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

Europe. On stimulus, Europe is opening the taps even more while the US is scaling back. This continues to be an environment where they have a combinative monetary policy. We saw them step into a negative deposit rate, and they are contemplating doing asset backed security purchases, injecting more liquidity into the economy and trying to fund small to medium-sized enterprises, which are critical for the economies of countries like Italy and Spain. As a result, he thinks there is going to be an acceleration of GDP growth, but it is still going to remain somewhat lacklustre, probably 1.5% next year. As you pick up from 1%, he feels there is an opportunity to buy some good European dividend payers that will benefit from that improved growth.

Cdn Banks. Royal (RY-T) would be his top pick, but also likes Toronto Dominion (TD-T). Has a bias towards Canadian banks that have exposure outside of “just Canada”, so they are not solely reliant on domestic banking for revenue and earnings growth. However he really likes US banks versus Canadian. Feels the Canadian consumer remains high leveraged, meaning there will be a deceleration in personal loan growth, which negatively impairs a bank’s ability to sustain double-digit ROE’s going forward. Conversely, in the US, he feels there is going to be an acceleration of corporate and personal loan growth that will support ROE expansion, especially after going through several years of very onerous and stringent regulatory environment that has really focused them on managing their domestic banking franchises and expanding them profitably.

REITs. He likes the apartment sector better than the retail and office sectors. They have access to cheap financing so they are borrowing at very low rates. A lot of apartment REITs are well-capitalized, and is a coveted institutional asset class. If the economy tanks, demand for low income housing increases. Also, have shorter lease terms, which is a great way to capture inflation.

Markets. Euphoria in the market is not good for anyone, but he thinks there is enough worry and skepticism right now that this is not a problem. The memories of 2008-2009 are still unbelievably with investors. This whole move in the last 4-5 weeks has been greeted with a lot of skepticism, and people are looking for the next correction. Feels the retail investors are not fully invested, but institutional money is fully invested, as they have had to turn to the equity markets because of the rates they are getting in their pension funds, etc.

Markets. There is a global savings glut where more money is chasing fewer bonds, US slow down, Low EU inflation and many more factors contribute to this. We should see a re-acceleration in growth in the second half of this year. Invest in investment grade 4-5 year corporate bonds. Stick with quality. He was not banking on the US slowing earlier this year. US deficit has improved rapidly and now there is a net shortage of government bonds. People thought the commodity market would be flat this year, but it is up and holding its own.

Preferred perpetual in a rising interest rate environment. The features and options are in the hands of the issuer. They perform badly in a rising interest rate environment and you should not hold them. Prefers reset varieties.

Bond Ladder. Disciplined way to protect capital and earn a decent return. Staggered maturities. Divide into partials and invest in increasing maturity durations and then renew as each year matures.

Convertible bonds give you the right to convert into a common share at a pre-determined price, but pay interest until converted. You have to know the underlying company before you buy them. They are expensive now and often yield less than the underlying portfolio.

Laddered GICs: He is in favour of them if you have limited access to bonds. You don’t pay a premium to buy them like corporate bonds. They are safe to $120,000 up to 5 years due to insurance (so use 5 year ladders). They are for people who are not willing to put their capital at risk. It is a dangerous time to reach for yield right now with corporate bonds. You get the most principle risk.

GICs: Illiquid – you can’t trade them. It comes down to relative yield. Prefers 1 to 10 year ladder. There is a place for them and they are safe.

Reliance LP 4.574% maturing March 15/17. (Top Pick May 6/13, Up 4.41%)

Real Return Bonds Maturing 2026: Low coupon and long duration. The principle is linked to CPI and interest is based on changing principle amount. Not the right time to be buying them because you only get 0.7% above inflation. He recommends getting out of them now because they are performing a little better this year. These have a lot of downside risk to them.

Call date gives company a right to purchase the bond back before it matures. Usually involves a premium. They can call it any time after that date.

Preferreds (vs. Common Shares). A lot of anomalies will be normalized in future years between the two. There should cease to be the narrow spread between common and preferreds. Stick with really high quality ones and with rate reset varieties. Not a good time to buy perpetual preferreds. Common stocks are better relative value.

1-30 year ladder. Doesn’t do those on a ladder. There aren’t always enough years represented. He does 5-10 year ladders.