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

Portfolios. Bonds may be the highest risk asset in a portfolio. We have had a very high interest rate environment for so many years, and as interest rates come down, bonds do very well. We are at the bottom end of the interest rate cycle. The federal reserve is being very adamant they are going to raise rates. We’ve seen some of that bump already take place on the mid to long end of the curve. Rates going up means bond prices are going to go lower. Thinks the Fed is going to have to start reducing their balance sheet. They are still carrying about $4 trillion on their balance sheet, which was just new money printed by the Fed and put into the system. When you don’t have inflation, that doesn’t necessarily disrupt the currency. But, as you continue to print lots of extra dollars, which is still going on in Europe and Japan, and as the world continues to get flooded with new dollars, it reduces the value of the currency, and you see it going into the value of harder assets.

Preferred shares. Prior to the financial crisis, they traded at roughly the yield and would be roughly 80% of the yield you would get on a corporate bond of the same company. That was because of the dividend tax credit on nonregistered accounts which, when grossed up, gave a little better return on the dividend, after tax. During the financial crisis, a lot of preferred shares got hit hard, particularly in the US. That caused a huge reaction in financial markets, and investors started to realize that companies don’t have to pay a preferred dividend, and not worry about bankruptcy if they don’t. Good quality preferred shares today are yielding about 120% of the yield of corporate bonds on the same company. Thinks they are vastly undervalued and you are getting a better yield that will give you some cushion as interest rates rise and as investors start to gain some comfort with preferred shares. A good way to play the income component of a portfolio.

Cdn All Cap, US All Cap, Int’l All Cap for a portfolio. Is there a theoretical reason for doing this, or just get the World All Cap instead? The argument for using the 3 different ones is how you feel about weighting geographic regions around the world. There is some argument that the European Union markets are probably undervalued compared to the US markets. The argument for having 3 is whether or not you want to overweight a particular segment of the world. If you are just going for an “all world”, you are not getting that. He would argue for having 50% of your ETF equity exposure in the US. That will give you a lot of global economy, because a lot of their major companies are going to be represented in the global companies anyways. He might then overweight US a little and underweight Canada.

How many ETF’s in “an all ETF” portfolio, which geographic areas would you choose, and what would be percentages be? He would have a bond ETF, half of his money would be in a Canadian ETF. As a balanced investor, you would have 50% in the bonds, 10% in cash and 25% in the TSX 60 and 10% in the S&P 500 and 15% in EAFE. These have been 1^st or 2^nd quartile performers since the turn-of-the-century.

Split shares or preferred shares? On a split share, all you are really doing is taking a stock and writing a deep in the money covered call, giving you some downside protection, which allows the dividend to be increased to the point where it is attractive as a preferred. It depends on the underlying security. This is fine if it is a bank. If he were doing it on an oil stock or a broad sector, he would have some concern.

Canadian Dollar? Trying to forecast where currency goes is like trying to predict Wayne Gretzky’s next move based on his past one. It is better than a blind guess, but not much. We have a weaker dollar on the back of US grandstanding regarding NAFTA. Trump’s bark is probably 100 times greater than his bite. He doesn’t want out of NAFTA. We are probably going to have some choppiness in the Cdn$ while we go through that. The dollar is going to perform based on how the US economy strengthens.

ETF for a moderate investor? He would make it simple by putting 60% into the TSX 60 iShares (XIU-T) and 40% into the Government Bond Index (XBB-T), and just rebalance it once a year.

In an RSP, rotate 2 or 3 high beta when the market turns. Good philosophy? This is called market timing, by going to a lower risk model when the market is turning, and to a higher risk model when the market is rising. You can’t tell when the market is going to turn. A combination of high beta and low beta would probably put you in the position you would be if you just had a well-balanced ETF.

Market. He is invested and has 5% cash and 5% gold, so about 10% of his portfolio is hedged, or could go into equities if there was a sharp pullback. If there was a real meaningful pullback, he would underweight his bond allocation by around 10%, and go into equities for the short term.

Breakdown of a portfolio in terms of Canada, USA, Europe, Asia and emerging markets? He is 2/3 US and 1/3 Canada since January 2012. Doesn’t like to invest outside of developed markets. Although there is lots of opportunity he feels they lack regulation, and also many of them use different accounting standards making it difficult to analyse financial statements. Prefers to capture the upside in international markets through multinationals that trade in the US.

Market. One concern is the shift out of sectors that traditionally led the market up after an election. One of those is US banks. On a larger scale, you want market leaders to continue being leaders. If they start rounding over, it can be a sign of sector rotation, but if they are not performing at the time of the year they typically do perform, that could be a sign that the markets are running out of gas. Also, energy is a prime sector that tends to almost work like clockwork and typically gets a little bit of a bump into the spring. It didn’t do that this year, in fact fell back from about $54-$55 to $48-$49. He is building up cash and is at about 25%-26% as he feels the market is a little more bearish than normal. Expects to be 30% cash within the next month.

US banks. He just took profits today. The sector has been underperforming for the past quarter or so, which is unusual for this time of the year. Seasonally, they should be on fire.

Energy. This tends to almost work like clockwork and peak out around the end of April/early May. This year it didn’t at all. It should be having a last-minute bump, but instead it has fallen back to $48-$49.

Sell in May and go away? Although he is a base technical person, he always takes this into account. He is pulling out a little at a time, not bailing out. He has a cardinal rule that his portfolio must have at least 15% cash by May 5. This is because 72% of the time the markets tend to underperform between May and November. He starts to focus on lower beta stuff.

Market. The long-awaited recovery from 2008 started to take place some months before the election results were in, but the Trump victory, and more importantly the double win by the Republicans in the Congress and Senate, were the catalysts to accelerate the market’s confidence that things would change and that we would get more of a pro-growth, pro-cyclical type of market. The S&P 500 has been flirting with the record high of $2400, and wouldn’t be surprised to see a break out above that by year-end. We went 5 quarters in a row from middle to late 2015 to 2016, with falling earnings year-over-year. That has changed with this quarter looking at 12.5% growth in earnings in the US, probably 10% for the full year, and there is still that confidence that the regulation and the long-awaited tax reform will be a boost for earnings. He sees a pretty good economic outlook for the US.