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

Preferred shares as a fixed income vehicle? Preferred shares are really undervalued at this time. It’s a really misunderstood market that doesn’t have a lot of institutional players. We are playing catch up at this stage and he thinks they are really great value. Prefers insurance companies over banks as there is more yield in them. You are receiving dividends, not interest so you get a preferential tax treatment.

Target bond ETFs. This is a basket of bonds, very short, around a maturity date. The ETF will terminate, usually late in the year, of that date. For example, with a target date of 2018, the company will wind down that ETF on Nov 30/18. Most of the bonds will mature at that time. As it gets closer and closer to maturity, the actual value will get closer to the original NAV and they will distribute whatever is left at the end. An example of a target bond ETF would be RBC Target 2014 Corp. Bond ETF (RQB-T).

Interest rates of corporate debt versus yields of their preferred shares? Would this differ between perpetuals and resets if both are trading below par? The gap between the bond yield and the preferred does matter somewhat and tend to follow what the corporate bonds do. We measure things in fixed incomes with the spread, usually over Canada so resets tend to be spread off of the 5-year Canada. However, the relationship is very, very loose because you also have the equity on the other side and the pref yield cannot be driven lower than the common.

Laddered bonds coming due and interest rates are atrocious. Should this be put into preferred shares? If the money is RRSP, you are not going to get the tax advantage of preferred shares, but you will still get a really decent yield. He would think that is where the value is. You are taking a step down in the capital structure, but preferreds look and act so much like bonds and you are getting all the pickup in yield, it is well worthwhile to look at.

Is now a good time to buy Real Return Bonds for 2026 for a ladder? Not a big fan of Real Return bonds. A Real Return bond usually has a fixed coupon plus it pays whenever the CPI rate is. These really came out for pension fund managers that had an established book of business that they were paying out indexed to inflation. You really have to ask yourself whether or not there is going to be inflation because this is what they were designed for.

Safest and most secure place to park cash for 10 months? There are options such as floating rate funds and he would recommend a floating rate preferred which gives you some protection if rates go up. Trading with a yield of about 3%.

Brookfield Preferred Shares Series E. (BRF.PR.E-T) Really likes these. These are one of the ones that he thinks it should do better. 5% dividend. Trading at around $21 so the current running yield is almost 6%.

Markets. We know the Fed will have a difficult time normalizing interest rates so they announced they are testing a facility related to term deposits. They are going to be asking members of the Federal reserve to submit bids to help mom up the liquidity of the stimulus. They are going to do it for about 8 weeks, but there is no plan to change interest rates. Pay attention next week if you are a fixed income investor. This largely got ignored last week by the markets, however. The ECB is still talking about stimulus. They will be doing something in June. The markets actually make their highs in June, but it does not rhyme.

ZAG-T is the cheapest way to get the bond market in Canada. ZCS-T is a laddered portfolio. Doesn’t think interest rates are going up until the end of next year.

What sectors look expensive? Which have underperformed? Being in the right sector is a key way to re-balance portfolios for superior returns. XIC-T is the broader Canada Market. Thinks energy (XEG) is a bit expensive, so deemphasize it. Thinks gold will dip below $1200. This would be the buy for the next 4 or 5 years.

Canadian Dollar. We have seen a huge volatility in the Canadian economy and if you smooth it our over 6 months you see it is weakening. Thinks Canadian dollar will be centered around $0.90USD.

Educational Segment. Smart Indexing or Smart Beta. New improved ETFs. Alphadex is a proprietary stock screening process. Growth and value factors. They eliminate the bottom quarter of the list and break the rest into quintiles to be weighted differently. They beat their benchmark over 5 years.

Markets. Markets are fairly valued with pockets over and pockets undervalued. He selects those that are undervalued. He would be buying on any type of selloff in the market. He buys 20-25 stocks.

Rotation out of Growth and into Value stocks? He focuses on value plays. He doesn’t think it is changing in the markets.

Banks or Insurance Companies. He is in insurance more than banks. He does own SLF-T. He is also looking at AIG. The banks will be fine long term.