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Opportunities abound to use international investments when saving for retirement.  But even the most successful investment can be impacted by currency fluctuations.

The foreign content limit for RRSPs was eliminated in the 2005 Federal Budget, allowing Canadians further diversification in their retirement portfolio.  With this opportunity however came additional risk.

A simple example

The impact of currency fluctuations can be seen in the following example. Our fictitious friend Jane decides to purchase shares in Coach Inc., because she loves Coach purses and believes that the company’s stock will increase dramatically.  She buys 100 shares at $11.80US on March 6, 2009. 

The exchange rate on that day is $1.2863, so the stocks cost her $1,517.83CDN.  For simplicity we will ignore dividends and brokerage fees.

On January 9^th 2010 Jane decides to sell her Coach shares which have risen to $37.27US per share yielding $3,727US, a $2,547US or 216% gain. The exchange rate on that day is $1.0344 meaning the value of the Canadian dollar vs. the US dollar has risen since she purchased her shares, making her US dollar denominated stocks worth less Canadian dollars.  Therefore in Canadian dollars her stocks on sale were worth $3,855.21CDN, a $2,337.37CDN or 154% gain.

Without exchange rate fluctuations, her gain would have been $3,276.20CDN, which means she lost $938.84CDN due purely to changes in the relative value of the Canadian dollar vis a vis the US dollar.

Mitigating exchange rate risk

The risk isn’t always downside risk – one can gain on the exchange rate as well when the foreign currency appreciates relative to the Canadian dollar.  However, when thinking about investments denominated in foreign currencies, one should include exchange risk when assessing their overall relative risk tolerance.

Relatively small holdings such as an individual’s RRSPs cannot support hedging operations akin to those that large institutions and multinationals undertake, so what’s a little guy to do?   Educate yourself about currencies – read the forecasts and consider them in whether it makes sense to purchase the stock, and when it makes sense to sell.  Then keep an eye on the exchange rate and time your sale to optimize a) the price of the stock, and b) the currency to maximize your overall return.  Build this “cost” into your equation, much like you would your brokerage fees, or capital gains…it’s just a little harder to estimate.

Yes, foreign investments offer a wealth of opportunity for Canadians.  With the proper consideration of all of the risks, we can make better informed choices.

By now we’ve all heard about the Ontario Government’s plan to lower prescription drug prices by banning professional allowances paid by generic drug manufacturers to pharmacies.

Drug companies provide these allowances or discounts to pharmacies in return for exclusively stocking their brand of generic drugs.  It is subsequently built into the price that is passed on to the consumer.

A significant portion of a pharmacy’s revenue comes from these allowances. This is particularly so for smaller independents then larger corporate chains who depend less on their prescription related revenue.

What is not being said however is that the generic drug companies also stand to lose as a result of the reforms.  Without the professional allowance arrangement they will lose their exclusivity with pharmacies.  Therefore the drug companies have a strong incentive to find a solution to the pharmacies’ perceived loss as a result of the Ontario Government’s reforms.

How will the generic drug manufacturers address this issue?  They might consider borrowing a trick or two from their name-brand cousins.

Brand name drug companies already deal with a similar situation vis a vis physicians, who are subject to OHIP regulations and the Canada Health Act.  In return for prescribing their name-brand drugs, physicians receive incentives including free samples, conferences and trips, and research funding.

I think in the months to come we will see the generic drug companies using some innovative pricing strategies to once again secure pharmacies’ allegiance.

One final though.  What is the Ontario Government doing to lower the price of name-brand drugs?

Recently I picked up a small box of Godiva truffles to share with my spouse.  What a disappointment.  They were hard and the flavour was inferior.  At a price of $3.33 per truffle I felt I had been ripped off.  You see, truffles from Eitelbach at $1.50 per truffle are heaven in a box.  Their truffles are fresh and they offer a nice variety of flavours.  Soma offers its truffles at $2.00 per and are also excellent.

With other better quality truffles available, how can Godiva sell theirs at premium prices?

Godiva is held by a Turkish confectioner Ülker Bisküvi Sanayi, who purchased the company in 2008 from Campbell Soup which previously held it for 40 years.  Eitelbach Baumkuchen Pastries Ltd. is a small Toronto based privately held company opened in 1989 and has two retail locations and an on-line store shipping to Canada and the US.  Soma Chocolatemaker is owned by David Castellan, a former executive pastry chef at Oliver Bonacini restaurants. It opened in 2003 and has one retail location in Toronto’s Distillery District and online ordering shipping in Canada only.

How does Godiva do it?

The majority of chocolate consumers do not eat fine chocolate on a regular basis, if at all. So when it comes to special occasions or communicating thoughts of affection, Godiva is seen as a safe bet.

So why did I purchase the Godiva truffles?  This was a spur of the moment purchase, with no Soma or an Eitelbach in the vicinity and no time to order from their websites.   I relied on my perception of Godiva chocolates, the perceived perception my spouse would have, and the reassurance that the higher price provided that I was buying quality chocolate.

But because I have tasted quality chocolate, I knew instantly on tasting the Godiva truffles that I had been had.

That is the key to successful marketing – having customers believe a desired attribute about your product.  We believe that Godiva, Soma, and Eitelbach offer quality truffles.  In the latter two cases I believe it to be true because I’ve tasted them and know they are good quality chocolate.  In the case of Godiva, I was relying on truth in marketing and appropriate pricing. 

I would liken Godiva’s strategy to Starbucks’ (see post “The Starbucks Strategy”) in that 15-20 years ago before relatively good 70% dark chocolate graced the shelves of every grocery and drug store in the land, Godiva was relatively speaking, fine chocolate.  However as the years passed and demand for good chocolate increased, Godiva opted to pursue a volume strategy, while getting by on status quo quality.  

This brings me to my last point – making the customer believe something that you can’t or won’t deliver on leaves a lasting negative impression.  The worst kind of PR a company can have.  And while an entity as large as Godiva may be able to withstand a some disappointed customers, many small businesses whose reach is a great deal smaller and depend on repeat business, can’t. 

The moral of this tale?  Tell an honest story, deliver on your promises, and price appropriately.

The venerable $20 bill – probably the most popular bill these days thanks to ATMs.  But how do they impact small businesses?   My local dry cleaner and gelato place offer two good examples of the problems $20s cause.

Both of these companies do a lot of cash business, often with only 1 employee in the store at a time.  So if they have to give change for a twenty or larger denomination bill on a regular basis, they can be in a spot change-wise in pretty short order. 

I recall one morning walking into my drycleaner when another customer was giving the staff person an extremely hard time because she wouldn’t accept a $50 bill for what was a small order.   She explained that she simply couldn’t make change for such a large bill.  He finally coughed up something more appropriate, and left with some not so nice parting words.  I subsequently made her day by giving her exact change!  She said to me that if she was to accept such a large bill from the gentleman, she’d be out of change in no time with no one to mind the store while she went to the bank to replenish her float.

Then other day I visited a local gelato place that we like to celebrate the warm weather with our first taste of the season.  All I had was a $20.  Our order was just under $10 so I felt badly and mention the same to the woman who served me.  She thanked me for saying so and asked me to spread the sentiment.  Being Easter weekend, she felt it would be a challenge to make it through till the following Tuesday without feeling the pinch.

There are usually many opportunities to use big bills, at grocery stores and other large corporate stores that have plenty of float from which to draw on.  Not even considering the counterfeiting issue, using small bills when patronizing small businesses makes their lives a little easier, and isn’t that part of supporting our community?  I think so.