The good

Depression and post-mortem

The entire financial system almost tanked in 2009. It finally survived and markets soared. Was this crisis predictable? Read The Efficient Markets Hypothesis: The Demise of the Demon of Chance? doc.1483 by Stephen Brown who discusses the theory of market efficiency in the context of a financial crisis.

Who (and what) caused this unprecedented crisis?

An OCDE report (OCDE report 2009 The Elephant in the Room doc.1504, p. 23) concludes that excessive leverage and risk taking were the prime causes of the crisis. And who picked up the pieces? The report (p.15) estimates that over $US 1.5 trillion in emergency capital was invested in banks worldwide and over $US 5 trillion of asset purchases, guarantees and other aid were extended to banks. And if Canada avoided the worst of the crisis (Canada made no emergency capital injections), the Canadian program of asset purchases and other aid to Canadian banks was the sixth largest of the 29 countries in the OCDE report. Will we receive a thank you note from Canadian banks?

In the U.S., but not in Canada, the search for causes has begun. A first report was published on the U.S. government aid to help banks overcome the crisis, but contributed little to explaining the crisis itself; see the Barofsky inspector General AIG report (or as PDF doc.1484)  and an article (or as PDF doc.1485) in the New York Times by Morgenson.

The U.S. government in 2009 created a national commission to investigate the causes of the financial crisis; see Wikipedia . The committee began sitting this winter and should report before the end of 2010. This committee could be a historic turning point if it makes critical conclusions and recommendations with respect to the role of the banks and other financial intermediaries, as well as remedies to limit future risks. In Canada, no equivalent study of the financial crisis in general nor of the uniquely Canadian asset-backed commercial paper crisis is scheduled.

Market recovery

equity markets around the world hit their lows in March, and then rose dramatically. For results for the year, see our previous commentary: The financial markets in 2009: how did your portfolio do? .

Beginning of the end for unfair management fees?

Canada holds the dubious record for the highest costs of actively managed mutual funds in the world; see Guess where the cost of investing is lowest? on our site . One unusual feature of the Canadian system costs is the high level of trailer fees. Most investors don’t understand that these fees, which are part of the management fees paid by the investor in actively managed mutual funds, are not used to better invest the money in the fund, but rather are handed over to the broker through whom you purchased your investment in the fund. In other words, they are marketing costs, not costs to better manage the fund on your behalf.

In the U.S., called the equivalent charges are called 12b-1 fees; general fees on mutual funds in the U.S., see Wikipedia .They are only 50% of the level of trailer fees in Canada; see Kid (or as PDF doc.1486A) . The SEC announced in 2009 that it would begin a regulatory review that could lead to a ban of such fees; see article Zweig Wall Street Journal (or as PDF doc.1486) .

In Canada, the regulatory silence is deafening. When will Canadian provincial securities commissions take steps to reduce the costs of actively managed mutual funds?
 
More attacks on mutual fund
 
In Canada the Bank of Montreal has launched a family of exchange traded funds; see ETFDataBase and Larry MacDonald . In the long term this is probably going  to undermine actively managed mutual funds sold by the same bank. That is a sign that even the banks expect that the domination of actively managed mutual funds will inevitably continue to erode.
 
In the U.S., discount broker Charles Schwab in 2009 announced the launch of a family of ultra-low cost exchange traded funds to that it will sell to its own customers; see IndexUniverse (or as PDF doc.1487) and InvestmentExecutive (or as PDF doc.1488) . This is yet another sign that the domination of actively managed mutual funds is starting to falter.

TFSA launch successfull, but at the expense of RRSP’s
 
2009 was the first year of the new investment plan, the TFSA; see our review TFSA versus RRSP: are certain investments more suitable for one or the other? on our site.

This product has proved very popular, but success comes with two caveats:

• The major Canadian banks quickly took almost total control of this new market; see Kid  (or as PDF doc.1490)  ; and 
• The continuing decline in contributions to RRSP’s that we see since 1997 (see report Royal Bank RRSP - or as PDF doc.1491  ) accelerated in 2009 (see article Won Globe & Mail doc.1492). It seems that Canadians who contributed to a TFSA in 2009 did so by reducing their contributions to RRSPs. Ideally, investors should contribute the maximum to both. Remember: it is your rate of savings, not the return on your investments, that is the best predictor of how much you put together for your retirement; see Savings and returns on our site  .
  
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