Comments on: Free Investment Management

By: Manulife Dividend Cut and Links

Manulife Dividend Cut and Links — Wed, 16 Dec 2009 05:11:57 +0000

[...] Where Does All My Money Go found the impossible – free investment management. [...]

By: Manulife Dividend Cut and Links « Daily News

Manulife Dividend Cut and Links « Daily News — Wed, 09 Sep 2009 17:02:30 +0000

[...] Where Does All My Money Go found the impossible – free investment management. [...]

By: RR Top 5: In The News Edition(?) | Realizing Retirement

RR Top 5: In The News Edition(?) | Realizing Retirement — Fri, 07 Aug 2009 12:03:56 +0000

[...] Preet from Where Does All My Money Go? details one way to get Free Investment Management [...]

By: The Risks Of Securities Lending : WhereDoesAllMyMoneyGo.com

The Risks Of Securities Lending : WhereDoesAllMyMoneyGo.com — Wed, 05 Aug 2009 23:07:05 +0000

[...] post indicated that the reason the db x-trackers DJ Euro Stoxx 50 Index ETF was able to charge a 0.00% MER was due in part to the revenues it collects on lending out securities to short-sellers. Below is a [...]

By: Preet

Preet — Wed, 05 Aug 2009 20:14:02 +0000

@Cam Birch – we’re talking two totally different things. The x-trackers is a 90/10 synthetic replication ETF structure: 90% holding actual stocks, and 10% holding forward index contracts (or a series of forward contracts, known as a swap). This structure has nothing to do with their securities lending practices. Of the 90% of the fund that actually holds underlying stocks, they can lend these out to short sellers (external to the fund, the fund is not short selling) and charge them interest. Part of this interest collected is used to offset the cost of running the fund + profit.

By: Preet

Preet — Wed, 05 Aug 2009 20:02:03 +0000

@Ink-Stained Gorilla: many ETFs engage in securities lending, and in each case the investor carries the risk (and most don’t know it). Barclays earned about $750 million in securities lending last year, with about 20% of that coming from their ETFs. Securities lending fees in actively managed funds occurs as well. Could be a good story to look into. Some securities lenders share the revenues with the fund, some do not.

By: Cam Birch

Cam Birch — Wed, 05 Aug 2009 18:34:19 +0000

@Preet – I looked into this a little deeper. This is not a fund that deals with short selling at all. This is a swap selling system. Basically You invest x amount in the fund. The bank takes x amount of dollars and invests it where they want and guarentee you a return matching that of the index the fund tracks. Then if the bank does better than the fund they pocket the extra money, if not they chip in the difference. The actual assets purchased cannot exceed a +-10% difference between the index and the actual value. Otherwise this fund is in essence a glorified loan to the bank.

Its a very interesting idea that some of my smarter clients have been using for years when doing investing. With this system you actually have a better return than is typical (at or even slightly better than the index). The risk side is if the bank doing the swap arrangement goes caput then you loose some (or all) of your money. This is mitigated by the 10% requirement, actual assets under management will never be more that 10% from the promised value.

By: Cam Birch

Cam Birch — Wed, 05 Aug 2009 18:10:21 +0000

@Preet – the short seller is “Deutsche Bank AG” (detailed perspectus page 31). The default risk is pretty low considering if the bank defaults on you the fund you are holding will be worthless anyways. If they change their short selling policies and allow others to short sell those shares then the risks would certainly mount.

The main problem with this fund is that you cannot purchase it unless you live in Germany. As has become very standard Canada is a loooooong way behind the curve in unique investment tools (unless overcharging on MER is unique).

By: Ink-stained gorilla

Ink-stained gorilla — Wed, 05 Aug 2009 17:51:57 +0000

If I’m going to carry the lender’s risk, then I would rather pay a nominal MER and take distribution on the interest income.

By: Preet

Preet — Wed, 05 Aug 2009 01:23:33 +0000

@Michael James – Your skepticism is warranted. The custodian providing the short selling abilities has no liability, and the fund has no liability. So if a short seller is unable to meet their obligations, the counterparty risk manifests itself in losses to the fund and hence the unitholder. There are certain provisions required for short sellers, such as they are required to post 102% collateral which must be money market “or similar” securities in most cases, but nonetheless, any risk is born by the unitholder (usually unbeknownst to them).