The David Miner Communiqué—Winter 2007

Happy 2007!

Belated “Happy New Year” to all. May the year 2007 be your best ever!

Running is the sport which I try to pursue twelve months year. Last spring, I managed personal best in a 10K and halfmarathon, only to be humbled by a personal worst (partly due to a 29 degree heat wave) in a full marathon in Ottawa. A flu bug blocked me out of my usual fall marathon. The next upcoming big event is the 30K “Around the Bay” in Hamilton the end of this March.

In October, we moved my office out of the Toronto downtown core to Mississauga. Having been a downtown boy for decades, I was concerned that I may not be able to handle the culture shock. On the contrary, the shorter commute saves me over an hour every day and most clients have expressed how much easier it is to get to the new office, with more convenient parking. And for those clients who prefer meeting in the downtown Queensbury office, I am there regularly. In a way, it is a “best of both worlds” scenario.

2006 was a busy year for Dorinda and I. We traveled more than usual, starting with a Southern Caribbean cruise last January, a ski trip to Whistler in March, Las Vegas in September (my first time, had fun, did not gamble), the Agawa Canyon in October, and California in November (partly business, mostly shopping and exploring).

Our Long-Term Investment Objective is to Achieve Out-Performance

Achieving out-performance long-term requires skill, discipline, and time. While we employ a multitude of advisory skills and disciplines in this practice, at a higher level we employ the skill and discipline of a number of talented portfolio managers. To you the client, the real benefit is in knowing that you have a strong team of people behind the scenes working for you every day. The skill and discipline required for investment success is the subject of volumes of books (and well beyond the scope of this newsletter). But I’d like to highlight one simple idea that can help you be a winner over the long-term.

Here is what it means. Having been through more market cycles than I shall admit, the biggest mistake I see investors and advisors make is extrapolation of short term results to predict the future. For instance, if we go back over 8 years, the price of oil was bouncing off $10 a barrel. No one wanted to invest in energy. By early 2006, investors were jumping into energy stocks and energy trusts like there was no end in sight. And oil did hit a price of about $77 a barrel last summer.

But oops! The price of oil has dropped to just over $50 now. In 2006, the S&P/TSX Capped Energy Index returned only 4.2% . That compares to a return of the broad market S&P/TSX Composite of 17.3%. The lesson is simple – trends can and will reverse. And who can forget the bursting technology bubble in 2000. Focus on process, not on recent results to make better returns and reduce risk.

Many of the new clients that came to me in the last 18 months had portfolios that were:

1. Over-loaded in income trusts. We have been advising to lighten up. Of course, legislative changes last fall have made income trusts less appetizing going forward. The S&P/TSX Capped Income Trust Index fell 2.8% in 2006.
2. Over-loaded in energy, especially energy trusts. We have been advising to lighten up. The S&P/TSX Capped Energy Trust Index fell 3.7%.
3. Not enough global exposure. We have often advised to add more. The MSCI World Index (in Canadian dollars) was up 20.2% in 2006, doing slightly better than the S&P/TSX Composite. The Canadian market is too small, to narrow, and too illiquid to be placing all of our investment assets.

Commission Free Investing – Higher Returns, Greater Flexibility

Our philosophy is to provide service on a commission- free (“no-load”) basis -- no front end, no back end commissions. To achieve that objective, we usually purchase funds on a front-load at zero commission basis (effectively, no-load). We are happy to provide this cost effective service wherever the management companies pay service fees to dealers out of the regular management fees. The client pays nothing extra and often saves money.

Unlike us, most mutual fund advisors today earn their living through deferred sales charges (“DSC”). In such cases, the mutual fund company finances a commission to the advisor. The client pays a hefty commission if he redeems within the first seven or eight years. This penalty makes DSC positions cumbersome, less flexible, and more expensive for investors.

New clients often come to us with DSC units in their portfolios from previous advisors. In such cases, we work hard to avoid DSC charges as we recommend adjustments to the portfolio. We accomplish this where possible by staying within the same fund family.

For those clients with pre-existing DSC units from previous advisors, we offer commission free investing going forward by getting their authorization to move any DSC units to the front end equivalent when possible. Included in this exercise are the annual 10% free units as well as DSC units that mature (i.e., have been held enough years to no longer be subject to DSC charges if redeemed.) Moving DSC Units to the front-end equivalent offers the following advantages and features:

1. Units becoming free under the annual 10% free program are maintained indefinitely as free units through this exchange.
2. The service fees payable by the mutual company to the dealer (Queensbury Strategies Inc.) may be higher under the front-end option. The management expense ratio, however, under the front end sales option will be no higher and in some cases lower. (i.e., the investor does not lose and sometimes gains a little.)
3. This exchange is a non-taxable event.
4. No charges or commissions will apply to any such transactions.

By going from DSC to front-end you have more flexibility at no cost. In some cases, your returns are enhanced because the front-end versions of the funds have lower management expense ratios. Most important, we are better able to work for you on a commission-free basis going forward.

Fidelity Investments – The World’s Biggest Mutual Fund Company

In the world of investments, size matters. Small firms may not be able to hire the best teams and adequately cover the research. Small firms cannot set up offices around the globe where needed.

We are pleased that Fidelity is one of the great firms that we work with. Whether we are talking about global equity portfolios or domestic, balanced or bond, Fidelity does a lot of things right. They are a firm which has been conscientiously lowering management expense ratios, which means higher returns to you. They are a firm which has even lower management expense ratios on front-end funds compared to the DSC versions.

We are pleased that Fidelity is one of the great firms that we work with. Whether we are talking about global equity portfolios or domestic, balanced or bond, Fidelity does a lot of things right. They are a firm which has been conscientiously lowering management expense ratios, which means higher returns to you. They are a firm which has even lower management expense ratios on front-end funds compared to the DSC versions.

In the news at Fidelity lately:

Alan Radlo has left, a 22 year veteran. Replacing Alan at Fidelity Canadian Growth Companies Fund is Maxime Lemieux, a protégé of Alan’s for the last 10 years.

Fidelity Global (formerly Fidelity International Portfolio) has been tightened up to hold fewer stocks (now approximately 160) and now allows some emerging markets. We expect these changes will enhance long term returns.

Fidelity Northstar has introduced Cecelia Mo as a replacement for Alan Radlo on the team. Joel Tillinghast, possibly one of the top 5 portfolio managers in the U.S. today, is taking on greater responsibility and the depth of the non- North American team as been increased.

Rebalancing though ClearPath and ClearPlan

To further add to the experience, Fidelity has introduced sophisticated rebalancing services to facilitate the process of buy low, sell high. These services go under the ClearPath and ClearPlan banners.

For new accounts at Fidelity, we are often now initiating one of these services at the outset and we are often introducing the services as we a re going though reviews with existing clients. (I use ClearPlan in the Fidelity component of my own RSP). And these services are free!

Mutual Fund performance includes changes in share value and reinvestment of all dividends but do not take into account sales, redemption, distribution of optional charges or income takes which may have reduced returns. Fees and expenses are associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Mutual funds are not insured by the Canada Deposit Insurance Corporation or any other deposit insurer and are not guaranteed.