Issue 1 - June 2009
In the News: Measuring Investment Losses In a Declining Market
Declining portfolios have many people now questioning the investment advice they were only too happy to follow in recent years. As reported recently by The Globe and Mail, client complaints about their financial advisors are 90% higher in 2009 than in 2007. Given the market downturn, the May 2009 issue of Lexpert magazine also anticipates an increase in securities claims related to investment losses.
Claims involving losses by investors present an interesting issue: How to deal with the losses in light of the declines experienced by major equity indices? Typically, these claims compare actual returns generated against the investment income that would have been earned if the capital had been invested appropriately. The investment income that could have been earned varies depending on the proportion of an investor's assets that should have been invested in either bonds or equities.
For example, we compared the returns from bonds to the returns from equities during the three-year period ended May 31, 2009. As one would expect, the returns from bond investments were positive and returns from equities were negative. A summary of the returns/(losses) from a sample of indices for this three-year period is as follows:
| Asset Class | Index | Returns for the 3 year period ended May 31, 2009 |
|---|---|---|
| Bonds |
DEX Universe Bond Index* (previously Scotia Capital Universe Bond Index) |
18% |
| Canadian equities | S&P/TSX composite index* | (4%) |
| US equities | S&P 500 index* | (23%) |
| US equities | Dow Jones Industrial Average* | (18%) |
* Represents total returns assuming dividends and interest were reinvested. US indices have not been converted to their Canadian dollar equivalents.
Bottom line: When assessing damages in matters involving investment advisors, it is important to consider how the investor's capital should have been allocated between bonds and equities.
