For example, you can safely triple your return on a basic bank account this week by choosing Oaken Financial or Luminus Financial. Both are covered by deposit insurance and both are paying 1.75 per cent on a savings account — the best rates I could find. By comparison, my bank is offering 0.55 per cent for a similar account.
You can more than double that return by investing in the shares of Canada’s largest companies. These are the places where you shop, such as Loblaws, Metro and Canadian Tire, or where you buy phone services, such as BCE and Telus.
Brookfield pays a 65-cent annual distribution, so based on the $ 10 issue price, the yield would be 6.5 per cent.
The fund’s structure is complicated. It uses derivatives-driven strategies to reduce taxes by distributing the money as capital gains rather than the interest you’d normally earn from a fixed-income investment.
But four years later, the fund is worth $ 7.41 a unit, a decline of 26 per cent.
The fund has not been able to generate the money it needs to pay the distribution, so to make up the difference it has been returning money to unitholders. As it does so, the unit price falls because the fund is smaller, so each unit is worth less.
Brookfield says it can’t comment on how a financial adviser marketed the fund. Alice Olive, a marketing vice-president with Brookfield in Chicago, said in an email that it invests in companies that have better performance and default records.
Olive said Brookfield’s strategy is sound, but 2015 was a tough year for high-yield securities, particularly in the energy and commodities sector. She says the market for high-yield corporate bonds has improved and through July 25 the fund’s value has risen.
Dan Hallett, a partner in Oakville’s Highview Financial Group, says the fees associated with this fund are high. It was sold as an initial public offering at $ 10 a unit, but before it landed on the TSX, fees of 52.5 cents a unit were paid out to the brokerage firms underwriting the issue. There were other fees as well.
“In other words, investors who bought this as an IPO were sitting with a fund worth $ 9.41 when it started trading,” Hallett says.
Hallett says the fund was initially able to support its payout, but the distribution was set at such a high level it didn’t allow for bad years. So when oil prices collapsed, the fund was hurt, as Olive noted.
Hallett figures with the lower asset value, Brookfield needs to generate a 12-per-cent annual return to pay its fees, keep distributions flowing at the same rate and stop the unit price from falling further. He thinks that is unlikely.
The lesson here is that the lure of high yields in a low-rate world is hard for many people to resist, but they may not fully consider the risks. As well, the more complex the investment, the more it usually costs. Finally, think twice about an investment that’s based on a tax advantage. The Canada Revenue Agency doesn’t like them, and rules change accordingly.
“We should have been more careful,” W.H. admits.
If an investment seems too good to be true, it probably is. If somebody is offering you 6 or 8 per cent in a 2-per-cent world, ask yourself why.
More columns by Adam MayersEND