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

Building a 10 year ladder. With most bonds selling at a premium, won’t this result in capital losses? A ladder is a passive strategy and not a bad way to go. All the bonds now have a premium. They were issued with a fixed coupon, rates have come down and the price of the bond is at a premium. As a bond manager, he looks at “yield to maturity” and takes a little bit off the coupon that you would be getting and this does shrink the yield. He would do it with corporate bonds rather than government, or perhaps mixed, when they are at a premium. A better way to do it would be through a fund or an ETF, instead of doing a ladder.

Convertible Bond Fund? Convertible bonds are kind of a mysterious animal, especially in Canada. Looks like a bond in every way, but at some point there is a conversion feature. Usually, as the underlying stock starts taking off, you can convert to the stock. Usually it is weaker companies, weaker credits that issue these. A good way to play it would be through the iShares Convertible Bond Index ETF (CVD-T).

Markets. It has been a very strong recovery over the last year. He finds that a couple of the names that are large caps are entering into expensive territory, but the whole middle section is very attractive, especially from a yield perspective. Picking the right name with a higher yield is okay if you are careful. He is still seeing some very attractive values. It’s a good time to be in the space. In Canada we are not seeing the participation in the REIT space that would be expected, which is a good thing if you are buying.

Interest rates. They will have to go up over time. So he is not that concerned. REITs will not continue to grow double digits year after year. He does not see those sharp fears from a while back.

How to select REITs? Watch the debt to enterprise value, or debt to total assets. Look at FFO. 12-15 range is fair. Growth is how they are growing FFO over time.

Markets. The economy in the US is still chugging along. It is early in their recovery. Some months, jobs are very encouraging and other months they are not, so don’t make a judgment on one economic number. The 2 year bond yield in the US is starting to edge up, as is the 10 year, which is encouraging to him. Thinks the Fed will move interest rates in the next 6 months. He has 55% of portfolio out of North America. That’s where bargains are. He is looking in Northern Europe and emerging markets. It could take a year or two to pan out for him. Toronto has been one of the best markets this year, but he is worried about oil prices. If the US dollar continues to be strong that does not bode well for commodities and so for Canada.

Financials and how much to allocate. A lot of investors allocate a lot to financials due to weighting in the index. He does not do that. He only owns one Canadian bank (BNS-T). He has 3 US financials.

Markets. The stimulus announcement today was a real surprise. It’s not a huge program, though. There are at least two countries in Europe with bonds having negative yields. You are going to see rate hikes happening over the next 6 to 12 months. This is priced into the market. The long bonds have been outperforming.

ETF? A lot of the European rally has finished. You have to worry about the Euro’s value as it can wipe out your returns. You need currency hedging, but he is not aware of a European Bond ETF that is currency hedged.

Preferred Shares or Bonds? Prefers preferred shares. Five year rate reset are best.

Preferred perpetuals. Fixed dividend rate that never matures, but company can call it. There are very wide credit spreads.

Ville de Quebec. 2.3% bond due Dec 4/18. (Top Pick Nov 22/13, Up 3.5%) It was a short term play.

Time to buy Convertibles? The US market is very different than the Canadian one. In the US they can have 0 coupons and it is just about the option to convert. They can sell off quickly. In Canada one of them is a Top Pick today.

The Big 5 Bank Preferred Shares. Ratings have recently been reduced. The new rules allow shares to count as Tier 1 capital if you have the ability to lose all if the bank goes belly up. The banks have not changed, but the structure of the share has.

Bond Ladder. You should go out 10 years. Longer term yields are higher. Equal weighting per year and 50/50 government / corporate.