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If your retirement security is built on your home, now might be the time to sell

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If you’re a homeowner thinking about leaving work in the next few years, it may be time to cash in your lottery ticket (also known as your house) and trade it in for a comfortable retirement.

Across the country, but specifically in Vancouver and Toronto, the growth in house values has reached the point where, for many retiree homeowners, their house is by far their largest asset. It is not uncommon to see 75 per cent of someone’s net worth tied up in their home.

As a certified financial planner those stats make me nervous — especially if the person in this situation is a retiree. Here are five reasons why:

1. Concentration risk. If an investment portfolio is too heavily weighted in one sector, we can see the risks. For example, if you owned 30 per cent or more in energy and materials in 2014 and 2015, you were hurt badly. Now, what do you say about someone who has more than half of their entire net worth in residential real estate on one street in one city? That is a very high level of concentration risk.

2.buysell When house prices fall, recovery is very slow. In 1989 Toronto house prices dropped after a big rally. It took 13 years for prices to recover. When adjusted for inflation it took 20 years to recover! As a retiree, do you have 13 or 20 years to wait? The previous spike in Toronto took place in 1974. In that case it took 12 years to recover when adjusting for inflation. Predicting the fall of house prices has been a losing bet for several years, but when home prices start to fall, it can take many years to recover. You don’t want to be forced to sell at a time when prices on your biggest asset are down.

3. Uncertainty. Most people want as much certainty as possible in their retirement and estate planning. If you want very low risk on an investment portfolio, it isn’t that difficult to count on an average return of four per cent. The lower the risk, the lower the volatility. With house prices, you have no control. The value of your home could go up 10 per cent, go up five per cent or go down 10 per cent, and as a homeowner you simply ride the wave. If you want more certainty over your financial future, sell your house and put together a low risk portfolio.

4. Debt. This may not be an issue for some, but for those with debt on their home in retirement, there is an added risk. Today, the borrowing cost is very low, but IF housing markets turn down, it will likely be in part because borrowing costs have gone up. That combination of higher costs and lower equity can have a big impact on a retirement plan.

5. Maybe housing prices ARE overvalued. I am not in the real estate prediction game, but some pretty smart people (including economists with the OECD and IMF) are warning that real estate prices in Canada are overvalued by 30 per cent or more. In Vancouver, a house selling for $1.8 million today was selling for $1.2 million just two years ago. What if the house prices “crashed” to where they were just 24 months ago? That would take $600,000 out of your retirement nest egg. I know they have been saying it for a while, but at some point they will be right. If you are 45, then you might be OK riding out that storm and still selling at a great price in retirement. If you are 65 and thinking of downsizing anyway, that isn’t a storm you want to weather.

Despite all of this, from a pure financial standpoint, I can think of one very good reason to stay fully invested in your home. The benefit is tax. There is almost nothing in Canada today that is as good a tax shelter as your principal residence. Remember that 100 per cent of the capital gains in your home are tax-free. Having said that, keep in mind that this large benefit is only of value on gains. There is no tax benefit to losing money on your principal residence, but cashing in a big capital gain tax-free certainly sounds pretty good.

So, if you are feeling concerned about having too many eggs in the real estate basket, what are your options?

1. Sell and rent: While many don’t like the idea of renting after many years as an owner, from a financial perspective it can end up costing you very little when you subtract all of the real estate taxes and capital expenses that you regularly had to put into your house.

2. Sell and buy something much cheaper in the same city: This will allow you to cash out a good percentage of your lottery ticket while still owning property and benefiting from the tax advantages. One of the challenges with this one is that you will need to pay an extra set of real estate commissions, land transfer tax, etc.

3. Sell and buy less expensive property in a completely different location: This can be the move to cottage country, somewhere warmer or closer to grandchildren (as long as they don’t live in Vancouver or Toronto).

When it comes to your home, there are lots of opinions floating around and nobody has the perfect answer. However, when it comes to your retirement, if you are relying on something that many people say is 30 per cent overvalued today, now might be the time to reduce or eliminate that big risk.

Ted can be reached at tedr@tridelta.ca or by phone at 416-733-3292 x221 or 1-888-816-8927 x221

Reproduced from the National Post newspaper article 12th September 2016.

CPP – When is the Right Time for You to Take It?

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CPP is the one defined benefit pension plan that every Canadian employee receives, so it is not surprising that I am often asked about when is the right time to take it.

I was asked about my thoughts on this very question by MoneySense Magazine.

This article expands on those thoughts and reviews when it is the right time to start receiving your CPP.

Is it better to take CPP at 60 or 65?

To answer this question, let’s take a look at the math, assuming the maximum pension is received either at 60 or 65. Based on the reduction factors for taking CPP early, the pension is reduced by 0.6% per month, or 7.2% per year, to a maximum of 36%. Ignoring the effects of inflation, the cumulative payment of CPP at 65 exceeds that at 60 around the age of 74. Putting it simply, if you live past age 74 you are better off taking CPP at 65 than 60.

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If I stop working at 60, should I take CPP at 60 or 65?

Again let’s take a look at the math behind this analysis. CPP works like a fraction with 47 years between ages 18 to 65. This is your denominator (bottom of the fraction). The numerator (upper part of the fraction) is based on your work history. You receive a “one” for every year you maximize CPP and a “zero” for every year you do not contribute at all. The rest of the years get a percentage between one and zero. These are added up and divided by 47 to get your percentage of maximum CPP payable.

However, the calculation does not end there. Everyone is entitled to the general dropout provision, which allows you to drop your eight worst years automatically, making the CPP fraction out of 39 not 47. For example, consider you retire at 60 with eight years of zero CPP contributions. You would receive the maximum CPP at age 60. If you wait until age 65, you will have five years with zero contributions. To determine which option is better, you only need compare the reduction in CPP. If you take it at 60, you will have a 36% reduction in CPP. If you take it at 65, you will have five zero years and a 13% reduction in CPP (100 – 34/39). Ignoring the effects of inflation, the cumulative payment of CPP at 65 exceeds that at 60 around the age of 78 in this example.

cpp60vs65d

What other things can I do to maximize my CPP?

Other than the general dropout provision, which is automatically given to everyone, there is also a child-rearing dropout provision. The child-rearing dropout provision allows the primary caregiver to drop up to seven years of CPP contributions, following the birth of a child, that have earnings less than the maximum. If multiple children are born there may be some years which overlap. These can only be counted once. Unlike the general dropout provision, you must apply for the child-rearing dropout provision

You may share your CPP with your spouse or common-law partner. The portion of the pension that is available to share is based on the number of months you cohabitated while eligible to contribute. To share your CPP, both of you must be eligible to receive CPP and apply for it. This measure does not change the total amount of pension received by the couple; rather, it changes who the pension is paid to and subsequently how it is taxed.

What other considerations should factor into my decision?

What other sources of income do you have during the years you will not be receiving CPP. For many people the decision to defer CPP to 65 is no decision at all, as they need the pension to cover their everyday costs of living.

If your spouse or partner is much older than you, you may benefit from having the extra income now to enjoy with them. Your expenses will potentially decrease as your older spouse can no longer enjoy these activities or passes on.

How does your income compare to the OAS and GIS thresholds. By taking the CPP earlier, it may keep you below these thresholds in the future.

It may be beneficial to defer taking the CPP if you have RRSP assets to draw upon and no other income. You can draw down your RRSP and lower tax rates and the overall lower balance in the RRSP will reduce your future RRIF payments as well.

If your family has a history of longevity, you should include that in your decision. All other things being equal, the longer you expect to live, the more you should lean towards deferring.

The math favours waiting until age 65 to take your CPP for many people today. If you can afford to do so, it is preferable. That being said, you need to look at your personal circumstances and how this choice will affect you and your lifestyle. There is no single answer that is right for everyone.

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

Record debt levels only bad if you’re using the money wrong

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ted_bnn_15sep16cTriDelta President Ted Rechtshaffen appeared on BNN TV as a guest speaker to discuss the implications of Canadian household debt levels at new highs.

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

Financial Facelift: Couple with high incomes needs tighter budgeting to meet their goals

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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, Sep.02, 2016

Rose and Ron are feeling squeezed financially despite their high income. Ron, who will be 37 this year, makes $120,000 a year in marketing, while Rose, who will be 40, earns $175,000 working in the health-care field. But they want to renovate their basement and send their children to summer camp. Then there’s the $2,890 a month in child-care expenses and the $2,600 a month in mortgage payments.

They have two children, ages 5 and 2. Their expenses – which they track loosely – seem to eat up nearly every dollar they make.

“How do we put aside enough money for both our kids’ education and our RRSPs while still meeting our monthly obligations?” Ron writes in an e-mail.

“Currently, we do not save any money each month for emergency funds,” Ron writes. “I’m worried that if we have a major home issue, we won’t be able to cover the costs,” he says. “How do we curb our spending? It feels like there’s a never-ending stream of expenses.”

Earlier this year, Rose set up a professional corporation. “With the corporation, how would it be best to shelter income and withdraw it when needed?” Rose asks.

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

What the expert says

Fotolia_76895572_XSaThe couple’s three short-term goals are mostly in hand, Mr. Ardrey says. They have borrowed against their house to pay for the basement renovation. With a rate of 2.2 per cent a year and payments of $1,200 biweekly, their $170,000 mortgage will be paid off in five years.

As for retirement savings, Ron and his employer contribute to Ron’s defined contribution pension plan, so he has no extra RRSP room. Rose’s corporation offers a more tax-efficient way of saving for retirement than an RRSP, but more about that later.

They are saving about $2,000 a year to their children’s registered education savings plan (RESP), mainly through gifts. If they top this up to the annual maximum of $5,000 for their two children, they will have enough to pay for a four-year degree for each child, assuming an annual education cost of $20,000 a year for each child, adjusted for inflation, Mr. Ardrey says. “As there is no surplus in their budget, these savings will need to come from a reduction of other expenses.”

As well, they would like to raise their travel budget to $1,000 a month and send each child to summer camp starting when they reach Grade 1. The eldest starts two years from now. The cost initially is $2,500 for Grades 1 and 2, and escalating from there as the children get older.

“By the time they have both children in camp, they will have paid off their mortgage and the funds will be readily available without any further budget constraints,” Mr. Ardrey says.

A major concern for the couple today is budgeting. They have a lifestyle with more than $3,000 a month in discretionary spending alone, plus $1,000 a month in travel costs, the planner says. To achieve all of their short-term goals, they will need to make some adjustments to the expense side of their budget or find a way to increase their income. “The crucial years will be the next five until the debt is paid off,” Mr. Ardrey says. “As they are tight against their budget, they will need all of Rose’s income from the corporation to make ends meet.”

Rose can take dividends instead of salary from her corporation, which will save some tax. Her children (in trust), husband and mother are also shareholders. She might also be able to pay dividends to her mother (depending on her mother’s income), which could further reduce her tax bill.

After five years, when the mortgage debt is paid off, Rose will be able to reduce her draw from the corporation by $50,000 a year and they will still be able to meet their budget, Mr. Ardrey says. This will allow these funds to be taxed at the lower tax rate of a CCPC (Canadian-controlled private corporation) and accumulated for retirement inside the corporation.

When Rose retires, these savings will create a future dividend income stream of $65,000 per year, assuming equal payments from her corporation starting when she retires at 65 and lasting until she is 90. At that time, Rose should look at the income of her adult children to determine if there is any tax advantage to paying them the dividends instead of her, the planner says. “She would pay their reduced tax bill and then take home the larger after-tax income amount.”

When they retire, the planner assumes Rose and Ron will begin collecting maximum Canada Pension Benefits at 65. Their Old Age Security benefits will be clawed back because of their high income. He assumes the rate of return on their investments is 5 per cent a year and the inflation rate that affects their expenses is 2 per cent. He further assumes that they both live until the age of 90.

They plan to spend $85,000 a year in retirement, very close to their spending today once savings, debt repayment, child care and travel expenses are removed, Mr. Ardrey notes. They would like to spend an additional $20,000 a year on travel, inflation adjusted, in today’s dollars, from when Ron retires till he is 80.

Based on these assumptions, they will not only meet their retirement goal, but have a substantial financial cushion. They currently have retirement investment assets of about $1.4-million, and with contributions and growth over the next 25 years those assets will grow to more than $6.5-million, the planner says. They will be able to spend $178,000 a year in current year dollars on an inflation adjusted basis over and above their travel budget. In addition, at the age of 90 they will still own their house.

There are some risks to consider, Mr. Ardrey says. The first is job loss. Though Rose, as a medical professional, wouldn’t likely lose her position, it is conceivable that Ron may lose his job. If that happens it may have a significant effect on their financial plan. Next is insurance risk. Rose has a healthy amount of coverage at more than $2-million, but Ron’s is much smaller at $652,000.

He also suggests some changes to their investment portfolio, which is 28 per cent in cash and 45 per cent invested in Canada. A better approach would be to shift their cash into fixed-income investments and diversify their equity holdings geographically.

Finally, the planner explores how to get funds out of Rose’s corporation tax efficiently. Because the corporation has multiple classes of shares, Rose and Ron can allocate dividends to themselves or their children. Providing dividends to adult children is one way to pay for education or other expenses tax efficiently, Mr. Ardrey says. Once the child is an adult, the attribution rules no longer apply. Thus, dividends can be paid to the adult child directly when they are in a low tax bracket.

Insurance can also be a useful tool, Mr. Ardrey says. Rose could insure her mother on a policy paid for and owned by the corporation. The policy benefit would be paid to the corporation tax-free. Any amount in excess of the adjusted cost basis would be credited to the capital dividend account (CDA) in the corporation and the funds in the CDA could then be paid out tax-free to the shareholders. If Rose’s mother is in good health, this policy would likely pay out close to Rose’s retirement. “This would provide her with a lump-sum, tax-free payment at or near retirement,” Mr. Ardrey says. “This is one of the most tax-efficient ways to get money out of the corporation.”

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

The people: Rose, 40, Ron, 37, and their two children.

The problem: How to deal with short-term financial pressures and still save. Longer-term, how to take best advantage of Rose’s corporation to shelter tax.

The plan: Look for ways to cut spending now. Use corporation’s share structure to make dividend payments to adult children to help cover higher education costs. Consider using an insurance policy to generate tax-free income for Rose. Review insurance and investments.

The payoff: All their goals achieved with plenty of money to spare.

Monthly net income: $15,250

Assets: GICs $72,000; equities $899,000; his TFSA $61,000; her TFSA $30,890; his RRSP $166,000; her RRSP $188,000; market value of his pension plan $40,300; RESP $37,400; residence $882,000. Total: $2.4-million

Monthly outlays: Mortgage $2,600; property tax $580; water, sewer, garbage $70; property insurance $108; electricity $150; heating $145; security $35; maintenance $250; garden $400; transportation $560; groceries $1,250; child care $2,890; clothing $150; gifts $20; vacation, travel $750; dining, drinks, entertainment $880; miscellaneous shopping $250; grooming $250; sports, hobbies $125; subscriptions $15; uncategorized personal spending (children’s activities, house cleaning; gifts, vet bills) $1,500; dentist, drugs $70; vitamins $35; health, dental insurance $100; life insurance $475; disability insurance $250; cellphone $65; Internet $65; TFSAs $900; his pension plan contributions $350. Total: $15,288

Liabilities: Mortgage $170,000

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

Financial Facelift: Couple in good shape to retire early, but spending plans need review

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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, Jul. 15, 2016

Like so many people with defined-benefit pension plans, Norman and Lena can hardly wait to retire. He is 51, she is 50. They have two grown children.

Fotolia_100642283Norman works in manufacturing, earning about $93,700 a year. Lena works for the provincial government, earning $88,900 a year. Although their pensions will not be indexed to inflation, they give the couple choices that people without such plans likely don’t have.

The couple’s goals are to pay off the mortgage on their Greater Toronto Area home, retire and travel. They have a mortgage of $142,340 on a house valued at $750,000.

Should we be continuing to make such high mortgage payments to get that paid off, or should we be investing more money in our RRSPs?” Lena asks. Norman wants to retire in September 2017, while Lena would retire a few years later.

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

What the expert says

Though Lena must wait another nine years before being able to receive a full pension, Norman can retire as early as next fall with a full pension, Mr. Ardrey says.

One large question looms over this couple, the planner says: Can Norman retire even though they will still have mortgage debt? Likely, Mr. Ardrey concludes, but the priority is to pay off the mortgage. “If they maintain their current payment schedule,” he says, “they should be debt-free by 2020, which is only a few years after Norman retires.”

Norman and Lena use their RRSPs to save for retirement. She saves $2,600 a year and he saves $3,400 a year. They use their tax-free savings accounts for short-term goals, such as vacations.

When Norman retires at age 52, he will have a pension of $56,472 a year. That includes a bridge benefit of $16,080 until age 65, at which point his pension will be reduced to $40,390. When Lena retires at age 59, she will have a pension of $51,226 a year. That includes a bridge benefit of $11,830 until age 65, at which point her pension will fall to $39,439.

In addition, both do some work on the side, bringing in at least $2,100 each a year. In preparing his plan, Mr. Ardrey assumes they continue with these roles until their respective age 65. Because they are retiring early, Mr. Ardrey assumes they will get 75 per cent of the maximum Canada Pension Plan benefits; they will get full Old Age Security benefits. “Both of these pensions will be taken at age 65.”

He further assumes that the rate of return on their investments averages 5 per cent annually, that the inflation rate affecting their expenses is 2 per cent and that they live until age 90.

When they retire, they plan to spend $55,000 a year – close to their spending today once savings and debt repayment are removed, Mr. Ardrey says. In addition, they would like to travel, spending $10,000 a year from when Norman retires until his age 80.

Based on these assumptions, Norman and Lena should be able not only to meet their retirement goal, but have a substantial financial cushion,” the planner says. Once their debt is paid off, they can increase their spending by $27,500, to $82,500 a year, over and above travel spending.

Having this financial flexibility is important for the couple because they plan to retire so early, leaving a lot more time for life to present a problem that requires a financial outlay,” Mr. Ardrey says. As well, their budget is less than precise. Spending in some categories is high; in others, such as car expenses, clothing, gifts and vacations, it’s non-existent. He recommends they prepare a more detailed budget before the final retirement decision is made for Norman to ensure the target retirement expenses match what is actually being spent.

Finally, Lena and Norman should review their investment strategy. They have five RRSP accounts, one spousal RRSP and one locked-in retirement account (LIRA). “Though the spousal and LIRA accounts cannot be consolidated, the RRSPs can,” the planner says. Consolidating them would make them easier to manage.

Their retirement assets are invested in balanced funds and individual stocks. “An investment strategy that focuses on asset mix and disciplined investing would serve them better,” he says.

Their current asset mix is 23 per cent cash and fixed income, and 77 per cent equities. Mr. Ardrey suggests they shift their holdings at a rate of 5 per cent a year until they have 60 per cent equities and 40 per cent fixed income. “This,” he says, “will help with any volatility in the markets as they approach and enter the early part of their retirement.”

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

The people: Norman, 51, and Lena, 50.

The problem: Can they retire early while paying off a mortgage without affecting their retirement spending goal?

The plan: Keep up the big mortgage payments so the debt will be repaid a few years after Norman retires next fall.

The payoff: A sizable financial cushion to buffer any expenses that might arise.

Monthly net income: $8,950

Assets: His RRSPs $176,820; his TFSA $4,800; her RRSPs $26,520; her spousal RRSP $14,275; her locked-in retirement account $7,576; commuted value of his pension plan $379,750; commuted value of her pension plan $311,690; residence $750,000. Total: $1.67-million

Monthly outlays: Mortgage $3,280; property tax $360; water, sewer $60; electricity $270; heating $125; car lease $420; grocery store $1,200; line of credit $50; dining, drinks, entertainment $850; grooming $125; club membership $125; pets $500; cellphones $185; TV, Internet $200; RRSPs $500; tax-free savings account $800. Total: $9,050. Shortfall $100

Liabilities: Mortgage $142,340; line of credit $5,500. Total: $147,840

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

TriDelta Investment Counsel Q2 2016 Report: Markets move higher – even with all the dire headlines.

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Executive Summary

markets_010

Brexit, Trump and Terrorism.  Take all that together, and surprise, surprise, the markets went up. 

In the second quarter of 2016, the Toronto stock index closed up 4.6%.  The DEX Universe Bond index closed up 2.6%.  The S&P500 US index in Canadian dollars closed up 1.9%.  All looks pretty good.

Even leaving North America, which has been a treacherous thing to do this year, the EAFE (Europe, Australia and Asia and Far East) index was down just 0.3% – although the index is down 10.4% year to date.

It was a great quarter for precious metals and materials, and it was a very good quarter for ‘safe’ stocks like BCE and Enbridge.  Some of the sectors in between struggled a little.

This quarter was a reminder that the stock market can be very resilient.  It will  bounce back from all sorts of bad news.

In a research study (by Ned Davis Research) of the Dow Jones index in the United States, it showed that strong performance generally follows a major loss day.  On average, among all the major losses reviewed, there was 6.7% in average losses on that down day, and the gains on the index following that loss date were as follows:

22 days after 63 days after 126 days after 253 days after
+3.7% +5.2% +8.9% +13.9%

One of the major reasons for the numbers above is that including all the bad days, the long term average annual return of the S&P500 has been 10% a year.  The long term average for the TSX is closer to 9% a year.  Over time, stock markets go up and that is why when you decide to sit in cash for investment reasons, you are often swimming upstream.

The key message is that it is better to stick to your overall investment plan before, during and after a major event, than to try to make major asset mix changes to outperform.  It is too easy to be left on the sidelines as the markets rise again.

How Did TriDelta Do?

This quarter, most TriDelta clients were up between 2% and 3%.

Our TriDelta High Income Balanced Fund had a very good quarter – up 7.9%.

The best investments in our Pension portfolio models were Mondelez and General Mills, both up 14% during the quarter.

The best investments in our Core Growth portfolio models were Tahoe Resources up 49% and Barrick Gold up 31% during the quarter.

The worst investments in our Pension portfolio models were Computer Programs and Systems (discussed below, which we bought after it had already fallen a little), down 23%, and Apple down 11% on the quarter.

The worst investments in our Core Growth portfolio models were LyondellBasell down 22% and Concordia Healthcare down 16% during the quarter.

The TriDelta High Income Balanced Fund benefited from higher exposure to materials names that were very strong performers.  The fund also benefits from its ability to leverage allowing for higher yields on the bond portfolio.  Essentially we are able to borrow within the fund at a rate of 1.4%, and invest in bonds that typically have a yield of 3% or higher.  This leads to the higher income in the fund. 

Our overall performance reflects an investment strategy that aligns with that of our clients.  We want to do more to protect on the downside, while we aim to achieve or beat the long term return targets in your financial plans.  Most of our clients are OK being up 6% in a year and not beating the ‘market’, but are not OK to be down 10% or more even if we meaningfully outperform the ‘market’.  This quarter was a good example of achieving that goal.  We certainly have clients who are looking to beat the market, and their portfolio is set up accordingly, but even in those cases, there is some risk management in place to try to soften the blow of bad investment markets.

What Did TriDelta Do?

This quarter we are going to take a closer look at some trades, how they have turned out so far, and the reasons for those moves.

  1. We recently added ARC Resources to our growth portfolios. The company is mostly gas related but also has some oil exposure and has some of the lowest production costs in the industry.  Their production cost on gas is around $0.57/MMBtu and $16 for oil/barrel.  Management has done a great job protecting the company in the downturn while also preparing for the future.  Top analysts have a target of around $25.  We bought it around $20.  We wanted more exposure to Energy, but chose a name with lower volatility and an almost 3% dividend.

    It is very early, but so far the stock is up almost 4%.

  2. In late April in growth portfolios we sold a long term holding in 3M that we had done very well with, and bought Barrick Gold (ABX) with the proceeds. We sold 3M because the valuation was getting up to levels where the stock has previously corrected and technically the stock was starting to weaken after a great period of significant outperformance.

    In the case of Barrick Gold, the company is the largest gold miner in the world and is newly focused on the basics of gold mining and has made some great steps in significantly reducing leverage and also reducing production costs.  With cyclical stocks the time to get in is when earnings have troughed and the Price/Earnings ratio looks high.  Production costs are currently at a 4 year low of around $830 an ounce and the company is trying to get the cost down to $700 in the next couple of years.

    As mentioned, this has been a great trade for us.  Barrick is up about 35% while 3M is up about 7% since we sold it.

  3. On April 13th the asset mix committee met and we decided to reduce our exposure to the Developed EAFE markets and add exposure to Emerging markets. We wanted to maintain our overall Global weighting but were concerned about ongoing developments in Europe.  We also felt that Emerging Markets had underperformed for quite a period of time and is better poised for a rebound.

     
    In Pension portfolios we reduced our Ishares MSCI EAFE Min Vol (EFAV) by 1/3 and bought Ishares MSCI Emerging Market Min Vol (EEMV). 

    So far the trade has been marginally positive.  The EFAV that we sold is down 0.7%, while the EEMV that we bought is up 0.9% for a 1.6% swing.  We did a similar trade in our growth portfolios as well.

  4. On April 8th we sold Cal-Main (a U.S. egg producer with a high dividend) in our Pension portfolios. We sold the company because they had made negative estimate revisions for future earnings, and as a result it no longer met the criteria we set for buying the stock.

    We switched into Computer Programs and Systems (CPSI).  CPSI is a healthcare information technology company that designs, develops installs and supports IT systems to hospitals.  They focus on specifically patient care systems which cover a full range from financial to clinical applications.  Valuations seem to be very fair.  The company trading at 26x’s this year’s earnings per share and 15x’s next year.  The company is also growing at a pace well above the S&P 500.  CPSI has also been able to stockpile cash, and has a large portion of earnings tied to reoccurring revenue from  support and maintenance, so the recently increased dividend of 4.9% looks to be safe with the strong possibility of future increases.      

    So far this trade is what you might call ‘two wrongs don’t make a right’.  The good news is that Cal-Maine fell 13.1% after we sold it, however, CPSI is down 12.1% from where we bought it.

    The next question would be what we do with CPSI.  The view is to hold it for the following reasons:

    At the beginning of the year, CPSI closed a deal to buy a competitor.  While this is viewed as a good acquisition there were a few lost clients from the integration and that hurt the stock.  At the same time there are some industry compliance changes that will cause some of their smaller competitors to potentially exit the business.  Partly as a result, the company currently has its highest sales backlog since 2010/2011.  After the decline in stock price, the current dividend yield of 6.3% and we believe this is sustainable and may grow.  Next earnings come out on July 28th.  We will watch this closely for signs of decline or earnings turnaround, and act accordingly, but at this point we believe the stock is good value.

Dividend Changes

As we do every quarter, we look at dividend changes for stocks that we own.  We believe that dividend growth is a key component of long term returns for conservative clients, and track these changes carefully.  This quarter, there were no dividend declines and 9 companies grew the dividends, with the leading dividend growth coming from Apple at 9.6%, LyondellBasell at 8.9% dividend growth and Restaurants Brand International (Tim Hortons and Burger King) at 7.1%.

Dividends
AAPL +9.6%
LYB +8.9%
QSR +7.1%
JNJ +6.6%
T +4.5%
GIS +4.3%
SU +3.8%
CM +2.5%
NA +1.8%
Bonds

In the Bond world, the continuing decline in government debt yields helped produce solid gains in the 2.5% to 3% range for the quarter.

In early April we sold a Government of Canada 2045 bond and purchased a Royal Bank of Canada 2025 bond.  The Government of Canada bond had already gone up 4% in price, and we decided to lock in that gain.  By moving from Government bonds to Corporates, and we were able to add almost 1 percent in yield.

We probably shortened the bond duration a little too early, as the Government of Canada bonds have continued to do well, but when it comes to bonds, if you can lock in decent capital gains on a trade, this often adds significantly to overall returns.

On June 13th we sold Cineplex Debentures with a 4.5% coupon coming due 2018.  We have actually owned this twice.  The first time we bought it at $105.90 and sold for $108.44.  This time we held it for about 7 months and made about 0.4% capital gain on top of the coupon.  We then purchased a Fairfax Financial bond with a 4.95% coupon that expires in 2025.  This bond is up over 1% since we bought it, and it has a higher coupon and much higher yield to bond maturity.

Overall our bond view has been to shift out of Government bonds and increase Corporate bond weightings.  We had made a rare shift into Government bonds a couple of quarters ago, as a defensive move given all of the political uncertainty, and to some degree corporate uncertainty that was on the landscape.  We are now much more comfortable back in the corporate bond space, especially as the yield on the corporate bonds is much higher.

TriDelta Financial – Investment Direction

At this stage, we remain comfortable with our higher U.S. stock positions.  We believe the Canadian dollar should be fairly stable, but given all of the Global gyrations, the United States is the safer place at the moment.

The U.S. Federal Election will become a bigger influence on the market.  As it turns out, a Republican win would likely hurt U.S. and Global Markets in our view….as it has the drag along effect of having a guy named President Trump running things, who is seen as protectionist and against free trade. 

At this stage it looks more likely that Clinton will be the next President, and while not all industries will be happy (i.e. Pharma companies), the overall market could breathe a sigh of relief.

We do actually believe that the U.S. Federal Reserve will raise rates at some point this year or early next year, and it is even possible that Canada will as well.  However, we don’t believe a small increase and a temperate statement from Central Banks will cause too much concern for markets.

At TriDelta Financial, we are continuing to look at Alternative Investment products to provide higher income and lower volatility to portfolios.  We are also introducing TriDelta Equity pooled funds in the third quarter.  These shifts are meant to provide better overall investment performance, along with greater ability to use investment tools that can lower downside risk and increase income.  Your Wealth Advisor will provide more details shortly.

Conclusion

Growing portfolio values make everyone happier, and we are cautiously optimistic that we will see more growth ahead.  The current challenge is to watch for areas of overvaluation if corporate earnings do not grow to support the increased stock price.  We will also watch for changes in investor sentiment which can happen for any number of reasons.  As you can see from our trade analysis, while we may not always hit a lot of home runs, you can still win games by doing the little things right.  Hopefully the Blue Jays will do a little of both and make the summer ahead even more fun. 

We hope that everyone is having a great Summer so far, and that the current positive investment environment will continue into the Fall.

  

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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