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

Preferred shares price declines? The Bank of Canada really triggered this with their surprise cut. This all occurred when global rates were falling, which means that five-year yields have just absolutely tanked. They are going to call most of these preferreds, and probably issue them at a narrower spread.

Risk in bond ETF’s as opposed to individual corporate bonds, if held to maturity? There are a few subtle risks in ETF’s that should be explained. With individual bonds you know exactly what you are going to get back, when you are going to get it back, and how much it is going to be. ETF’s by nature invest in a basket or an underlying index of bonds. There is no guarantee they can buy all the bonds in an underlying corporate, because some of the corporates are impossible to buy. Your money never matures in an ETF, which is the same criticism he has in mutual funds. The good thing about ETF’s is that they have good diversification and low fees, compared to mutual funds. He prefers individual bonds.

Equities vs. Bonds? Thinks stocks are not that dangerous right now, because they are being underpinned by cheap money. Bonds are probably a little riskier right now than they have been for a long time, because their yields are artificially compressed, and at some point in time will rebound.

A corporate, government or other ETF that would do OK in a gradually rising interest rate environment? You could look at iShares Core Cdn Short Term (XSH-T) which has a short duration of about 2.8 years. Also, the iShares 1-10 Yr (CBH-T) which has a duration under 5 years and a reasonable diversification. These are 2 that he would recommend. (See Top Picks.)

Senior Secured Floating Rate Loan Fund for a 75 year old? He has a problem with this investment. He would like to know who the issuer was of the paper and decries this kind of investment, because people are reaching for yield in products that they have no business being in.

US bonds? Doesn’t think you should buy any US bonds right now. The Cdn$ has fallen too far and too fast, and has fallen below its purchasing power of parity. Over time it will work its way higher again, maybe to the mid-$.80’s and perhaps close to $.90. You have much less risk by staying in the Canadian bond market at this point.

3 months to 1 year effect on Canadian markets of the recent Bank of Canada rate cut and European quantitative easing? Indirectly this has an effect because it makes people look for more risks because bond yields are going to be close to zero for the next period of time. People look around for something to buy that makes more sense, and Canadian equities would be an attractive place for global investors to look.

What do rising rates do to high yielding equities such as Emera (EMA-T), Fortis (FTS-T), TransCanada (TRP-T) or Enbridge (ENB-T)? In this marketplace, the yield on bonds is so much lower than these higher yielding utilities, that if there is any weakness at all, it will be very, very slight in the early stages of rising yields.

Rate Reset vs. Perpetual Preferreds? Definitely avoid perpetuals, because they will be the worse hit by rising bond yields, which is going to happen eventually. Rate resets are the only preferreds to buy, and right now you would want to buy bank ones trading at a discount from their Call price if you can find them.

Laddering bonds using 20% RBC Target 2015 (RQC-T), 2016 (RQD-T), 2017 etc.? He likes the target maturities. These are a bunch of bonds in a basket of each of those maturities. Very low cost. Bank of Montréal has ETF’s similar to this, with a shorter maturity. Not quite as effective, but very attractive.

Target maturity bond ETF’s as an alternative to buying individual bonds? He still prefers individual bonds.

Bond education. He has authored a book called “In Your Best Interests” and “The Ultimate Guide To the Canadian Bond Market” is the trailer. This is available at any Odlum Brown branch or at Amazon. You can also ask him questions on his website www.inyourbestinterest.ca where you can ask him questions.

Videotron 2020 corporate bonds maturing in 2020 at a coupon rate of 7.125%? This is an attractive coupon and he likes the credit. If you sell them, you are not going to be able to replace the income.

Markets. Usually it’s recessions that cause an end to a bull market and she doesn’t see that, particularly in the US. There are very strong employment growth numbers, housing is picking up, consumer spending is picking up and the sentiment is improving. All of these things point to an expanding economy. The recovery is actually accelerating. US GDP has gone up 3.6%, and had been under 3% for the last 9 years. She thinks the US has a good chance of carrying the rest of the world, and actually may boost the rest of the world. The collapse in crude oil prices is benefiting the US consumer, as well as a lot of other countries. For this market to continue going up, it is all about corporate profit growth going forward. Earnings season is underway right now and she thinks it can grow in the mid-single digits. Despite the headwinds of currency, she still sees lower interest rates.

Investing Style. He likes to look for names where there are zero, 1 or 2 analysts on the name when he initiates a position. Doesn’t like being the 5^th, 6^th or the 20^th person to look at a stock. Being early and looking at under-owned and under-researched names allows him to unearth some interesting opportunities, particularly in the mid-cap space. There are only about 450-500 names in this category in the Canadian market, so he typically invests in a maximum of 40 names, which means he is looking for less than 10% of them. Has a library of names that he knows, that he built up over the last 7 years, and he tends to stick with his knitting in those names. Has 4 components to his portfolios, but pair trading is the bulk of it. Two thirds of his portfolio is in pairs trading. This means going Long in one position and typically going Short a stock in the same industry. That helps you to take out market specific risks, but also industry specific risks. A great example of that would be Canadian National (CNR-T) versus Canadian Pacific (CP-T). As the market moves up or down, it is how they move together. Because they are in similar industries, you can offset the impact of rising or falling diesel prices, or weather, or currency impacts, so you can really isolate the alpha in those 2 trades. What people miss on pairs trading is that it is not in absolute terms what happens to the stock, it is how they react relatively. For example, in a falling market, both of them can fall in value, but as long as the Short position falls more than the Long position, you actually earn money. This means you can make money in any market condition.