ODLUM BROWN REPORT 05 2018
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ODLUMBROWN.COM
ODLUM
BROWN
REPORT
Modest Cyclical Exposure Warranted
05 2018 Stocks have struggled lately in the face of economic concerns, geopolitical and trade tensions,
higher interest rates and fear of government interference and regulation in the Technology sector.
For the month ended April 15, 2018, the major Canadian and U.S. equity benchmarks declined 2.3% and
6.5%, respectively (measured in Canadian dollars). The Odlum Brown Model Portfolio’s 4.4% drop over
the same period was in line with what one would expect given our near 50/50 split between the
Canadian and U.S. markets. The recent setback reduced our Model’s year-to-date return to -3.0%.
When markets decline, it is natural to wonder if more trouble is on the horizon. We are compelled to assess
our commitment to equities in general and sector allocations and individual stock selections in particular. We
do this regularly and with added scrutiny whenever volatility increases and performance is poor, as has been
the case recently.
INSIDE THIS ISSUE
Nonetheless, context is important when considering past and prospective stock market returns, and it’s important
Page 1 to appreciate the exceptional performance of stocks in recent years.
Modest Cyclical Exposure Warranted
Over the last five years, the Model has appreciated by 94%, or 14.2% compounded annually. Having roughly
Page 2
half of the portfolio invested in U.S. stocks fuelled the satisfying result, with the S&P 500 Total Return Index up
Joint Ownership in Estate Planning
134% in Canadian dollar terms over the same period. The Canadian equity benchmark, the S&P/TSX Total Return
Index, compounded at 8.1% annually over the last five years for a respectable but considerably smaller total
return of 48%.
When one considers how well stocks have done in recent years, the modest setback thus far in 2018 hardly
seems alarming. Investing is a marathon and not a sprint, and it is wise not to overreact to the latest gyrations
in the stock market.
Odlum Brown Limited We do not know anyone with a decent track record of predicting short-term stock market trends, and those
Suite 1100 - 250 Howe Street who manage portfolios with hopes of outsmarting others in the near term invariably do worse than those who
Vancouver BC V6C 3S9 adhere to a long-term plan. Stocks rise over time and do better than bonds because business profits typically
Main 604 669 1600 rise alongside an expanding global economy. We still believe that the global economy will grow over time, and
Toll Free 1 888 886 3586 that stocks therefore remain a good long-term investment.
Kelowna 250 861 5700
Recessions and market corrections are inevitable, and it’s always prudent to assess one’s capacity to ride out
Victoria 250 952 7777
the setbacks without selling. Given that we are in the ninth year of economic expansion, it is particularly relevant
Chilliwack 604 858 2455
Courtenay 250 703 0637 to evaluate the risk and reward characteristics of economically sensitive businesses and question whether our
Langley 604 607 7500 exposures are appropriate. We think they are.
Email information@odlumbrown.com
While there is little doubt that the profitability of cyclical firms will suffer more than the average business
during an economic recession, the likely relative price performance of their stocks is less certain. Price is the
Odlum Brown Limited differentiator and the ultimate determinant of market-beating performance in the long run. With many cyclical
stocks cheaply priced today, there is a reasonable chance that they will contribute to market-beating performance
@Odlum_Brown over a three- to five-year horizon, which is where we focus our attention.
Odlum Brown Community The Model currently has 17.5% combined weight in the Energy and Materials sectors. This represents roughly
half the resource concentration in the poorly diversified Canadian equity benchmark and double that of the
broadly based U.S. stock benchmark. Continued on next page
MODEST CYCLICAL EXPOSURE WARRANTED Continued from page 1
COMPOUND ANNUAL RETURNS 1 (Including reinvested dividends, as of April 15, 2018)
YTD 1YEAR 3 YEAR 5YEAR 10YEAR 20 YEAR INCEPTION2
Odlum Brown Model Portfolio -3.0% 5.0% 5.9% 14.2% 10.9% 12.6% 14.8%
S&P/TSX Total Return Index -5.0% 1.2% 2.6% 8.1% 4.0% 5.9% 8.3%
S&P 500 Total Return Index ($CDN) 0.5% 10.3% 11.0% 18.6% 11.8% 5.7% 9.5%
1 2
Except for YTD period. December 15, 1994.
We believe that our cyclical posture strikes an appropriate and attractive balance between near-term worries
about the possibility of economic downturn and the favourable odds of cyclical stocks delivering above-average
Thunderbird Show Park long-term appreciation.
Spring & Summer 2018 Unfortunately, there is rarely a free lunch in the stock market. Positioning portfolios for long-term rewards
necessitates the risk of near-term pain. For those able to handle market volatility, we believe the potential reward
from cyclical exposure is worth the risk.
We are pleased to be a Premier Partner
of Thunderbird Show Park for the MURRAY LEITH, CFA
2018/2019 seasons. Upcoming events Executive Vice President and Director, Investment Research
@murrayleith
include the Odlum Brown BC Open,
featuring the prestigious Longines FEI The Odlum Brown Model Portfolio is a hypothetical all-equity portfolio that was established by the Odlum Brown Equity Research Department on December 15, 1994, with a hypothetical
investment of $250,000. It showcases how we believe individual security recommendations may be used within the context of a client portfolio. The Model also provides a basis with which to
TM measure the quality of our advice and the effectiveness of our disciplined investment strategy. Trades are made using the closing price on the day a change is announced. Performance figures
Jumping Nations Cup of Canada, from do not include any allowance for fees. Past performance is not indicative of future performance.
May 29 to June 3, and the Odlum Brown
ODLUM BROWN FINANCIAL SERVICES LIMITED
Limited Grand Prix on July 8, 2018.
Thunderbird Show Park has been Joint Ownership in Estate Planning
ranked one of the top horse shows in Often cited reasons for registering property1 in joint names include avoiding probate fees,
North America for five consecutive years. expediting asset distribution following death and easing account administration. Many
This premier equestrian facility is “do-it-yourself” estate plans unfortunately fail to achieve these objectives, nor do they address the
potential pitfalls of owning property jointly, particularly with someone other than a spouse.2
located in Langley, home of our newest
Odlum Brown branch and the horse What is probate?
capital of British Columbia. Process
Probate is a process by which the provincial probate court validates your will and confirms the authority of
your executor. It provides confirmation that the will in question is your final will and gives notice to all named
For more information, visit tbird.ca.
beneficiaries. Before allowing an executor to transfer money or property title in accordance with a will, third
parties such as financial institutions and land title offices require proof that the will is valid and the executor is
the person named in the will. When applying for probate, the executor must swear an affidavit3 that they have
reported all of the deceased’s assets in the application.
Fees
To provide this approval process, the courts charge a fee. In BC, probate fees are based on the gross value of
all estate property and are on average 1.4% of an estate’s value. For example, the probate fee on a $1 million
estate would be just shy of $14,000. Probate fees should not be confused with income taxes. Income taxes may
arise upon death regardless of whether probate fees are payable. Income taxes cannot be avoided by moving an
asset into joint title and could, in fact, be accelerated as a result of adding a joint owner who is not a spouse.
Forms of joint ownership
There are two common forms of joint ownership: joint tenants with right of survivorship (JTWROS) and tenants in
common (TIC). With JTWROS, each owner has an undivided interest in the property with identical interests
and equal rights to the whole property. Depending on the original owner’s intent and relationship with the new
owner, the deceased co-owner’s share may pass directly to the surviving co-owners, bypassing the deceased’s
estate and without reference to their will. With TIC, co-owners have a divided interest in the property and may
hold different shares. There is no right of survivorship, and each co-owner’s share forms part of their estate
and is distributed in accordance with their respective wills (or provincial intestacy rules where the deceased
has no will).
2
ODLUM BROWN FINANCIAL SERVICES LIMITED
Unless stated otherwise, all references to joint ownership in this article refer to JTWROS. Odlum Brown Joins the
Risks of joint ownership Langley Community
There are some potential risks that should be considered before placing a property in joint names, especially
with someone other than a spouse.
To accommodate our growth and better
1) Loss of control
serve our clients across the Lower
The new joint owner of a bank or non-registered investment account could withdraw funds without the
original owner’s consent. On the other hand, decisions regarding jointly held real estate must be made Mainland and the Fraser Valley, we are
jointly, requiring the cooperation of all owners. pleased to announce that we have
opened a new office in Langley:
2) Exposure to creditors
Jointly held property is exposed to current and future personal and business creditors of all joint owners.
Suite 240 - 8621 201 Street, Langley,
3) Exposure upon marriage breakdown BC V2Y 0G9
Jointly held property with an adult child may be exposed to claims by the child’s spouse in the event of a
marriage breakdown.
We look forward to meeting new and
4) Family conflict existing clients at this location!
When only one of multiple children becomes a joint owner with a parent, there is potential for conflict and
dispute among siblings over the parent’s intentions following their death. Did the parent intend to gift the
property to one child to the exclusion of the others, or was the one child meant to simply hold the property
in trust for their siblings? What happens if the surviving joint owner fails to honour a promise to distribute
the asset in accordance with their parent’s wishes? What if they die or become incapacitated before the
distribution?
5) Tax consequences
The Income Tax Act allows property to be rolled over to a spouse on a tax-free basis (at cost). However,
gifts and transfers of beneficial ownership to any person other than a spouse are deemed to be at fair
market value, triggering any unrealized capital gains to be taxable at that time.
Finally, there is a risk that some “do-it-yourself” estate plans that rely on joint ownership with an adult child to
avoid probate not only expose jointly owned assets to the risks identified above, but may not even avoid probate.
This may arise from the inherent contradiction in having the parent retain the full rights and benefits of ownership
without reporting capital gains at the time of transfer to joint ownership, while contending that a change in
beneficial ownership took place for the purposes of avoiding probate.
What is the original owner’s intent?
At the heart of many family disputes and litigation is the issue of whether adding a joint owner presumes
(1) an immediate gift with a right to control plus a right of survivorship, (2) a temporary trust arrangement
without right of survivorship or beneficial interest, or (3) a gift of the right of survivorship with no other rights.
Continued on next page
3ODLUM BROWN FINANCIAL SERVICES LIMITED
The Supreme Court of Canada has ruled in differing ways based on the facts and evidence specific to each DISCLAIMER & DISCLOSURE
situation. When registering an asset jointly (particularly with someone other than a spouse), it is therefore
Odlum Brown Limited is an independent, full-service
essential to clearly document the owner’s intention, which may, for example, be formalized with a “deed of investment firm focused on providing professional
gift” or “bare trust agreement.” As such, legal and tax advice should be sought prior to transferring an asset investment advice and objective research. We respect
your right to be informed of relationships with the issuers or
into joint ownership. strategies referred to in this report which might reasonably
be expected to indicate potential conflicts of interest with
respect to the securities or any investment strategies
Legal and beneficial ownership
discussed or recommended in this report. We do not act as a
Legal and beneficial ownership may be one and the same but can also be held separately. market maker in any securities and do not provide investment
banking or advisory services to, or hold significant positions
in, the issuers covered by our research. Analysts and their
Legal ownership: The legal owner may have property registered in their name (title) but held in trust for a associates may, from time to time, hold securities of issuers
different true owner. Legal ownership on its own has no real value or rights. discussed or recommended in this report because they
personally have the conviction to follow their own research, but
we have implemented internal policies that impose restrictions
Beneficial ownership: The beneficial owner is the real owner of the property and is the one who can ultimately on when and how an Analyst may buy or sell securities they
exercise the rights of ownership on the property. cover and any such interest will be disclosed in our report in
accordance with regulatory policy. Our Analysts receive no
direct compensation based on revenue from investment
If legal title to an asset is transferred into joint names from “A” to “A and B” but beneficial ownership remains banking services. We describe our research policies in greater
detail, including a description of our rating system and how
with A, and on A’s death probate is required, the value of the jointly registered asset must be disclosed on the we disseminate our research, on the Odlum Brown Limited
probate application. The distinction between legal and beneficial ownership is also relevant in determining website at odlumbrown.com.
income tax implications, as it is a change in beneficial ownership (not merely legal title) between parties other
This report has been prepared by Odlum Brown Limited and
than spouses that gives rise to a deemed disposition and may result in capital gains or losses. is intended only for persons resident and located in all the
provinces and territories of Canada, where Odlum Brown
Limited's services and products may lawfully be offered for
Alternative strategies sale, and therein only to clients of Odlum Brown Limited. This
Given the many risks of holding property as JTWROS with someone other than a spouse, it is often useful to report is not intended for distribution to, or use by, any person
or entity in any jurisdiction or country including the United
start by critically considering your main objectives and then deciding which tools or strategies best meet your
States, where such distribution or use would be contrary
needs. Below is a summary of five commonly used strategies to not only avoid probate, but also address other to law or regulation or which would subject Odlum Brown
estate planning objectives. Limited to any registration requirement within such jurisdiction
or country. As no regard has been made as to the specific
investment objectives, financial situation, and other particular
(1) (2) (3) (4) (5) circumstances of any person who may receive this report,
Give Gifts Name Use Two Wills Use a Power of Use a clients should seek the advice of a registered investment
Strategy
advisor and other professional advisors, as applicable, regarding
During Your Beneficiaries For Shares Attorney Trust the appropriateness of investing in any securities or any
Objective Lifetime in Private investment strategies discussed or recommended in this report.
Corporations
This report is for information purposes only and is neither
Avoid probate fees ✓ ✓ ✓ ✓ a solicitation for the purchase of securities nor an offer of
securities. The information contained in this report has been
Keep assets and affairs out of public record ✓ ✓ ✓4 ✓ compiled from sources we believe to be reliable, however, we
make no guarantee, representation or warranty, expressed or
Plan for lack of capacity ✓ ✓ implied, as to such information’s accuracy or completeness.
All opinions and estimates contained in this report, whether
Provide for children from previous marriage ✓ ✓ ✓
or not our own, are based on assumptions we believe to be
Exclude potential beneficiaries from your estate ✓ ✓ ✓ reasonable as of the date of the report and are subject to
change without notice.
Control distribution from “beyond the grave” ✓
Please note that, as at the date of this report, the Research
Conclusion Analyst responsible for the recommendations herein, associates
of such Analyst and/or other individuals directly involved in
Despite some of the risks outlined, holding property with a spouse as JTWROS is typically a very practical the preparation of this report may hold securities of the
strategy with respect to continuous access to the asset by both spouses, as well as avoiding probate fees issuer(s) referred to directly or through derivatives.
upon the death of the first spouse. Introducing an adult child as a joint owner invites additional risk and may No part of this publication may be reproduced without the
accelerate capital gains tax. express written consent of Odlum Brown Limited. Odlum Brown
Limited is a Member-Canadian Investor Protection Fund.
Before transferring assets into joint name, carefully consider your objectives – what are you trying to accomplish? Odlum Brown Limited respects your time and your privacy.
Reducing or eliminating probate is a legitimate objective, and holding assets jointly may accomplish this. If you no longer wish us to retain and use your personal
information preferring to have your name removed from our
But as with any planning, consider the costs (risks) and benefits (savings) of this strategy and whether any mailing list, please let us know. For more information on our
alternative strategies may better meet your needs. Privacy Policy please visit our website at odlumbrown.com.
MICHAEL EREZ, CPA, CGA, CFP
Director
Odlum Brown Financial Services Limited
1
The term “property” includes personal property such as a bank or investment account as well as real property (real estate). The terms “property” and “asset” are used synonymously
throughout this article. 2 The term “spouse” also refers to a common-law partner throughout this article. 3 An affidavit is a document that contains facts that you swear under oath or affirm to
be true and must be witnessed and signed. 4 Privacy is limited to the contents of the will that do not need to be probated.
This article is for general information only and should not be construed as tax or legal advice. None of the strategies described in this article should be undertaken without legal advice. Please
consult your tax and legal professionals to assess your specific circumstances. Odlum Brown Financial Services Limited is a wholly-owned subsidiary of Odlum Brown Limited, offering life
insurance products, retirement, estate and financial planning exclusively to Odlum Brown clients.
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