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

Perpetual preferred shares and interest rate increases. Perpetual preferreds are not his favorite holding, because of the interest rate increases. However, after selling most of their interest rate sensitive holdings, he is thinking rates may be peaking. He would hold an ETF for a preferred portfolio such as PFD-T. He thinks the equity market for common shares may provide more liquidity, such as Fortis, Altagas or Enbridge and they tend to have a lower beta as well.

What maximum percentage would you recommend for a holding? Hold no more than 25% for an individual sector. Base metals holdings would never get this close, but banks and utilities could approach this. Individual stock holdings would average 5%, going as high as 10% for high-quality holdings.

How to play the US trade tumult? You have to look through it. It’ll calm down. US earnings quite good, economy is strong, employment’s good, consumer’s in good shape. In Europe, they’ll start to move off monetary policy, and towards fiscal stimulus, especially in Germany. Low rates aren’t doing anything for Europe anymore.

With the TSX hitting new highs, can investors heavily invested in Canada, expect better than 2% this year? Depends on energy, doesn’t see much happening with financials. Excitement in energy has been due to the lift in crude oil prices, but this is temporary. Not that there’s anything wrong with Canada, it’s just there’s not enough fuel in the tank to get Canada beyond where it is.

Canadian financials. Will they keep going sideways? Yes. Canadians have been heavy borrowers for housing, but regulations have cooled this down. Profits are the fuel for earnings. At end of the day, earnings can’t go up if profits aren’t going up.

Benefit of ETFs. Important to diversify your portfolio. All the big ETF providers have full suite of non-Canadian stocks and bonds, hedged and non-hedged. He encourages people to move outside of Canada.

Covered call ETFs. Covered call ETFs attract attention because of the big yield. Over a longer period of time, a regular ETF will do better than covered call. What you get in income, you give up in performance. They’re very expensive, by at least 0.25%. Looks like it’ll work, but it doesn’t.

Fixed income ETFs. Protect against capital losses in rising rate environment? If looking for some sort of FI vehicle, and don’t want any capital loss at all, your only option is to buy GICs. A fixed income ETF will still have price movement. When rates are rising, you want short-term, low duration (2 years or less) ETFs. XSB and ZST are good examples. ETF is much less sensitive to rising rates, and when rates start to rise you can go over to cash.

Rate-reset preferreds. Preferred share market in Canada has become complicated with all these resets. He uses HPR, which is actively managed. Would work pretty well in rising rate environment.

For a small cap ETF, IWM or OUSM or IJR? Granddaddy is IWM, which has already had a pretty good year. For small cap in the US, go with this because it has liquidity. You can use the options market if you want something fancier. Be careful, as this are subject to US estate taxes. In Canada, use an active manager in this space. Canadian small-cap needs an active manager, rather than an ETF.

Tech ETFs right now? Too late for this. Had a fantastic run. The S&P 500 is the harbinger of all equities, at 60% of the market. Driven by tech stocks, which are mainly US. Everything good about tech is already there. If anything goes wrong, they’ll be hit. Look to 2001-02 for the tech wreck, though now it’s a much more solid market.

Emerging market small-cap? This is a specialty. Go to an active manager like Mawer for global small-cap, non-Canadian.

US banking deregulation. US banks will get into stock manipulation, which will make the stocks do better. ZUB and ZBK track this, and he expects good performance in the back half of this year.

Investing in Russia? All these countries have an intersection of capitalism and communism or a dictatorship. Cautious because of the dominance of energy, which duplicates energy risk that you’d already have in Canada, plus adding political risk.

Market. He cannot talk about Hydro One and there is a process in place and it is best if he does not talk about it. There is a whole process that takes place to replace the board. In the markets it is a real mixed bag out there. There are a lot of one off opportunities. Energy is interesting. In general the valuations are not as compelling as they were a couple of months ago except for a couple of high quality players. The market is more stretched in the US. He is a bottom up stock picker. Brazil is pretty inexpensive and there are parts of Europe that are cheap too.