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He never recommends that individual investors play real return bonds at all. Very challenged asset class. Buy at the wrong time, and you could have a really bad outcome. If inflation expectations are fully anticipated, this will give you a bad return. If inflation is underestimated, then this would be a good holding. So you have to have the ability to do that analysis, and it's not a skill set that most people would have.
Are you getting compensated enough by that additional yield for a shorter-term bond to take that interest rate risk? Right now, he prefers the US to Canada. Canadian long-bond yields are about 125 bps below those of the US. So he's not wild about them.
Much prefers the long end of the US curve where the yield is north of 5% at this point. But the challenge is the currency exposure. It speaks to being a sophisticated investor in terms of bond exposure. If you think a hard landing's coming, they'd absolutely be good for a trade. Institutional investors can do these kinds of trades all day, much more difficult for individual retail investors.
Put-write covered call strategy, very tax-efficient yield strategy (though that doesn't matter in a TFSA). You'll have about half the risk of the S&P 500. If your house purchase is in the next year, then no. Not something you put your safe $$ in to use as a deposit for a house a year from now. If that purchase is 5-10 years down the road, then he likes it a lot.
It's still equity risk, even though it's less risk with a higher yield.
Tweaking Investment Exposure
He often gets questions about whether it's a good time to invest now, and it's usually new money coming off the sidelines. Right now, the US equity market's at all-time highs. One of the ways you can be a bit more conservative at times, or aggressive at times, is by looking at different ways to get exposure to the US large-cap area. And you can do that by using factors.
He brought along a chart of 5 different ETFs as ways to play: SPHB, SPLV, SPHQ, SDY, and SPY.
SPY -- low-cost MER, broad S&P 500 exposure.
SPHB -- S&P, high beta. Rebalanced a couple of times a year into the higher-volatility names. Typically exposed to ~20% of the index.
SPLV -- S&P, low volatility. About 20% of the index, typically higher yield. In the long run, similar returns to the broader market.
SPHQ -- his favourite factor. High quality. In the long run, uses filters to give you 20 names of the highest-quality companies in the S&P. Good balance sheets, less sensitive to the economic cycle. Some dividends, some growth. High-performing names. If you can handle the ride, this is the one to buy and hold.
SDY -- a way to play the S&P with a dividend basket.
Reality is that depending on what kind of investor you are, there's a different solution for everyone. Right now, with markets at all-time highs, he's not comfortable telling people to take $$ out of the bank and put it in the market. If you did right now, he'd say to go low volatility or high dividends. Because...look at his next chart.
The next chart shows that, during volatile periods over the years, when it's bad (as it was during Covid or 2015-2016) the low volatility and higher dividend options give you a better experience. They keep you invested, with more yield and less downside. But after a correction (typically about 13%), you want to pivot and shift into high-beta names for more growth, the broad S&P, or high-quality names. But do this when markets are cheap, not when they're expensive.
Learn which tools work in which environment, but there's an ETF for just about every person out there. Always stay fully invested for the long run, as it's really the best thing people can do. But tweak your exposure, so if we go through an adverse period, it's a little bit less bad. We can't time markets perfectly.
TMDX is up 90% this year, and recovering from its 'slower growth' fall of last year. The short interest remains high at 25%. But earnings growth really has not changed much: 80%+ expected this year and 40% next year. The balance sheet is OK. The last quarter was really strong. For investors who have held it through its volatility, we would be comfortable keeping it now that it is back on track. It will report earnings near month-end (no set date).
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We have long thought someone should take over DOCU. While there is competition and not really a 'moat' anymore, it still has a solid 'brand'. Growth is slowing, but cash flow is solid and growing. It is 21X earnings right now, down 15% for the year but of course well off its pandemic highs. Its low is just below $50. We would likely get more interested in the $65 range.
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MER is interesting. A lot of its oil production is hedged, which is great when there is oil weakness and not s great in an oil rally. Still, it is a very cheap stock and offers a very high dividend right now. The merger with Prime looks good, though the discussions with Tullow have collapsed. It gets a good premium on its production, a combination of good transportation costs, hedging and grades as well. With its very large 2022 discovery now getting more developed (the largest in the world in many years) the growth outlook we think is better than many Canadian names. Risks are still higher, though. With the dividend (likely OK), growth, management, shareholders and benefits of the merger, we do think it should be trading at more than 6X earnings. The average analyst target price is more than twice the current trading price.
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Investing 101: Have the correct investment expectations
Risks widely vary across investment markets and products. Be wary of implied rates of return that sound too good to be true, because they probably are, at best, very high risk or, at worst, complete scams. Many investors get attracted to high yields: some derivative products have current yields of 15 per cent or more. But past and current returns are not the same as future returns.
A realistic long-term return for stock investors might be in the eight-per-cent range. For a bond investor, five per cent or so. Don’t chase returns. Don’t envy someone bragging about 20-per-cent returns — they are not you, and they might be taking on huge risks.
But if things do work out for you as an investor, don’t get greedy. If one of your stocks has soared, that’s great, but it likely now represents a big portion of your net worth. As such, any future disappointment in that stock is going to be far more painful. In addition to maintaining realistic expectations, we would also maintain portfolio balance and discipline — always.
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Editor's Note: The Global Equities Description is focused on Small Caps which Greg considers to have a market cap between $500 million and $5 billion, The dispersion between between small and large caps is getting larger with some large caps reaching the trillion dollar mark and NVIDIA now having a market cap of $4 trillion.
He calls this year's volatile market ideal hunting grounds and doesn't necessarily see volatility as risk. He likes volatility and pessimism. and doesn't see pessimism in large caps. Some of the small caps don't have analyst coverage. Equities that they buy have between 0 and 6/7 analysts covering them.
He looks for a long term management track record of success. Companies should be cash generative and operate business that you can understand. He doesn't like debt.
It is the largest LBO in Australia to go down during the financial crisis. It has a very high payout ratio with a 7% yield and too much debt. The business of broadcast outlets is a tough one because there is lots of inflation. It is hard to invest for growth when a company is paying most of its cash intake in dividends.
Provincial bonds will give you an incremental pickup over the federal bonds (ZFL). But you're taking on a massive amount of interest risk. Yes, it's good monthly income instead of federal government bonds. If long bond yields are going to be volatile and inflation's going to be a challenge for the next few years, then he doesn't love ZFL or ZPL or any kind of passive income, low-risk generator. The yield is safe so you don't have to worry about that, but there is a lot of price volatility in the next couple of years.
Likes it from a trading perspective. But buy-and-hold, long-term bonds are a challenge right now because of the interest rate risk embedded in them.