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

Preferreds. Resets are linked to the 5 years Gov’t of Canada Bonds. But there is indiscriminant selling by retail investors of these. There is a lot of value there.

Interest Rates. There are all kinds of what if scenarios. He thinks interest rates will stay low for 10-30 years. The bond market will not go up because of yields.

Educational Segment. How to position yourself for a low growth environment. He has an equal weight portfolio:

He gets about 45% exposure to Canada and an average yield of just over 4%. YTD he got 2.16%, ahead 3.6%. Annualized since inception is 9.55%.

Markets. It’s getting easier to find compelling valuations. His view is long term and that this is a cyclical event with oil. We should have a recovery in the medium term in oil. If you look at the commodities and health care sectors, they have cycles. Commodity producers are forced to pay you a dividend. When the tech sector pulls back it can take all your gains with it. CPG-T cut its dividend and it was painful, but he understands what they did. Things tend to sell off harder and faster than you predict. It should impact their growth in the long term. He is happy to stick with that kind of stock as oil recovers and hopefully he gets his dividends back.

Markets. He wants to be everywhere except “Canada”. His typical client would have maybe 20%-30% of equity exposure in Canada. That number is starting to go down and he is telling his clients that if they want to meet their targets they have to a) reduce their Canadian exposure or b) realize that their target is going to be lower than what they had thought. Thinks Canadian equities will underperform other parts of the world for the foreseeable future, by maybe 2%. Canada, by market cap, is only about 4% of the world. When he talks about investing, he usually talks about having some money in income and then equal weighting in 5 other asset classes, but has been telling his clients to get out of hard commodities of rocks and trees, but instead use things like infrastructure, agriculture and water. They are a little more recession proof and are doing better in this environment. He tends to use ETF’s which have a global mandate and which give very little or no exposure to Canada.

Collapsing a RIF and moving the funds to a TFSA? Why do you want to do this at all? What you are doing is accelerating your tax liability. If you take all or most of the money out of your RIF, all of that money will be taxed in the year of the withdrawal. That could bump you into a higher tax bracket. If you take the money out in dribs and drabs, you might be able to save yourself some taxes and reduce your OAS claw back. There is a tax benefit you get if you have pension income.

Sector weighting in a portfolio? There are 2 ways of doing this. You can buy more globally diversified portfolios, or you can go sector by sector. He prefers buying a more globally diversified portfolio, and as a by-product, you tend to not overweight any given sector.

What can an investor due to produce income with little risk of capital? There is nothing you can do. You can either get some security with very little income, or you can try to get a little bit of income and forgo the security. In this environment, income and security is not going to happen.

In an RRSP, is it prudent to have half in a Global Stock Index fund and half in a US Bond Index fund? Why wouldn’t you have half in global stocks and half in “global” bonds? He doesn’t know if US bonds are better than anywhere else. He doesn’t like bonds, so he wouldn’t do that.

Better off taking money out of an RRSP every year at 25%-35% tax, or waiting until the estate is settled where it will be taxed higher at 50%? It depends on how long you are going to live. On the one hand you are taking money out and paying the tax sooner, and if you can actually defer that 25%-35% tax for the next 10-20 years, you get the extra 10-20 years of compounding.

Market-linked or conventional GIC? Believes market-linked GICs, or better yet, their 1^st cousins Principal Protected Notes (PPN) are better than traditional GICs. Gives you most of the capital appreciation, you don’t get the dividend of the stock market or PPN, but there are 3 benefits. 1.) It is liquid, so if you want to sell it before, with a PPN, you get liquidity after about one year. 2.) If you sell it and it is up, then you will be paying tax as a capital gain on the proceeds, whereas with the traditional GIC or even equity linked GIC, that will be taxed as regular income at your top marginal rate, so you cut your tax liability in half. 3.) If you are wrong and the stock market drops, as long as you hold it until maturity you get your money back.

Markets. After 2008 we had an environment where equities were deeply undervalued and all sort of catalysts for above historical growth for the last 6 years. So for the last 5-6 years we’ve had phenomenal returns with very little volatility. The easy money has been made and on a go-forward basis the new normal is 1) we will not see the same magnitude of returns as we have seen and 2) we are going to experience reduced returns with more volatility. When equities are trading at discounts to intrinsic values, investors are a bit more patient with bad news and are not pricing in perfection. Now when looking at valuations there is not much room for anything but perfection. We have seen that recently with companies reporting earnings, and those that miss earnings have their share price being punished quite a bit more than what we have seen over the last few years.

It is advantageous for an investor to have money managed properly. He is somewhat counterintuitive to what many investors and money managers try to do, which is to hit home runs on the way up. In an environment where volatility picks up, active management can better manage risks on the downside. For example, when you buy an ETF or an index in Canada, you are very heavily exposed to banks and energy. An active manager can choose and limit the allocation to any one sector, which you can’t do in a pre-packaged product, including an ETF.

Markets. Seasonally we are approaching the weakest period of the year. The US market peaked in the middle of May and so far has traded flat. It has still shown its strength despite all the volatility. We have basically seen a digestion of negative news pertaining to China, some negative earnings results and has held up quite well. Going forward we are approaching the weakest and most volatile time of year. September and October are notorious for large swings in the equity market. You want to stay fairly defensive and lower the beta in your portfolio. Also, take advantage of some of the seasonal opportunities. With regards to the S&P 500, back in 2011 when we had the ultimate low, you could draw an upward line under the market. Recently it has consolidated and we have had some resistance. About mid June, it broke the lower limit of the trend. Usually when you get a break in a rising trend pattern, you typically see a large retracement in the market, but the market has held up quite well. There could still be a retracement coming. The leadership right now is turning more towards defensive such as Consumer Staples and utilities. When you see defensive sectors take control that does not bode well going forward. We are starting to see some of the riskier areas of the market underperforming the market. These are all warning signs that suggest investors are reducing risks and getting defensive, which is not positive for the market going forward.

Markets. We are in a secular bull market. Asset classes come into favour and go out of favour. In a secular bull market you get earnings growth, multiple expansion, and over time the correlations between stocks seem to fall. We are now in a world where energy, low priced and plentiful, is leading the markets. There are sectors and markets being hurt by that, putting them into a bear market. He favours consumer sectors. Housing ETFs are hitting new highs today. Consumer discretionary like SBUX-Q is hitting new highs. Financials that are domestically focused on the US are doing well. Technology is in favour because companies are looking for technology and have cash to spend. We are headed for a tough period, but the trend is good for equities. Money should slowly rotate from bonds which are over owned into large cap equities.

Prefers the auto parts and assemblers as opposed to the big auto companies. The strong dollar is a problem for US auto makers.