Report returns in real terms

Canadian investors would benefit from knowing by just how much inflation is reducing their investment returns. Tony Fell, former chief executive of RBC Dominion Securities, has written the Ontario Securities Commission recommending it make inflation-adjusted performance reports mandatory. Informed investors are good for markets' integrity and efficiency, which is what regulators are supposed to aim for. So it's a sound recommendation that merits adoption across the country. It wouldn't cost a lot and would be relatively simple to implement. Statistics Canada already publishes the consumer price index every month.

Most people either don't know or overlook how much inflation is eroding their investment returns. Nor are investment and mutual fund managers eager to bring that information to their clients' attention. They may well oppose Fell's proposal. But disclosing the real purchasing power investors have gained or lost would enhance transparency and enable betterinformed decision-making.

Understanding inflation's effect would help investors see how closely their nominal returns are keeping pace with purchasing power, especially over an extended period when a modestly lower yield can produce a huge difference in principal. Since 1957 the Standard & Poor's index has gained 10.26 per cent a year. After inflation, however, its return has been 6.37 per cent. That makes a huge difference. An initial investment of $10,000 in 1957 would have grown to an impressive $5,185,000 in nominal terms by 2023. But in real (i.e., inflation-adjusted) terms, it would be only $520,506 — not bad, but not even 10 per cent the inflation-swollen amount.

Understanding the ravages inflation can exact would encourage investors to focus on real returns over the long term, leading to more realistic financial planning and a better chance of reaching retirement goals. It could guide investors in deciding which sectors to invest in, how much liquidity to hold, how to deal with volatility in markets and currencies and how to navigate different economic environments.

Inflation awareness may well lead investors to chose equity over fixed income securities, equity having historically provided returns that outpace generalized price increases, in part because many companies can adjust prices and revenue to keep pace with inflation. In contrast, in an inflationary environment an apparently risk-free strategy of staying in treasury bills could significantly erode the purchasing power of retirement savings. During 2022, the TSX rose 8.5 per cent in nominal terms but only 1.7 per cent after inflation. However, the yield on one-year Canada bonds was just 0.84 per cent at the beginning of January, producing a real loss of six per cent.

Generally, value stocks perform better when inflation is higher, growth stocks when it's lower. Certain sectors, such as commodities and real estate, can protect against higher prices since their underlying assets can appreciate in value. Consumer staples and utilities, which offer essential goods and services, may also fare relatively well as demand for their products is relatively price-inelastic. Being aware of inflation-adjusted returns can sensitize investors to such factors. It can also make clients less accepting of mediocre performance and less tolerant of high fees, especially during periods of low or negative real returns. Many analysts say Canada's stock market will perform only modestly over the next decade because of our economy's mediocre productivity growth.

Savings are crucial for the more than three-quarters of Canadians in the private sector without a workplace pension plan. They are among the 4.9 million Canadian households who own mutual funds, many of whom are not financially sophisticated, and the millions of others who own individual stocks and exchange-traded funds. So this strategy would have a broad and beneficial application.

The U.K. Financial Conduct Authority requires investment firms to provide inflation-adjusted performance figures in their communications with clients. The U.S. Securities and Exchange Commission encourages firms to provide such information in prospectuses, but does not require it. Canada could show its southern neighbours the way.

Provincial governments have supervisory authority over securities commissions, which have been slow to adopt disclosure of mutual fund fees nationally, partly due to the convoluted policy-making process of the Canadian Securities Administrators. Ontario Premier Doug Ford has an opportunity to show leadership on this issue. The federal government also has a compelling interest in Canadians' financial security, which is very much a middle-class issue that should find favour across the political spectrum: Jagmeet Singh rails against “corporate greed,” Justin Trudeau claims to care about the middle class and “those working hard to join it,” and Pierre Poilievre has drawn attention to the damaging consequences of inflation, especially for “working class” Canadians.

This is one of those potentially contentious ideas that, once implemented, would leave people wondering why it took so long to adopt.

IT WOULDN'T COST A LOT AND WOULD BE RELATIVELY SIMPLE.