The Portfolio Doctor

By David Cruise and Alison Griffiths
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Q: In March 2000 I purchased (through an advisor) $10,400 in C.I. Global Telecommunications units and $10,200 in BPI American Equity units. Over the years there has been some merging. My last statement showed units in C.I.Global Science & Technology ($1,800) and C.I American Equity ($4,900).

In view of the extremely poor performance of these investments I am considering turning in the shares for cash and I do not wish to invest further. I have two questions: 1) Would I be taxed on the amount of approx $6,700 or can I claim any tax credit because of the loss from the original investment. 2) Would I have to pay any fees? HC

A: It is depressing to watch an investment sag, then sag some more. You had the misfortune to purchase a technology fund at the height of the market and an American equity fund in the years before the Canadian dollar soared against the greenback, pulling down the value of U.S. investments, once converted to loonies.

You have certainly absorbed the maximum loss and can hardly be blamed for wanting to bail. Since the investments are held outside your registered account you will be able to claim an investment loss on your income tax, which is the only bright light here.

As for fees, it depends entirely on your arrangement with your adviser. Both funds were purchased on a deferred sales charge basis but the DSC schedule has now run to zero, or it should have. Check that when the mergers happened you didn't end up with a full DSC schedule when the new funds appeared on your statement. If you were with a discount broker there would likely be a trading fee to sell the units.

Your adviser may or may not charge you a fee to sell them for you, but it's certainly something you should raise. We know advisors who will absorb the fees, when they move a client out of a bad investment that they've recommended.

Q: My wife and I bought a CI Short-Term Bond for our family RESP (Registered Education Savings Plan) because we wanted something very safe as we didn't start saving for our children's education until they were 10 and 12. I don't think we have had a very good return, though we haven't lost money. One child is going to university next year and the other two years later. We have $8,000 in a GIC which comes due in 2008 and $6,000 in the bond fund. Should we use the GIC first or sell the fund? Henry McIntyre

A: It must be some bad karma over at CI Investments as we have quite a pile of questions about their funds from unhappy readers. You guessed right about CI Short-Term Bond. It isn't anywhere near the top of the class.

Purchasing a bond fund is a tricky business in these days of low interest rates. Many bond funds of a few years back looked very appealing with equity-like returns because the value of the bonds held was climbing as interest rates were dropping.

But that can't continue and bond funds must eventually renew their holdings at the lower rates. CI Short-Term Bond has attempted to add value by including a larger selection of lower grade bonds in its holdings. But, of course, that adds risk!

According to a recent report on the fund by Morningstar, the yield on this fund over the past 12 months was just 3.1 per cent and the funds trailing one year returns have ranked in the lower half of its peer group 86 per cent of the time since mid-2004. (www.morningstar.ca - go to Analyst Reports, November 16)

CI Bond Short Term Bond isn't sitting the corner with a dunce cap on but the dean's list isn't likely in its near term future. Since you will need some money for education shortly and your GIC doesn't mature until 2008, selling the bond fund is a reasonable move.

Q: I hate to ask a question about income trusts since I am so depressed about what has happened to their value. However, here it goes. Should I sell? I have what used to be $26,000 worth (two mutual funds and one real estate trust) and they are now down to $18,000. I don't need the money right now but I don't know if I can stomach looking at my statement any more. Mary P.

A: Hold on! Got to dash down to the basement and see if we can locate that darn crystal ball. It keeps getting lost.

The future, is well … the future. The Liberals could come to power and reverse the Tory decision. Or the Torys could have a change of heart. Or there could be some softening of the blow by extending the tax deadline or some tricky accounting loophole could be introduced that allows current income trusts to keep partial tax free status. And a tsunami could rise up in Lake Ontario making all these possibilities moot.

Don't know, is the short answer. Some of the experts we have been talking to have advised clients to reduce but not bail, others have suggested hanging on in the short term. We own income trusts through an exchange traded fund and have reduced by one third, mainly because the money is in an RESP and it will be needed soon. So we are hedging our bets, believing that there will be some increase over November prices, but nothing like we have seen in the recent past.

The lesson here is that if income trusts were treated as equity in your portfolio and strictly kept to a given percentage, then the decline would not have hurt as much. Your holding, like so many others, has risen 50 per cent since purchase. As well, you have enjoyed a yield of close to 9 per cent. That's a healthy return. But we expect you did not sell any of your trusts in the run up, leaving you vulnerable to a downturn.

Rebalancing as an asset rises or shrinks in value is the single most important key to portfolio health. It is particularly hard to do when a stock or fund has springs on its feet, but it is best way a small investor can protect themselves from the market vagaries. Income trusts took a hit. Take that as a warning! Who knows what might happen to precious metals and energy stocks!

If you own those asset classes then take a look to see if they are now over-weighted in your portfolio because the good times have been rolling. If so, reduce and stay balanced.