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TriDelta Investment Counsel Q1 2016 Report: Signs of Light but No Need for Sunglasses Yet

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Executive Summary

1727060_s-300x240Where everything Canadian was bad in 2015, in terms of local currency, Canada was the place to be in Q1.  In an economy that still remains very commodity driven, Canada had the double benefit of better numbers in Oil, metals and mining, and with it the support of a stronger Canadian dollar.

Canadian Material stocks were up 17% on the quarter, while Energy names were up 7%.

The quarter also highlighted why all investors need patience.  By mid-February, Q1 seemed like a ‘total disaster’ (to quote Donald Trump), yet by the end of the quarter many markets were positive for the year.  The volatility involved this quarter was very high.  At one point in late January, the Canadian market was down 10% but moved up 14% from that point to the end of the quarter.

How Did TriDelta Clients Do?

Most TriDelta clients were up between 2% and 4% on the month, while on the quarter, conservative clients had a small positive and more aggressive clients were mostly a little down on the year to date.

The TriDelta High Income Balanced Fund ended the quarter up slightly.

Our continued focus on capital preservation in times of high volatility has continued to help clients lower their overall volatility and maintain peace of mind during market whipsaws.  The one thing to remember is that investors can’t be momentum investors and dividend growth investors at the same time.   Each style comes with positives and negatives, and one of our goals is to fit the right style with the right client. 

There could be a very positive run for the TSX as energy, metals and mining make a rebound.  If you are looking for less volatility and strong income, you will underperform the TSX during these periods.  This doesn’t mean that we won’t participate in some of these gains, but for those who are Pension style clients, expect that your portfolio will not gain as much as the TSX when companies with names like HudBay Minerals and Labrador Iron Ore Royalty lead the charge up (or down).

How did the World do in Q1 2016?

On a Canadian Dollar basis, stock returns were very mixed.

The TSX was up 3.71%
The US S&P 500 was down 6.12% (despite being up 0.77% in US dollars)
The Euro Stoxx index was down 10.16%

As mentioned, Canada was the place to be in the first quarter.

The DEX Canadian Bond Universe was up 1.4%

Canadian Preferred shares finally saw a big positive move in March, up 9.9%.  Even with this tremendous return, the index was still down 4% for the quarter.

The Canadian dollar went from 72.2 cents to 76.7 cents vs the US dollar.

The price of WTI Oil started the quarter at $40, went under $28, back to $41, and dipped to $36 and change at the end of the quarter.  Of course it has risen back to $42 in the first couple of weeks of Q2.

Items Worth Noting – Interest Rates and Oil
  • A German 10 Year Bond is now paying just 0.11% a year. This tells us a few important things.  The first is that with Canada at 1.24%, there really is still room for interest rates to go lower.  The second is that for many, simply the safety of their capital is of such importance that they are essentially willing to earn nothing on their money as long as it is safe.
  • Interest rates can even go negative. Today, Switzerland 10 year bonds pay MINUS 0.40% annually.  The chart below shows rates in 1995 in the 5% range, steadily heading down until it went under 0%.  While that may seem crazy to many of us, many of us are invested to some degree at similar rates, as bank accounts pay 0% in interest and then charge us fees for the privilege of holding our money there.
    14apr16_01
  • U.S. Oil Inventories are still going up. Despite cuts in Oil production and supposed agreements among OPEC nations, Oil and Petroleum inventories haven’t stopped growing.  It will stop at some point, and there are some positive signs in terms of increased demand, but this current Oil rally is very tenuous.  We believe that even small negative comments from key OPEC producers can cause a meaningful pullback, and we believe this will happen.  While we do believe that two years from now, Oil will be a fair bit higher than today, it will be a very bumpy ride with many pullbacks along the way.

    14apr16_02
  • Canadian Banks are Cheap. The chart below is the Price Earnings ratio for Royal Bank of Canada for the past 12 years.  What it shows is that the company has generally traded between 10 and 16 times earnings.  Today it is at 11.5 and was down close to 10 in February.  There are not that many companies that have such long term strength and happen to pay 4%+ dividend yields along the way.  There are always reasons for lower valuations, but the past 20 years have shown that if there are low valuations the best response is simply to grab it.

    14apr16_03

What TriDelta is Doing Headed into Q2
  1. The Big Picture: While the World is always changing, your investment approach shouldn’t be. Our most important job is to ensure that your portfolio is built to meet your long term financial planning needs, your risk profile, your cash flow needs and personal tax situation.  If we are doing those things correctly, then you are will be in good shape over the long term regardless of whatever is happening in the market this day, week or month.
  2. The Smaller Picture –
    1. Global Stocks: We are seeing some strengthening in Emerging Markets and some strength in China.  As a result we are reinvesting a little bit back in Emerging Markets, pulling the money from developed economies in the EAFE (Europe, Australasia and Far East).
    2. North American Stocks: We remain ready to add more back into Canada but don’t feel that this is necessarily the right time. We believe that there will be a better entry point after there is a little pull back in Oil and likely in the Canadian dollar as well.  In addition, US Multinationals may see some positive earnings coming up as the US currency decline will improve their Foreign earnings – when converted back to US dollars.
    3. Preferred Shares: We continue to believe that this sector is undervalued, and when you combine undervalued prices, with 5.5%+ dividend yields, and tax preferred income, we see a number of benefits.  It is a tough sector to love, but we do remain very comfortable holding beaten down names.  We believe that the rally seen in March has some room to continue.
    4. Bonds: For now we have moved away from Government Bonds and back to Corporate Bonds.  There seems to be more comfort level with Corporate Bonds in the market place and the increased yield certainly helps.  While we believe that the Bank of Canada will remain steady and that long term interest rates will be fairly range bound, we believe that shorter term bonds may be a safer place to be in the short term.
    5. Alternative Income: We are continuing to add to Alternative Income streams where we can. We believe that in a low yield world, it is worth taking a little added risk in the Private Lending, Factoring and Mortgage space to achieve higher returns.
Dividend Changes

As always, we believe that Dividends and Dividend Growers play a key role in long term returns and lower volatility.  This quarter, the dividend growth continued.

Leading growers were:
CCL Industries 33%
Canadian National Rail 20%
L Brands 20%
Enbridge 14%

We actually saw a dividend decline in one of our holdings.  Cal-Maine (an Egg producer) directly ties their dividends to annual profits, and lowered their dividend 41%.  Largely as a result, we sold the stock.

New at TriDelta

One other Q2 note for TriDelta is the introduction of our TriDelta Fixed Income Pool.  Clients will be hearing more about it shortly, but we believe it will allow us to deliver better returns on Bonds for clients.  Through the ability to do better currency management, getting better pricing on trades, and easier liquidity for clients adding or withdrawing Fixed Income money, it should add up to stronger returns.

Summary

We believe that while things seem more positive in the investment markets, we are trying to pick our spots.  With a possible pullback in Oil and CDN dollar from here, the possible Brexit or British exit from the European Union, and ongoing Terrorism risks, we are taking only small steps out of our more conservative positions.

  

TriDelta Investment Management Committee

 

Cameron Winser

VP, Equities

Edward Jong

VP, Fixed Income

Ted Rechtshaffen

President and CEO

Anton Tucker

Exec VP and Portfolio Manager

Lorne Zeiler

VP, Portfolio Manager and
Wealth Advisor

TFSA comes of age in retirement strategy

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lorne_bnn_24mar16Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor at TriDelta Financial, recently appeared on BNN’S Market Call to discuss when it is more tax-efficient to contribute to your TFSA vs. RRSP.

Click here to watch the interview.

Lorne Zeiler
Posted By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

Buying vs. renting when downsizing after retirement

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Buying vs. renting when downsizing after retirementTriDelta President TedRechtshaffen was on BNN TV to discuss whether Retirees should buy or rent when they downsize their home.

Ted Rechtshaffen
Posted By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

Two types of retirees: dreamers and savers

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lorne_bnn_feb16Lorne Zeiler, VP, Portfolio Manager at TriDelta Investment Counsel was a recent guest on BNN’s Your Money Month to discuss sources of income for retirees featured in TriDelta’s ‘Canadian Retirement Income Guide’

Click here to watch the interview.

Lorne Zeiler
Posted By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

The five things to do after you win the lottery

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By: Olivia Glauberzon, Special to the Star, Published on Tue Jan 26 2016

When it comes to buying lottery tickets like ones this month’s $1.5 billion Powerball, players put plenty of thought into picking their numbers. But how much goes into the plan if they actually win?

In 2001, Vicki Damant was close to the dream that many lottery players have: second place to the jackpot. A Torontonian living in the U.S. at the time, to her shock, her ticket had five of the six winning numbers.

lottery“It was 7:30 a.m. on a Sunday morning. When I check the numbers on the computer, I had one match, then another, then another . . . then I started screaming,” says Damant. “I was so loud that my husband came running into the room thinking he had to kill a spider.”

While the couple hadn’t won in the millions, Damant did win $103,682 (before tax, as it was a U.S. lottery; in Canada, lotto winnings aren’t taxed as income).

“That’s when we started making all of our phone calls,” she says. “It wasn’t a life-altering amount of money, but it was enough that we were able to buy ourselves new cars, invest in an annuity and send both of our parents on vacation.”

Whether you’ve won a modest amount like Damant or $528 million (U.S.) like one Tennessee couple this month, here’s what the financial experts say you should do next:

1. Cool off for 30 days

That’s the suggestion of Larry Moser, regional manager with BMO Investor Line, based in Ottawa: “You don’t want to start writing cheques before you have a chance to figure out how you want to spend your prize.”

Since most lotteries are required to make the winners’ names public, the prize announcement (depending on its size) can wreak havoc on your personal life. “All sorts of people are going to come out of the woodwork. I’ve even heard of people getting blackmailed,” says Moser. “You need to be prepared for how you’ll handle various situations.”

A cooling-off period also gives you time to reflect on how the winnings will add to your happiness, says Ted Rechtshaffen, president and CEO, TriDelta Financial, a Toronto-based independent financial planning firm. “Whether you’ve won $500,000 or $500 million, it’s not about the investments you make, it’s about how the money helps your lifestyle going forward.”

Rechtshaffen recommends using the old adage of “Spend $1, save $1 and give $1” to allocate the winnings to your personal and financial goals. Just be warned, adds Rechtshaffen, that deciding how much you want to spend, save and give can be a complex psychological and emotional undertaking. “You may want to talk to a psychologist before doing anything else . . . that could be the best investment with your winnings you’ll ever make.”

2. Get professional help

Once you’ve figured out how to divvy up your winnings, find a lawyer or financial advisor who can help structure a financial plan for you.

“Whatever you do, don’t go flipping through the phone book and call the first lawyer or investment advisor you see,” says Moser. “Ask your friends and family for someone they recommend and trust.”

Another way to screen for a good advisor is by noting the balance of personal versus financial questions he or she asks you. “The best advisors will always spend more time figuring out who you are as a person before structuring a plan,” says Rechtshaffen.

3. Calculate your income needs

Depending on how much you’ve won, you may decide to stop working or splurge on a big-ticket item like a house, trip or boat.

Just don’t blow all of your winnings on one big trip to Vegas, says Moser. “Every dollar you spend today is less you have to invest for tomorrow.”

A financial plan will help you determine how much money you need to maintain the lifestyle you want to lead without working, especially if it includes a larger home or second property with bigger annual expenses.

4. Sort out your give-aways

Decide how much money you’ll give away to charity, family and friends. Like Damant, it’s not uncommon to want to share your newfound fortune with family and friends, or your favourite charity.

“With family and friends, one idea might be to share your good fortune in the form of a one-time only gift,” says Rechtshaffen. “If you are disciplined about it, you will be less vulnerable to being asked for money down the road.”

For charities, giving can be complex depending on the amount of the donation.

If you are planning to donate over $5 million, Rechtshaffen recommends setting up a private charitable foundation. “By donating through a foundation, you have an ability to generate large tax credits you can use to offset any investment income you may have.”

If you want your foundation to continue donating long after you are gone, Moser says it’s also critical to hire an estate lawyer for the set-up. “You won’t be able to set this up yourself with a $29.99 kit you buy at a store.”

5. Invest tax efficiently

Once you’ve determined how much money you’ll need for your lifestyle and how much you can part with, chances are the amount left over may be too much to place in a registered savings account. This leaves your wealth in unregistered territory, which makes minimizing tax exposure on income-generating investments a priority.

Investments can range from a diverse equity portfolio — which takes into account your risk tolerance — to a permanent life insurance policy, which allows you to grow your money tax-free.

“An advisor will help you navigate your investment options and do so in a way that minimizes your tax exposure,” adds Rechtshaffen.

TriDelta Investment Counsel – Q4 2015 Investment Review

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26158252_sSome people believe that the grass is always greener on the other side of the fence. Well in 2015 it was true, if you were a Canadian and your fence looked over at the U.S. border. From an equity and currency perspective, the U.S. meaningfully outperformed Canada.

Although 2015 was a difficult year, with Canadian equities down over 11%, most TriDelta clients, depending on their asset mix, were roughly flat on the year. No one heads into a year hoping to have a flat investment year, but given the very weak Canadian markets, and our focus on protecting capital in tough times, we believe that we added meaningful value to clients in 2015.

Executive Summary – 4th quarter equities were down for Canada, but up for International Developed markets

It was a challenging 4th quarter and year as a whole, for investors in Canada. Canadian bond returns were mildly positive and Canadian equities remained very volatile, down 2.2% in the quarter. The economic and stock market weakness in Canada, unfortunately, was driven by excess global supply of oil and other commodities, causing commodity prices to fall.

Even with Europe’s issues in the first half of the year, China dominated the world stage this year with its economic slowdown. The lion’s share of growth in global demand for virtually all commodities, including oil, has emanated from China over the past decade. With its economy growing more slowly, prices of most commodities have weakened materially. Moreover, due to China slowing along with many emerging market economies, the U.S. Federal Open Market Committee (FOMC) was reluctant to raise rates until the end of the year. On December 16th, the U.S. Federal Funds rate was finally increased by 0.25%.

China still faces deflationary pressures

  • Dragged down by sluggish domestic demand, weak exports and a property downturn, China’s economy expanded by 6.9% year-over-year in the third quarter, the lowest quarterly growth rate in six years.
  • China’s consumer inflation (CPI) grew 1.6% year-over-year in December, which is well below the government target of 3%. Moreover, producer prices (PPI), a measure of cost of goods at the factory gate, fell 5.9%, marking the 46th straight month of decline. Price fluctuations usually first appear at the production level before being passed on to consumers; therefore, the deflationary forces acting on China’s PPI does not augur well for its CPI. Prolonged deflation will pose risks to the Chinese economy by eroding growth potential and could possibly put the economy at risk of a downward spiral.
  • To combat the economic slowdown, the central bank of China has cut the benchmark interest rates and the reserve requirement ratio of its banks several times since the beginning of 2015. We suspect more aggressive policy easing will be forthcoming to stabilize growth in the coming months. There certainly is ample room for more measures to fight deflationary pressures and stabilize growth, such as reserve ratio cuts, relief in tax and fees, and increases in fiscal spending.

 
A Tale of Two Markets: International Developed Equity Markets were up (in Canadian dollars) and the Canadian Equity market was down

  • The Canadian equity market, as measured by the S&P/TSX Composite Index, was down 2.2% in the 4th quarter, ending the year down by 11.1%.
  • Due partly to the weakening of the Canadian dollar over 2015, European, U.S. and Asian developed equity markets were up generally for the 4th quarter and for the year as a whole, as measured in Canadian dollars.
    • TriDelta made the decision to not currency hedge our U.S. and International equity investments, which was beneficial to our clients’ portfolios.
Forecast for 2016
  • TriDelta remains cautiously optimistic about 2016 as the U.S. and Europe appear to be on more solid ground; however, China will continue to be challenged in its efforts to stabilize its economy as it transitions from an export-based to a consumer-based economy.
  • The economic outlook for 2016 is supportive of developed market equities with inflation and oil prices remaining low, a continued mid-cycle U.S. economic expansion with cyclical leadership coming from the U.S., the U.K. and Europe, and with the U.S. FOMC possibly moving rates up gradually.
    • Since 1950, the median performance of different asset classes six months after the first U.S. Federal Funds rate hike has been very positive for markets: U.S. Equities up 9%; Developed Market Equities up 7%; Emerging Market Equities up 8%; Commodities up 4%; and, Investment Grade Bonds up 1%.
    • Oil prices will continue to be weak in 2016 owing to global excess supply, exacerbated by the expected rise in Russian and Iranian oil production, as well as weaker economic growth from China. China has accounted for roughly 45% of growth in global demand for oil during the past decade.
  • We have been actively adjusting our clients’ portfolios, reducing our exposure to Canadian equities in favour of U.S. equities, given our concern with continued weakness in the Canadian dollar and commodity prices, especially oil.
  • We continue to closely monitor European equities for purchasing opportunities as they represent good relative value.
  • With low positive returns expected from bonds in 2016, we believe our clients need to maintain their equity exposure, especially given that many equities have dividend yields in the 2% to 5% range.
  • We expect returns to be lower than long-term averages. We are now recommending alternative investments, from our well researched approved list, where appropriate, to clients for additional diversification in their portfolios to reduce risk and to enhance returns.

 
Risks to the Outlook

  • China fails to stabilize growth, increasing deflationary forces globally.
    • China’s renminbi continues to depreciate.
  • A credit crisis occurs in the emerging markets.
  • Heightened geopolitical instability (e.g., Saudi Arabia and Iran tensions, Russia, ISIS, and the like).
  • Profit trends weaken in the developed equity markets.
  • Faster-than-expected improvement in the U.S. labour market causes the Fed to raise rates faster.
Equity Market Commentary

10884799_sThe 4th quarter witnessed a decent bounce in global equities after a very rough 3rd quarter. Most equity markets rallied and came close to recuperating the losses suffered in the third quarter. Unfortunately, Canada did not participate in this rally.

In local currency, global equity markets were some of the top performers. Germany and Japan represented the best performing major equity markets, up more than 11.2% and 10.7%, respectively. Closer to home, the S&P/TSX Composite Index continued its losing streak, down 2.2%; whereas, the S&P 500 Index bounced back, returning 6.5% in local currency. The strong U.S. dollar was again a positive factor for our portfolios as measured in Canadian dollars. The U.S dollar strengthened 4.1% relative to the Canadian dollar, adding to the total return of U.S. holdings.

For the S&P/TSX Composite Index, volatility in the 4th quarter was substantial as the Index had a number of moves up and down greater than 5%. October turned out to be a positive month as the market rallied 1.3%; however, November and December were down months, consistent with the fall in the price of crude oil. November declined almost 2% and December was down 3.4%. The three worst performing sectors in the quarter were Health Care, Consumer Discretionary and Telecommunications, down 37.0%, 5.7% and 2.8%, respectively. In contrast, the three best performing sectors were Information Technology, Materials and Financials, up 10.3%, 3.1% and 0.6%, respectively.

The S&P 500 Index performed much better than the Canadian market, up 6.5% in the 4th quarter. The Index posted a great October, up more than 8%. Despite a couple bumps in the road, it eked out a small gain in November before falling 1.8% in December. All sectors in the 4th quarter were up except for Energy, down 0.6%. The three best performing sectors were Materials, Health Care and Information Technology, up 9.1%, 8.8% and 8.7%, respectively.

TriDelta Core Equity Model

Our Core Equity Model was up 2.1% for the 4th quarter, outperforming the S&P/TSX Index by 4.3%. During the last three months, the Core Equity Model was very active.

  • In October, we sold a couple of stocks, redeploying the cash during the November correction. We also increased our weight in U.S. equities in early December to take advantage of a stronger U.S. dollar, which has continued to strengthen since our purchase.
  • We purchased the Canadian energy market opportunistically, using the exchange traded fund, XEG, as it looked as if seasonal, technical and fundamental factors were turning positive, but sold it quickly thereafter. Unfortunately, this was a losing trade as Saudi Arabia revealed it would increase production, leading to potentially lower prices.
  • Other detractors from performance that were sold at a loss were Valeant Pharmaceuticals, which fell due to some concerns about accounting irregularities; and, Amaya Inc., the online gaming company, which fell as revenue and profit guidance from the company was cut.

In contrast, a number of our stocks, especially those in the U.S., had a great quarter and positive results were found in all sectors, including Energy.

  • Our holding in TransCanada Corp. was up over 8%.
  • Other top performers were Avago Technologies Limited, AmerisourceBergen Corporation and Verizon Communications Inc., up 20%, 13% and 11%, respectively.
  • Five companies, in the Core Equity Model, raised their dividends in the 4th quarter with none reducing dividends: Alimentation Couche-Tard Inc., AmerisourceBergen Corporation, Zoetis Inc., AbbVie Inc. and Sun Life Financial Inc.

 
TriDelta Pension Equity Model

Our Pension Equity Model was up 0.7% during the 4th quarter, as our more conservative strategy, outperformed the S&P/TSX Index by almost 3%. The Pension mandate focuses on stocks with solid and growing dividends and other less volatile characteristics, leading to less trading relative to our Core Equity Model.

  • We entered the quarter with excess cash, and opportunistically added a couple of new holdings during periods of market corrections in November.
  • Positive performance for the quarter was driven mainly by our U.S. holdings as the strong U.S. dollar helped bolster returns.
  • Health Care stocks in the U.S. led the gainers in the portfolio as Abbott Laboratories, Johnson & Johnson and GlaxoSmithKline were all up more than 10%.
  • In contrast, Canadian Utilities Ltd. declined along with the rest of the Utilities sector as investors feared higher interest rates would threaten earnings and dividend growth. Home Capital Group Inc. declined on fears that the economy was weakening and the real estate market would burst, leading to an increase in homeowner mortgage defaults.
  • Ten stocks that we hold in the Pension Equity Model increased their dividends during the quarter and only one stock reduced its dividend, namely Cal-Maine Foods. Some of the stocks that raised their dividends include Emera Inc., Enbridge Inc., AbbVie Inc., Telus Corp. and the Canadian Imperial Bank of Commerce.

 
Quarter Ahead for Equities

At the end of the 3rd quarter, we believed that the majority of the decline in the equity markets was over, and we were looking for opportunities to be fully invested again in the coming months. Looking forward, we continue to believe that the September 2015 lows will hold for the S&P 500 Index, but may be temporarily breached by the S&P/TSX Index. We still have some cash in the portfolios, and are looking for the right time to become fully invested again.

We believe that the heightened volatility that we have experienced in the 4th quarter, and throughout 2015, will continue in 2016. The equity markets generally appear to be fairly valued, which could lead to more volatility if economic headwinds or geopolitical events surface. Earnings, as usual, will continue to be a major focus for investors, looking to be reassured that earnings are continuing to grow and valuations remain fair.

Fixed Income Commentary

iStock_000001104529SmallFor the majority of 2015, volatility in the fixed income market was unprecedented. The initial cut to the Canadian overnight interest rate in January, to be followed by another cut in the subsequent months served as a testament to the Bank of Canada’s concern over the negative impact of much lower oil and gas prices on energy companies, and its impact on the Canadian economy.

For most of the year, investors have been wrestling with the following:

  • The prospect of the first U.S. interest rate hike in 9 years;
  • A substantial decline in commodity prices;
  • A strengthening U.S. dollar; and,
  • The relentless negative headwinds from the Greek default drama and the Chinese economic slowdown.

As noted earlier, the U.S. FOMC finally raised the Federal Funds rate by 0.25% in December.

TriDelta Core Bond Model

Our Core Bond Model maintained its exposure throughout the year in high yield bonds as we were, and we continue to be comfortable with our holdings. Given the heightened investor concern over the U.S. raising interest rates, we started the year owning bonds that had shorter average maturities and gradually raised the average maturities of the Model through the investment in a 30-year Government of Canada Bond in the fourth quarter.

We were able to add value to the portfolios with this strategy towards the latter half of the 4th quarter. In addition to raising the average maturities of the bonds, another purpose of owning this 30-year high quality Government of Canada bond was to reduce the overall risk of the portfolio, especially in the current environment where investors are uncertain about the U.S.’s resolve to hike interest rates and its ability to continue with a series of hikes in the coming year.

TriDelta Pension Bond Model

Our Pension Bond Model benefited from not having any exposure to high yield bonds this year and in the 4th quarter. The strategy of managing the Model with a shorter maturity bias at the start of the year, followed by extending the average maturity with the purchase of the 30-year Government of Canada bond, mirrored the same strategy as the Core Bond Model.

Quarter Ahead for the Bonds

With an eye towards 2016, we expect the volatility that we have experienced in 2015 to continue. With continued Bank of Canada concerns over our economy, heightened geopolitical risk, and an uninspiring global macro-economic environment, we will continue to limit risk in the bond portfolios by maintaining our bias for the long-dated Government of Canada bond. However, our aim in 2016 is to take advantage of this volatility at the opportune time, and eventually move funds out of Government of Canada bonds and into investment grade corporate bonds.

Preferred Share Commentary

Not since the financial crisis has the preferred share market witnessed such a negative period. One fundamental difference between 2008 and today was that the drop in 2008 was disorderly – panic driven – while the current environment is slightly less disorderly and driven by three converging factors working to conspire against the preferred share asset class.

  • The Bank of Canada’s surprise 0.5% cut to the overnight interest rate was contrary to the market consensus expectation of multiple rate hikes in 2015;
  • Bond and equity investors became more risk averse, producing a great deal of volatility in the markets, which negatively impacted the preferred share market; and,
  • Canadian chartered banks issued Non-Viable Contingency Capital (NVCC) compliant preferred shares due to a new regulatory requirement. In short, an abnormal supply of preferred shares from the banks was issued into the market, causing downward pressure on preferred share prices.

The beneficial characteristics of preferred shares within a well-diversified portfolio remain very much intact, but the recent weakness in this asset class has left many disenchanted. Considering the attractive yields and the beneficial tax treatment of dividend income, we still believe that preferred shares will be a positive investment in 2016.

TriDelta High Income Balanced Fund
  • The Fund was up 2.1% in the 4th quarter, but down 4.2% for the year. Since inception, the Fund has earned an annualized return of 5.5%.
  • The performance of the bond component of the Fund started 2015 very well; however, the unanticipated interest rate fluctuations – both interest rate levels and corporate spreads – were negatively impacted by the leverage employed in the Fund to generate a consistent targeted overall bond yield of 8%.
  • Until December, the Fund had a substantial U.S. dollar exposure to take advantage of U.S. dollar appreciation. This position was held because of the divergent monetary policy in Canada (i.e., a bias towards reducing rates) versus the U.S. (a bias towards raising rates). Given the uncertainty surrounding U.S. interest rates and possible geopolitical events in 2016, the leverage employed as well as the exposure to the U.S. dollar have been reduced.
  • In contrast to the bond component, the equity portion of the Fund had a good year in 2015. U.S. equities, which were consistently about half of the equity component of the Fund, were the major driver of positive performance. This positive performance was mainly due to U.S. dollar appreciation, since it was up 19% for the year.
  • The performance of the S&P 500 Index, in local currency, was slightly negative for the 2016; however, the hedging strategy used by the Fund with respect to U.S. equities was a positive contributor, adding 1% to the return.
  • Canadian equities, which constitute the other 50% of the equity component of the Fund, outperformed the S&P/TSX Index, since the Fund held cash in the range of 5% to 10% throughout the year, and had a very small exposure to Energy relative to the Index. The Canadian equity strategy started out the year overweight income generating financial stocks. These positions were reduced during the 1st quarter and the Fund shifted into some gold and other resource stocks like Cascades Inc. and Claude Resources Inc.
  • The Fund also increased its Consumer Discretionary and Industrial sector weightings during the year, including Air Canada, Hardwoods Distribution, New Flyer Industries and Transcontinental, as we were searching for stocks that showed value with earnings growth potential.
Conclusion

2015 was a challenging year for Canadian equities and bonds, although the 4th quarter was generally up across international developed markets. As mentioned, there is potential for negative surprises in 2016 given the large number of global issues, including currencies volatility, political turmoil, increased terrorism activity, low oil prices and very low global economic growth. As a result, we forecast markets to remain volatile this year, but expect returns to be generally positive, however lower than long-term averages.

Happy New Year and All the Best in 2016!

  

TriDelta Investment Management Committee

 

Cameron Winser

VP, Equities

Edward Jong

VP, Fixed Income

Ted Rechtshaffen

President and CEO

Anton Tucker

Exec VP and Portfolio Manager

David Oliver

Chief Operating Officer

Lorne Zeiler

VP, Portfolio Manager and
Wealth Advisor

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