2004: A Delightfully Uneventful Year !

Several years ago, I started writing you this year-end letter to review the more noteworthy events of the year and help you understand their impact as an investor. In comparison to recent years, 2004 has been delightfully uneventful. No stunning losses or gains. No dramatic turns of events. Just the normal ebb and flow.

In the Markets

This was Canada's year to shine in the financial markets. The loonie continued to surge in value reaching a peak of $0.85 US before tapering off to its current level of $0.81 US. A stronger currency can be a mixed blessing, but it is also an indication of the relative strength of our country's overall financial situation.

And for the first time in years, our Canadian stock market out- performed that of the US as well as most of the rest of the world! Although all markets were down significantly earlier in the year, stock values rebounded in the last few months ending the year on a positive note.

Our Canadian S&P/TSX composite index is currently up year-to-date by almost 11 percent. The S&P 500, a broadly based index of US stocks has gained just over 7 percent.

So it appears we will make some money this year after all, if not great fortunes. A balanced asset mix including stocks and bonds is likely to end the year with an overall return of 5 to 6 percent.

Going forward, we can expect similar results, although 2005 is likely to be a challenging year. Concerns over interest rates and the cost of oil are still out there. And the weakness of the US dollar does not bode well in general. In such an economic environment, it would not be wise to anticipate more than single digit returns.

OSC investigations

As many of you are aware, the Ontario Securities Commission undertook in November of last year a full-scale investigation of market timing and other investment strategies which could be harmful to mutual fund investors.

Market timing is not illegal, but when it is used within the context of mutual funds, it can add to the costs of the fund, adversely affecting the returns of all unit-holders.

Mutual funds that invest outside North America are the ones that have fallen prey to this type of investment strategy.  This is because of the differences in time zones that allow sophisticated investors to watch foreign stock markets and effectively predict the next day's fund value.

The OSC probe initially involved 105 fund companies before narrowing its focus to four big names, including AGF, AIC, CI and Investors Group. On Dec. 17 this year, it was announced that an agreement had been reached with these companies to compensate unit holders of specific funds for any harm that market timing strategies may have caused. The OSC also entered into separate agreements with three of the bank controlled brokerage firms.

There has never been any evidence that the investors profiting from market timing were fund company insiders. What's more, the OSC has confirmed that there has not been any market timing activity in any of the funds under investigation since July 2003.

I will have more information for you in the coming months as to how the compensation will be distributed and who will benefit. But, don't hold your breath. The payments will only be distributed after  September 2005 and the amounts are not expected to total more than $25 on average per unit holder.

Fee reductions

For several years now, the Canadian mutual fund industry has been criticized for the high level of its management fees. The management fee covers operational and management expenses as well as the commissions paid to advisors. Since the fee is paid out of the fund's assets, it has a direct impact on the total return earned by unit-holders.

Now finally, Fidelity has taken the lead by reducing the management fee on all its funds sold with an up-front sales charge. The company has also announced that it is introducing an automatic conversion policy to allow all the matured units on funds sold with a differed sales charge to take advantage of the lower fee as well.

The reduction is just one quarter of a percentage point. It is nonetheless a significant tidal change.  As one advisor who has been asking for lower fees for sometime, I am greatly encouraged by this move.

More on values and priorities

Last year I told you that I wanted to get back to basics and focus more of my advice giving on questions that are of personal interest to you, to create a more values-based approach to the financial planning service I offer.

For sometime, I have been working on a project with that specific goal in mind. You will be hearing more in the up-coming months. So stay tuned! The survey I conducted earlier this year also raised some needs I was not aware of and you can expect more on that in the new year as well. I believe 2005 is going to be a year of new beginnings for me as your financial advisor. I am very much looking forward to it.

Thank you all for your trust and continued support!

Sara Gooderham

December 2004