigation
- provide dispute resolution services to its members and their clients
- not a regulator, but as an alternative to ensure member firms deal fairly with their customers
- not offer coverage in the event of insolvency
- all dealers and advisors except Quebec, must be members

apply to:
- financial entities
- life insurers
- real estate entities
- casinos

apply to:
- federally regulated, private sector organizations
    - banks
    - telecommunications companies
    - transportation firms

apply to:
- the public sector
    - Canada revenue agency
    - human resources and skills development Canada
    - bank of Canada

- channeling funds from lenders to borrowers
- facilitating the timing of purchases
- providing a mechanism for government policy

- primary market
    - where shares are first issued by the issuer to investors

- secondary market
    - shares are subsequently traded amongst investors

- direct financing
    - the lender and borrower transact with each other directly

- financial intermediary
    - used such as a bank to facilitate this transfer of capital

mutual fund distributor：
- the sale and marketing arm
- responsible for bringing assets to the mutual fund through sales to investors

investment fund manager：
- calculates the fund's daily net asset value

portfolio manager:
- construct and manage the portfolio of investments

the custodian:
- provides safekeeping of mutual fund assets

IRC (independent review commitee)
- oversee the potential conflicts of interests in decisions involving the investment fund manager

- preserve the integrity of the financial reports
- eliminate any real or perceived imbalances in the reporting

mutual fund, like public corporations, 
- must be audited by independent auditor
- and comply with IFRS (international financial reporting standards)

top-down:
- overall economy and current market trends
- determine the industries, markets and countries expected to perform well
- narrow down to pick companies can outperform competitors

- to ensure the clients understand their obligations to the dealing representative and vice versa
- also client aware of the service levels and costs so that clients can decide on the level of services

disposition effect: 
- the tendency for investors to sell their winning investments too early and to hold their losing investments too long

overconfident:
- overestimating their knowledge and underestimating the risks they take

implied need:
- express their dissatisfaction or concerns but may not be ready to deal with their problems

explicit need:
- ready to address the problems

- PEFP (politically exposed foreign person)
    - head of state or government
    - member of the executive council of government or legislature
    - deputy minister (or equivalent)
    - ambassador or ambassador’s attaché or counsellor
    - military general (or higher rank)
    - president of a state-owned company or bank
    - head of a government agency
    - judge
    - leader or president of a political party in a legislature