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Q2 TriDelta Investment Review – What a Rising Interest Rate World Means

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Are Central Banks Starting to Hit the Brakes?

On July 12th, the Bank of Canada raised interest rates for the first time in seven years.  While the pace of interest rate increases in Canada is likely to be slow and very gradual (0.25% increases at a time), it does reflect a significant change for the investment landscape, as it seems most major central banks are either raising or at least considering raising interest rates.  Low and in some cases negative interest rates have been a central feature of the world economy since the financial crisis of 2008.  This change in stance by the central banks could have significant implications on the world economy, investments and in particular our clients’ investment portfolios.  In this quarterly report, in addition to a discussion of the past quarter, we will focus on what central banks do, why they matter and our views of the effects of the likely interest rate increases.

The Highlights – Generally Positive Performance in a Lacklustre to Negative Market

Following a strong first quarter, most world equity markets retreated from their highs during Q2.  While market watchers may have rejoiced over US TV networks talking about all-time highs for US stocks throughout Q2, the reality for most markets was quite different.  The TSX declined by 2.3%, Europe declined by 1.7% and the US market was up only 0.2% in Canadian dollar terms (it gained 2.9% in USD).   Most of the drag came in the final few weeks of June when central bankers globally took a more hawkish tone with the Bank of England and the European Central Bank (ECB) both talking of potentially higher rates and less accommodative monetary policy in the near future.  In particular, Mario Draghi of the ECB proclaimed that deflationary issues in the Eurozone were over.  The US Federal Reserve reconfirmed that it plans to continue gradually raising interest rates and discussed reducing its balance sheet.  The Bank of Canada, gave hints of raising rates as well (this was confirmed with a 0.25% rise on July 12 – the first increase in seven years).  The Canadian dollar rallied against other currencies, particularly the USD as a result. 

On a political front, the Centrist, Emmanuel Macron won the presidency in France and his party then won a majority in the legislature.  His victory has already resulted in substantial increases in consumer confidence in France and throughout Europe with expectations that he will usher in pro-business reforms, such as tax cuts and needed labour policy reform, as well as pushing for greater integration in Europe.  In the US, the Trump bump has diminished significantly with most analysts expecting the promised tax reform and cuts and / or infrastructure spending will not happen in 2017, if at all, as the Republican congress is not fully united and the President continues to be under pressure.  Geopolitical concerns remain, including North Korea’s launch of more advanced ICBM missiles and continued military campaigns in the Middle East, but none of these concerns seem to be impacting equity or fixed income markets for the time being.

TriDelta’s Results

Overall, most of our clients earned positive returns for the quarter as our Fixed Income pool was up 1.4%, preferred shares were positive and the Pension Equity Pool was up 1.6%.  The Fixed Income pool benefitted from holding bonds with shorter durations / terms to maturity and its 5% weight to rate reset preferred shares.  These securities typically go up in value when bond yields increase.  The TriDelta Pension Equity Pool gained from its overweight position in US health care and limited commodity exposure in Canada.  Our Growth Equity Pool and High Income Balanced Fund were both down about 0.5% with losses concentrated in June. 

Our short list of recommended alternative investment funds focused on private credit, factoring, and real estate benefitted client returns in Q2 averaging about 2% for the quarter. 

Actions that we had taken at the end of Q1, which we described in the last quarterly report, helped protect performance as we took a more conservative tone by:

  • adding to cash
  • reducing our US equity overweight position
  • reducing the duration / term to maturity of our bond portfolios.

For the quarter ahead we remain cautious, but opportunistic.  Bond yields may rise a bit further in the coming weeks, but this could give us an opportunity to buy longer dated bonds at much more attractive yields.  With interest rates likely increasing in the US, Canada, the UK and potentially in Europe, equity markets will be much more reliant on companies increasing their earnings to generate positive returns.  The good news is that earnings in the US are expected to grow by about 8% this quarter and by over 20% for the year; European equities are expecting similar earnings growth as well.  In Canada, earnings growth is expected to be closer to 30%, albeit from depressed levels due to the drop in commodity prices in 2015-2016. This is offset by the fact that equity valuations remain high, so strong earnings and beating analyst expectations will be necessary for the markets to move up in the short-term.  Consequently, the changes that we put in place at the end of Q1 are still in place going into Q3, as we look for better opportunities to deploy capital. 

Central Banks – What They Do?

Central Banks, such as the Bank of Canada, the US Federal Reserve and the European Central Bank, implement monetary policy to help control money supply.  Most central banks attempt to keep inflation within a target range by either restricting or increasing money supply, primarily by setting the overnight interest rate.   Some central banks, in particular, the US Federal Reserve, also have an agenda of using monetary policy to encourage full employment.  Since 2008, the role of central banks expanded enormously as they provided emergency funding, lowered interest rates to zero percent and in some cases negative yields to encourage banks to lend, consumers and corporations to borrow to help kick-start the global economy while limiting the economic damage from the financial crisis.  Central banks also attempted to stimulate the economy through quantitative easing, which is explicitly buying longer dated government, mortgage and in some cases corporate bonds in an attempt to lower longer-term interest rates and flatten the yield curve, e.g. if a corporation knows that rates will remain low for 5-10 years, they may be more interested in borrowing funds to expand production or for a longer-term project, which leads to more jobs, more consumer spending and economic growth. 

Why They Matter

These very low interest rates became the norm for nearly all major economies and they have had significant impacts on both the economy and the financial markets.   These lower rates helped support fixed income (bonds) and stock returns in a variety of ways.  

1) Bonds – when interest rates decline, longer dated bonds are more valuable because investors earn a much higher return relative to short-term cash investments.  As a result, more investors buy bonds, their prices go up while their yields decline.  As an example, a 10 year Government of Canada bond yielded approximately 3.7% in September 2008, prior to the financial crisis.  For the next 8 years yields declined so that the  10 year Government of Canada bond was yielding less than 1.0% by mid-year 2016.  These bonds are currently yielding about 1.8%.  Easy monetary policy is a large part of the reason that bond investors have earned average returns of 4.5-5.0% per annum since 2008. 

2) Corporate Earnings – easy monetary policy meant that it cost less for companies to borrow.  Consequently, smart CEOs and CFOs issued a lot more debt over the past 8 years to make accretive acquisitions and expand production as well as using the funds to buy back stock and increase dividends.  All of these measures have resulted in higher earnings per share for companies and higher returns for investors. 

3) Stock Valuations – investors constantly have to decide where to invest their money to earn the highest return relative to their risk tolerance.  The easy monetary policy over the past 8+ years has made stocks more attractive.  When your options are very low rates on GICs and bonds, investors have been putting more money into the stock market.  In fact, many investors earned higher levels of income by buying dividend paying stocks than they could on bonds and they had the opportunity for capital appreciation.  As a result, stock prices continued to climb from their lows in 2009, with the exception of a few corrections along the way, and stock valuations, the multiple that investors are willing to pay of a company’s projected cash flow and earnings, are presently at much higher than historical levels. 

What Impact Will Higher Interest Rates Have?

While most major economies are now increasing or at least no longer cutting interest rates, what is still to be determined is the pace and total level of these increases.   It is also uncertain as to what impact they will have on financial markets, but our thoughts are below:

1) Bonds – Higher interest rates typically are a negative for bond holders.  Bond prices drop as yields increase.  The offset has been that the credit spread, which is the additional yield you earn by owning a corporate bond vs. government bonds, tends to shrink, meaning that corporate bond holders earn higher returns.  Presently, credit spreads are tighter than average, so the upside from spread compression will be limited.  Our view is that passive bond investors should expect to earn the current yield of the bond index, which is approximately 2.5%, but with some volatility. 

We actively manage our bond portfolios, adjusting duration, sectors, credit quality, and taking advantage of special opportunities, such as preferred shares, to enhance yield and overall return.  While we presently have a cautious stance, we will take advantage of longer dated bonds when yields are at more attractive levels or investor sentiment changes, as well, we will continue to look out for opportunities to extract additional returns from high yield bonds, USD pay bonds and preferred shares.  We believe that through active management and being nimble, additional returns can be earned in this asset class.

2) Corporate Earnings – Economic growth accelerated globally in the past year, particularly with Europe, Japan and most Asian emerging markets advancing at much faster paces.  As a result, business and investor sentiment have been going up (although recently declining moderately in the US), purchasing manager indices have been rising and consumer spending has also increased.  Consequently, while companies will be paying more for their debt, higher revenues may more than offset any of these increases.  In addition, if operating margins continue to improve in Europe and Asia to levels similar to those enjoyed by US companies, corporate earnings could increase further. 

3) Stock Valuations – Valuations are likely to decline as a result of central banks tightening the money supply, but higher corporate earnings may be able to more than offset this decline.  In the US market for example, stocks currently trade at a price multiple of 21.5 times earnings, but with earnings expected to grow 20%+ over the next 12 months, the forward earnings multiple is closer to 17.6 times, which is much closer in line with the historical average of about 15-17 times earnings.  The TSX is currently trading at about 21 times earnings, but if the earnings forecast over the next 12 months is correct, then it is trading at less than 16 times those projected earnings, a level more consistent with its historical average.   Europe, Japan and emerging markets are presently trading at valuations similar to their historical averages, so if growth continues at its forecasted rate, they will actually be trading at a discount.  Therefore, even with higher interest rates, equity markets can still provide positive returns if earnings increase at the anticipated rates and could generate stronger returns if corporate earnings beat analyst expectations.

Consequently, changes in central bank policy are important for us to monitor and anticipating those changes plays a role in our asset allocation and security selection decisions. 

In closing, we think that the central bank slowly and gradually raising interest rates is warranted given the improving economic fundamentals.  Stock markets should be able to absorb these changes as projected economic growth should lead to solid corporate earnings growth.  There is likely to be some volatility along the way, especially if policy changes are misunderstood by the market.  Companies meeting or exceeding projected earnings will become even more important without the support of the accommodative monetary policy of the past eight years. 

We have positioned our portfolios defensively looking to take advantage of potential volatility, while protecting client capital.  We believe that our patience will ultimately be rewarded with some solid buying opportunities.

Wishing all our clients and their families a relaxing, warm and sunny summer.

  

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

FINANCIAL FACELIFT: How can this couple make sure they’re prepared for retirement?

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Below you will find a real life case study of a couple who are looking for financial advice on when they can retire and how best to arrange their financial affairs. The names and details of their personal lives have been changed to protect their identities. The Globe and Mail often seeks the advice of our VP, Wealth Advisor, Matthew Ardrey, to review and analyze the situation and then provide his solutions to the participants.

gam-masthead
Written by: DIANNE MALEY
Special to The Globe and Mail
Published Friday, July 7, 2017

Mark and Marianne moved to Canada in 2003 “at an advanced stage of their careers.” He was in his late 30s, she in her early 40s. This posed a challenge faced by many immigrants, Mark writes in an e-mail.

“By the time you get professionally established, you are already late to the game of financial and retirement planning.”

Today, both have good jobs in higher education, earning a combined income of $250,000. Mark has a work pension plan but Marianne, who works on contract, has none.

“Now that we are in our early 50s, we feel we are not well prepared for retirement,” Mark writes. They have been focusing on paying off their mortgage.

They have questions about how pension entitlements earned in their home countries can be combined with Canadian pension benefits and Old Age Security. As well, their teenage daughter will be off to university next year and they have not yet saved enough to cover the cost of her education.

We asked Matthew Ardrey, a vice-president and financial planner at TriDelta Financial in Toronto, to look at Mark and Marianne’s situation.

What the expert says

Mark and Marianne are concerned that they are behind the “Joneses” when it comes to their retirement planning, Mr. Ardrey says. They want a better understanding of where they are today and how best to meet their goals for tomorrow.

They show a substantial surplus, but that has only come about in the past year as Marianne’s salary has increased. Their next project is to renovate their two bathrooms, estimated to cost $20,000. By allocating some surplus funds to their savings account, in addition to the $17,400 already saved, they will have enough to complete the renovation next year, the planner says.

They have been saving $5,000 a year toward their daughter’s education to take advantage of the Canada Education Savings Grant. Because their daughter plans to live at home and attend a local university, Mr. Ardrey assumes education costs of $10,000 a year for four years. That would leave a shortfall in their registered education savings plan of $21,400. The shortfall in the third and fourth year can be made up by the couple’s cash-flow surplus and savings.

“It is important to note that the key assumption under which the short-term goals are met is that the monthly surplus of $3,600 is correct,” Mr. Ardrey says. If their budgeting is out by much, “it will have a significant impact on their plan.”

Mark and Marianne will be mortgage-free by the end of 2020, so they will have an additional $3,770 a month in their pocket starting in 2021. The plan assumes they will save half of this amount, with the other half going to increased lifestyle spending. The planner assumes they both take full advantage of their tax-free savings accounts, catching up on unused contribution room.

Marianne has about $33,800 in unused RRSP contribution room. With her salary of $46,800, she will generate an additional $8,435 in contribution room annually. Mr. Ardrey assumes she averages out the prior year’s contribution room over her remaining working years, as well as making her annual RRSP contribution, for a total annual RRSP contribution of $11,820. Mark has no contribution room because of his pension adjustment.

Starting in 2021, Marianne and Mark will be able to start saving money in a non-registered investment account. With their current surplus, minus RRSP and TFSA savings, they will add almost $20,375 a year to the non-registered account. In addition, they will have $22,260 (50 per cent of the mortgage payments), for total savings of $42,995 a year.

Mark has a defined-benefit pension plan that will pay him about $7,725 a month when he retires at 65. The pension is not indexed to inflation, but has a 60-per-cent survivor benefit. He also has registered savings overseas toward which his parents have been contributing. The overseas plan will pay out an estimated lump sum of $230,000 when he turns 65. The planner assumes this will be fully taxable. Mark will also get a foreign government pension of $530 a month starting at 67, indexed to inflation. Both Mark and Marianne will be entitled to reduced Canada Pension Plan and Old Age Security benefits when they retire.

In looking at the couple’s investments, Mr. Ardrey used the couple’s actual rate of return and asset mix. The underlying asset classes of the mutual funds in which they are invested show a historical return of 4.54 per cent with a 2.38-per-cent management expense ratio.

“By the time we account for the 2 per cent assumed inflation rate, the real rate of return on their portfolio is almost zero!” Mr. Ardrey said. Even so, Marianne and Mark can achieve their retirement spending goal of $90,000 a year, in current year dollars, inflation adjusted, and have an additional $10,000 a year in travel spending until Mark turns 80, the planner says.

When Mark turns 90, they will have an investment portfolio worth $1,065,000, plus their real estate and personal effects, he notes. “Alternatively, if they spent all of their investment assets, they could increase their lifestyle spending by $22,800 per year.”

Mark and Marianne could greatly improve their situation by reviewing their investment strategy and cutting costs. With some portfolio rejigging, they should be able to increase their rate of return to 6.5 per cent and reduce their fees to 1.5 per cent, for a net return of 5 per cent a year.

+++++++++++++++++

The people

Mark, 52, Marianne, 55, and their daughter, 16

The problem

Are they on track to meet their retirement goals?

The plan

Continue paying off the mortgage, then shift the extra money to retirement savings. Use up unused TFSA contribution room. Look to lower investment-management fees and improve returns.

The payoff

Financial security with all their goals met.

Monthly net income

$15,555

Assets

Bank accounts $17,410; current value of overseas registered-savings plan $71,305; his TFSA $49,900; her TFSA $31,465; his RRSP $3,865; her RRSP $17,620; estimated present value of Mark’s DB plan $338,195; RESP $21,390; residence $800,000. Total: $1.35-million

Monthly disbursements

Mortgage $3,770; property tax $235; water, sewer $60; home insurance $90; heat, electricity $190; maintenance, garden $350; car lease $265; parking, transit $295; other auto $360; grocery store $1,300; clothing $340; vehicle loan $265; gifts, charitable $155; vacation, travel $500; house cleaning $240; dining, drinks, entertainment $410; grooming $150; clubs $95; sports, hobbies $60; subscriptions $15; child’s activities $165; doctors, dentists $30; vitamins, supplements $250; life insurance $145; telecom, TV, Internet $295; RESP $415; TFSAs $400; pension-plan contribution $1,085. Total: $11,930. Surplus $3,625

Liabilities

Mortgage $154,330; Home Buyers Plan loan $8,570; car loan $47,420 at zero per cent. Total: $210,320

Want a free financial facelift? E-mail finfacelift@gmail.com

Some details may be changed to protect the privacy of the persons profiled.

Matthew Ardrey
Presented By:
Matthew Ardrey
VP, Wealth Advisor
matt@tridelta.ca
(416) 733-3292 x230

If you’re retired, is now the time to sell your house?

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ted_bnn_15sep16cTriDelta President Ted Rechtshaffen appeared on BNN TV as a guest speaker to discuss retirement income from selling a house in Toronto.

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

FINANCIAL FACELIFT: The mortgage is paid, income is good but budgeting is hit-and-miss

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Below you will find a real life case study of a couple who are looking for financial advice on when they can retire and how best to arrange their financial affairs. The names and details of their personal lives have been changed to protect their identities. The Globe and Mail often seeks the advice of our VP, Wealth Advisor, Matthew Ardrey, to review and analyze the situation and then provide his solutions to the participants.

gam-masthead
Written by: DIANNE MALEY
Special to The Globe and Mail
Published Friday, May 19, 2017

Mike and Jade are raising three children on a single – albeit good – salary in an Ontario town where real estate prices are not especially high.

He is 45, she is 51. Mike earns $125,000 a year in a managerial job while Jade stays home with the children, who range in age from 8 to 11. Jade and Mike have paid off their mortgage, but they’re still having trouble getting ahead.

“I am well paid,” Mike writes in an e-mail, “yet I never seem to have any free cash flow.” His extended family has helped, gifting him and Jade money to invest 20 years ago when they were just starting out. Another relative lent them money to buy a vehicle.

“I want to pay back my $16,000 family loan,” Mike writes, but instead he is wrestling with a $29,500 line of credit that seems to keep going up rather than down.

“All of my peers are jetting off to vacations in the Caribbean, talking about their tax-free savings account performance, and making plans to spend the summer at their cottages,” Mike adds. “Why do I feel like a financial lightweight?”

We asked Matthew Ardrey, a vice-president and financial planner at TriDelta Financial in Toronto, to look at Mike and Jade’s situation. Mr. Ardrey holds the certified financial planner (CFP) designation.

What the expert says

Jade and Mike’s problems with budgeting and debt management are growing more common, Mr. Ardrey says. Short term, they want to repay their debts and at the same time spend money on the roof (at least $5,000), eye surgery ($5,000) and a vacation ($15,000).

“These two cannot be achieved simultaneously.”

They do not have a good handle on where the money is going, the planner says. “The budget is a key concern for me with this couple. From their comments, they seem to have a real desire to keep up with the Joneses, but what they really need to focus on is getting their own financial house in order.” The first step is to track their spending and prepare a detailed income and expense statement.

To repay the family loan, they could liquidate some of their non-registered investments, the planner says. They could sell about $4,000 a year for two years, which would pay off half the loan. With some budgeting, the remaining $8,000 could be paid off at the rate of $2,000 a year for four years.

In his calculations, the planner assumes the couple borrow on their line of credit to cover their short-term spending goals such as the roof, eye surgery and the vacation.

This “does not address the real problem of cash-flow management,” Mr. Ardrey says. Without a detailed cash-flow plan in place, they will “end up right back where they started.”

The next goal is the children’s education savings. They are saving $500 a month and the planner assumes they allocate their $500 surplus to the RESPs as well. As it is, the plan falls short of meeting total education costs for three children. That assumes costs of $20,000 a year for each child, rising with inflation.

Once the children begin studying, the planner assumes no further RESP contributions, so Jade and Mike will be able to use the money that had been going to the RESPs to help pay for the additional education costs. They could borrow to cover any shortfall. After the children graduate, the couple can direct their attention to paying off the line of credit.

With no surplus cash flow, the only way they can take full advantage of their substantial unused TFSA contribution room would be to shift some of their non-registered investments to TFSAs. Mr. Ardrey suggests Mike use the two accounts (he has three) with the least capital gains to fund the tax-free savings accounts: $45,500 split evenly between them this year and $49,500 in 2018. From 2019 onward, they can sell enough from their more profitable dividend fund to make annual TFSA contributions of $5,500 each.

Jade and Mike plan to retire at the age of 65. Mr. Ardrey assumes that Mike will get full Canada Pension Plan benefits at the age of 65 and that Jade will get 25 per cent of the maximum. Both will begin collecting Old Age Security at the age of 65. They will have Mike’s work pension, their RRSPs and their non-registered investments to draw from.

They will be in good shape financially, but they could do better if they upped their anticipated rate of return and lowered their cost of investing, Mr. Ardrey says. They are invested mainly in bank mutual funds, which can have relatively high management fees.

Based on their current spending (less savings) and adding a buffer in case their spending is understated, Mr. Ardrey figures the couple can spend at least $5,000 a month, or $60,000 a year, when they retire. By following the saving and budgeting plan noted above, they could increase their retirement spending to $90,000 a year from $60,000.

Given that they have about $750,000 outside of Mike’s work pension, the couple can afford to hire an investment counsellor to create a personalized portfolio strategy that would likely increase their returns, lower their risk and cut investment costs, Mr. Ardrey says. If, for example, they could earn 6.5 per cent with investment costs of 1.5 per cent, they would have more than twice as much as the original $60,000 target to spend in retirement.

+++++++++++++++++

The people: Mike, 45, Jade, 51, and their three children.

The problem: Trying to figure out where the money is going so they can pay off their loans and meet some short-term spending goals.

The plan: Track their spending carefully and draw up a detailed list of income and expenditures.

The payoff: A better understanding of how to get from here, where they’re feeling pinched, to a future where they will be financially comfortable.

Monthly net income: $7,185

Assets: Cash $1,750; non-registered investment portfolio $278,600; his RRSP $268,800; her RRSP $203,200; market value of his DC pension plan $144,000; RESP $89,000; residence $315,000. Total: $1.3-million.

Monthly outlays: Property tax $500; home insurance $30; utilities $380; maintenance, garden $175; transportation $570; groceries $450; child care $75; clothing $150; line of credit (varies) $300; personal loan $100; gifts $125; charity $250; vacation, travel $100; dining, drinks, entertainment $250; grooming $100; clubs $10; pets $45; subscriptions $25; children’s activities, special needs $300; vitamins $25; life insurance $180; disability insurance $210; telephone, cellphones, cable $280; RRSPs $1,500; RESP $500. Total: $6,630. Surplus: $555

Liabilities: Line of credit $29,500 at 3.7 per cent; personal loan $16,000 at no interest. Total: $45,500

+++

Want a free financial facelift? E-mail finfacelift@gmail.com.

Some details may be changed to protect the privacy of the persons profiled.

Matthew Ardrey
Presented By:
Matthew Ardrey
VP, Wealth Advisor
matt@tridelta.ca
(416) 733-3292 x230

Lorne Zeiler, Guest Portfolio Manager on BNN’s Market Call Tonight, April 20, 2017

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Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor, TriDelta Investment Counsel, was the guest portfolio manager on BNN’s Market Call tonight on Thursday, April 20th discussing large cap dividend paying stocks, portfolio strategy, the market  and the economy.

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

Q1 TriDelta Investment Review – What a great start to the year!

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The Highlights

After a great first quarter for our clients, stemming from high exposure to U.S. stocks, preferred shares, and high yield bonds, our investment direction is shifting slightly.

We’re witnessing some exhaustion in U.S. stocks, signs of some greater opportunity in Canada and Developed Markets outside of the United States.   We’re reducing our high yield bond weighting as those valuations have become expensive.

We remain positive on Alternative Investments and we are comfortable with Preferred Shares.  Our bond portfolios are leaning more defensive after strongly benefitting from a more aggressive approach over the past 6 months.

The net effect is that there are still some good investment opportunities heading into the summer, but for U.S. stocks at least, we are pulling back from our heavily overweight position.  The U.S. market has been leading the way globally over the past three years, and this has led to higher valuations in the U.S. than most other markets. 

In terms of Canadian stocks, we have been very underweight for a few quarters, and will likely be adding to our current positions this quarter.  This is based on surprisingly positive economic numbers, and a belief that there is some upside in energy related stocks from here.

We will also be increasing our cash holdings as a tactical defensive move – as we watch Trump try to get the support of the Republican Congress, tensions with Russia over Syria and North Korea, and the latest EU developments.

In the quarter, the TSX was up 1.7%, while the U.S., Europe and Japan were up 4%+ in Canadian dollars.

Preferred shares were very strong, with the TSX Preferred Share index up over 7%.

Canadian bonds were up just over 1%, although High Yield Bonds were up over 2%.

The key positive fundamental trend is global reflation and better growth, particularly in Europe and Emerging Markets.  Overall, this should be positive for stocks.

The key political issue is whether the U.S. can drive ahead with meaningfully lower corporate tax rates and infrastructure spending.  If they can make this a reality in the coming months, it will provide a further lift to U.S. stocks.  Our fear is that there are enough signs to suggest that this expected change will take longer to come to life (and could be more watered down) than the market had hoped.

How did TriDelta do?

Q1 2017 was one of our best ever.  Most clients ended the quarter up between 3% and 5%.  Those with higher returns tended to have more exposure to Preferred Shares, as our portfolio was up over 10%, and were also invested in our Pension portfolios which had stock returns of over 6%.

Our TriDelta Growth Fund had a healthy 4% return on the quarter.

While the Canadian bond universe was up only 1%, our TriDelta Fixed Income Fund was up 3%.

The TriDelta High Income Balanced fund continued its strong result – the Fund has had 14 consecutive positive months.  It was up over 4% on the quarter, and up over 20% over the past year.  This 5 star rated fund (Globe Fund), is meant to provide a much higher yield than bonds (currently a 5.1% yield), and stock like returns, but with lower volatility than stocks.  The fund has now moved from monthly to daily pricing.  This means that it can be purchased or sold on any market day, greatly enhancing liquidity.

Most of our Alternative Income strategies continued to do what they are supposed to do, which is provide consistent annual income and growth of 6% to 10% a year.  Unfortunately, in a quarter as strong as Q1, those 1.5% to 2.5% returns on Alternative Income felt underwhelming. 

Overall, it was a great start to 2017.

What investment shifts are coming and why?

At the risk of oversimplifying things, here is the synopsis:

*The U.S. equity market has been too good of late, and with higher than average valuations, we believe there is less upside from here, especially if corporate tax changes don’t come soon or as fully as the market expects.  We accurately timed an overweight position in the U.S., but will now be trimming our positions back to a more neutral or slightly under neutral weighting.

*The Canadian equity market has been underperforming most other markets over the past 9 months, and we have been highly underweight Canada vs. our benchmark.  We will now be increasing our weight a little in Canada, mostly driven off better than expected economic numbers.  While we are aware of the residential real estate risks, until mortgage rates meaningfully rise we believe the general rise in real estate values will continue.  We also believe that oil prices seem range bound in the $50 to $60 zone, but have some room and support to rise within that range, from today’s prices.

*We will be slightly increasing our weighting in developed global markets.  This is largely a shift from the U.S. where stock valuations are much higher than long term averages, to markets that are currently trading at or a little below long term averages. 

*An eventual rate hike from the Bank of Canada is unavoidable if the Canadian economy continues to improve, but for now, the lack of any move by the Bank of Canada will keep short term bond yields largely unchanged.

*For fixed income, we are keeping our powder a little dry with lower bond durations/terms to maturity.  We are doing this as we see longer term bond yields increasing from current levels. 

With yields starting off near the lower portion of the trading range, our defensive duration posture will allow for a more opportunistic investment in the longer end of the yield curve once interest rates work its way higher. Ultimately, the force of Canada’s gradually improving economic situation will convince the Bank of Canada Governor that an eventual rate hike is unavoidable.

*We will likely boost cash positions tactically for a short period as we take some profits and wait out a couple of areas of concern.  As discussed, one area is the ability or inability of Trump to push through major Corporate Tax cuts.  The expected cuts have been a meaningful driver of U.S. market growth, and any delays will be seen negatively by the markets.  Another concern is Syria and events in North Korea and the impact on U.S.-Russian Relations.  A final worry relates to E.U. solidarity or lack thereof, which will be tested in national elections.

*Canadian Dollar/U.S. Dollar – We have been seeing weakness in the Canadian dollar for quite some time, and while it has declined a little, it has mostly maintained its value of late.  While we do see room for declines if NAFTA changes hurt Canadian trade, we also see some economic strength in Canada, strength on the oil front and a lack of willingness to restrict foreign buyers of real estate.  As a result, our current view is a relatively range bound Canada/US dollar trade.

 

Summary

The news requires a headline every day, but how many of those headlines should really change the management of your investments?  Mostly we focus on earnings, valuations, and interest rates to drive the portfolio decisions.  This quarter sees some changes in our thinking – but likely the only headline that played into our investment thinking was Trump’s inability to pass a new Health Care bill. 

The best ways to build long term wealth and income are buying quality assets at reasonable prices, diversifying your holdings, being patient when valuations are not in your favour, and having the fortitude to switch when prices become more attractive.

We hope everyone will be able to fully enjoy the splendors of spring.

  

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

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