A Comment -- General Comments From an Expert (A Commentary)

Markets. Target Date funds in the US. You buy a retirement package that matures late in your life. Dropped in 2008 even though it was designed not to. They don’t eliminate volatility, but over the long run they do well. The growth of this sector is fantastic and they are now coming to ETFs. You can buy target date ETFs. 17 basis points cost. A robo-advisor is a program on the Internet that spits out a portfolio when you put in your risk tolerance, etc. There will be a correction at some point. This is when you need your advisor.

REITs are interest rate sensitive. It looks like the Fed consensus is to raise the interest rates around mid-next year (March to June). The market knows this. The economy needs low interest rates right now. He thinks the rise in interest rates when it comes will be little.

Because volatility is right now at all time lows. The cheapest form of insurance is options. A put option on the S&P or TSX will hedge you against a 5%+ decline and cost about 5%. Buy put protection from the indexes. He thinks the correction will be 5-10%, but not 20%.

Markets. Rates: They are looking for lower for longer. The US economy should do better in the second half. Longer data rates should inch higher in the next year. As data from the markets comes in stronger, the Fed should be pushed a little. Jobs data coming out later this week should be mild. There should be no rate adjustment in Canada in the next while and the economy should lag the US in growth. Play a bit defensive, overweight good quality corporations. Get some US dollar exposure. Maintain a short duration portfolio.

Rising Interest Rates – how to play in the short term: You don’t want to get too bearish on bonds too soon. Own a fund that has the ability to own floating rate bonds, rather than own them directly, so they can manage them.

Educational Segment. Does Rally Have More Room to Run? Divergence readings continue to build and sentiment indicators are not extremely bearish or bullish. Market breadth lets you see what’s going on under the market. Advance/decline lines show how many stocks go up vs. down. NYSE A/D line has made higher highs whereas the NASDAQ has not. Russell 2000 stocks corrected 10% this year and other small caps corrected up to 20%. The large cap market did not correct during this time. Last week the R2000 came very close to a high. The NASDAQ has not made a new high. History tells us that the Large Caps should follow suit, but he is only looking for a 5-10% correction. There is no reason for a bigger correction at this point.

Convertible Debentures. Tricky security. Make a lot of sense in theory. If the stock does really well you have upside participation. The strike price is usually 25-50% above the current price of the issue, and the paper is subordinate. You want to be careful about where you are in the capital structure.

Bonds vs. Life Insurance. Corporate bonds have a yield spread above government bonds that provides a cushion against rising interest rates. Lifecos typically do a bit better in a rising rate environment. It has to do with the present value of bonds as rates rise and the eventual liability lowers.

Laddered GICs vs. Laddered Bonds. Instantly cashable GICs cost you in terms of rate. You have to be willing to commit the money for a GIC. An open ended mutual fund allows you to invest in something else if you want to at some point. A corporate bond ladder means you are constantly investing, but you can’t take advantage of rates being high or low in making a trade. Laddered bonds are a more mechanical portfolio. If you know that in so many years you need the money for something, then you can use a ladder to get to that date.

Nova Scotia Power Bonds 6.95% August 25, 2033. The fall in long term interest rates really benefited this security. Holding it going forward means you have a long way to maturity. If it is the only long term maturity it may be okay. Otherwise move to 3-5 year paper.

Sovereign European Bonds. In the last year and a bit we saw significant convergence. There are still opportunities such as Spain. 6% bond with a 5 year maturity. Likes the risk reward of the name. Thinks it is unlikely that the EU will fall back into recession.

2021 Canada Real Return Bond. Real rates have fallen in the last couple of years. This could be held until maturity. Longer maturities should be avoided.

ICASA Bond 8.875% due May 29, 2024. Involved in infrastructure build out. They got downgraded last year. He likes the name and the Mexican story.

Portfolios. Now is probably not a bad time, at midyear, to actually start looking back to your plan in terms of what your asset mix ought to be, and rebalancing. He has been taking some money out of equity, and putting it into cash for the time being. He’ll then be deploying it into income for the remainder of the quarter. Now is the time to take some profits and sell some winners, putting that money into things that have done a little less well.

What’s the best way to play a rising rate environment in both the short and long-term? This is a bit of a misnomer. We are not in a rising rate environment. We are, and have been in a flat rate environment for the past 3 years, and expect it will persist for at least 1 more year. Because of this, you are going to be getting low single-digit on any kind of single debt instrument, no matter what you do. He is using a lot of equity linked GICs, which are structured products, and are tied to the stock market, but guaranteed not to lose money.