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Pape overhauls Low-Risk Portfolio
3/20/2019 6:18:57 PM
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Wealth Builder
Gordon Pape writes on common-sense wealth-building strategies.

By Gordon Pape  | Monday, July 30, 2018



There are times when the investing world gets turned upside down. This is one of them. Many of the investments we previously viewed as safe, such as bonds, preferred shares, and dividend paying stocks, have become liabilities as interest rates rise. As a result, our Low-Risk Portfolio, which we set up last October, has become more vulnerable than we would like. Here’s a review and update.

The goal of this portfolio is to protect assets against stock market losses while providing a return that is at least a point and a half better than the top GIC rate. Back in May, when I updated this portfolio in my Internet Wealth Builder newsletter, that rate was at 3.46%, so our current target is 4.96%.

The initial investment was $50,000. Commissions are not factored in, and the Canadian and U.S. dollars are treated as being at par for easier calculation.

The portfolio consists of the following securities. Here is an update on their performance with prices as of mid-day on May 24. Prices May have changed up or down since then, but my comments stand until my next update.

iShares Core Canadian Universe Bond Index ETF (TSX: XBB). This ETF tracks the performance of the broad Canadian bond market, including both government and corporate bonds. Bonds have been under pressure as interest rates rise, and the fund dropped $0.51 per unit since the fall. However, we received slightly more than that in distributions (including the May 25 payment), so we managed a fractional overall gain.

PIMCO Monthly Income Fund (PMO005). This fund invests in non-Canadian fixed-income securities from around the world. Like almost all bond funds, it has been hit by rising rates, with a decline of $0.41 in the net asset value (NAV) since October. The distributions didn’t quite match the NAV drop, so we took a small loss.

First Asset Enhanced Short Duration Bond ETF (TSX: FSB). This ETF invests in a portfolio that is divided between short duration high-yield securities and investment-grade corporate bonds. Like the other bond funds, rising interest rates have cut into the price, with a $0.13 decline in the period. However, we received monthly distributions totaling $0.17, so we ended up marginally ahead. Note that the distributions were cut back to $0.02 per unit at the start of the year from $0.03 initially. As a result, the yield dropped to 2.4%.

Canadian Utilities Preferred Shares Series BB (TSX: CU.PR.E). This straight preferred from a top-rated utility offers a fixed dividend rate of $0.3062 per quarter ($1.2248 per year). Like bonds, straight preferreds are negatively affected by rising rates. In this case, the dividends almost exactly offset the $0.90 drop in the share price. The current yield is 5.3%.

Royal Bank (TSX: RY). Banks are supposed to profit in a time of rising rates, but we have not seen that reflected in Royal’s share price to date. The stock is down $1.60 since October. However, that was more than covered by dividends totalling $2.76 per share. The bank raised its quarterly payment to $0.94 (from $0.91) in April.

Fortis Inc. (TSX: FTS). Bonds and straight preferreds aren’t the only securities hit by rising rates. Interest-sensitive stocks like utilities and telecoms also get sideswiped. Fortis is down about $5 a share since October. There is nothing wrong with the company; it’s just on the wrong side of the current cycle. We are receiving dividends of $0.425 per quarter, but that’s not enough to offset the drop in the share price.

BCE Inc. (TSX: BCE). This is another interest-sensitive stock that suffered a setback. The shares are down $4.56 despite the fact the company raised its quarterly dividend by 5.2% in March, to $0.755 per share ($3.02 per year).

Cash. We received interest of $25.94 from the $1,933.60 held in our on-line account at EQ Bank.

Here is a summary of the portfolio as of the mid-day on May 24.

Comments: Clearly, it has been a disappointing start for this portfolio. All of our securities dropped in market price during the review period. In a few cases, dividends/distributions offset those losses, but the net result was an overall decline of 1.7% in the total value.

The reason is simple. Interest rates are moving up faster than anticipated, especially in the U.S. and in the Canadian commercial marketplace. The Bank of Canada may be raising rates slowly, but financial institutions are ahead of the curve, especially when it comes to mortgage rates. This scenario is probably going to continue for a while.

Changes: We need to make some changes that will improve performance and reduce interest sensitivity without adding undue risk. Here is what I suggest.

PIMCO Monthly Income Fund. We can now purchase an ETF version of this fund with a much lower management fee than the mutual fund A units. It trades on the TSX under the symbol PMIF and is was priced at $19.60 at the time of this update in May. Distributions are paid monthly, but they are not consistent, so don’t count on predictable cash flow. We will switch our A series mutual fund units for 360 shares of this ETF, for a cost of $7,056. That will leave $40.05, which will be added to cash.

Canadian Utilities Preferreds. The straight preferred I originally recommended (CU.PR.E) is well suited to a stable or declining interest rate environment; however, its market price is vulnerable to rising rates. Therefore, let’s replace it with a rate reset from the same company that trades under the symbol CU.PR.I. It should move higher in price as rates rise. It was trading at $26.03 and yields 4.3%. We will buy 275 shares for $7,158.25, taking $12.67 from cash to make up the difference.

BCE and Fortis. Here again, we have two first-class companies that are long-term income generators. But both act too much like bonds to be included in this portfolio at present. Therefore, we will sell both positions for a net of $12,052.99. We will deploy that money as follows.

Dream Global REIT (TSX: DRG.UN). As a group, REITs are interest-sensitive, but this one, which focuses on business properties in Europe, is bucking the trend. It is up more than 20% to mid-May and pays a yield of 5.2%. We will buy 300 shares at $14.80 for a cost of $4,440.

Sun Life Financial (TSX: SLF). Insurance companies should fare well in a rising interest rate environment, and Sun Life is one of our best. The stock has made a modest advance this year and yields 3.4%. It was trading at $55.20 in mid-May. We will buy 100 shares for a cost of $5,520.

Apple Inc. (NASDAQ: AAPL). Technology stocks have come a long way from the Wild West days of the 1990s. The big companies are now well-established giants with strong cash flow, good balance sheets, and, in many cases, dividends. Apple falls into this group. Its shares have been steadily moving higher, and the dividend, while not rich, is reasonable at 1.6% as of mid-May. The trailing p/e ratio is a respectable 18.0, which means in the event of a market downturn it won’t be as vulnerable as its higher-priced competitors. The shares are trading at $188.07. We will buy 20 shares for a cost of $3,761.40. We will take $1,668.41 from cash to make up the difference.

We are left with cash and retained earnings of $762.71, which we will keep in our EQ Bank account at 2.3%.

Here is the revamped portfolio. I will revisit it again in my Internet Wealth Builder newsletter in October.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.

For more information on subscriptions to Gordon Pape’s newsletters, check the Building Wealth website.

Follow Gordon Pape on Twitter at and on Facebook at

Notes and Disclaimer

© 2018 by The Fund Library. All rights reserved.

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.


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