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FINANCIAL FACELIFT: Are these soon-to-be retirees ready to set sail?

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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 November 10, 2017

Cruising into retirement, Steve and Donna plan to work part-time for another three years then hang up their hats for good. He is 65, she is 62. They have two grown sons, ages 26 and 28, a house in Alberta, some savings and no debt.

In addition to part-time income, Steve is collecting a work pension, while Donna, who is self-employed, is drawing a dividend from her company. Add it all up and they have been grossing nearly $120,000 a year.

Looking ahead, they wonder when they should begin taking government benefits, and what investment strategies would best allow them to achieve their goals. Their retirement spending target is $70,000 a year after tax.

Short-term, they plan to buy a new vehicle ($40,000) and a motorcycle ($25,000). Longer term, they plan to sell their house, downsize and buy a sailboat ($25,000).

Are they on track?

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

What the expert says

Steve’s employment income is currently $47,720, but will drop to $32,000 for 2018 and 2019, Mr. Ardrey notes. Donna’s work income is expected to remain constant at $10,567 through 2019. In addition Donna is drawing $11,123 of dividends, while Steve is getting pension income of $50,316 a year, indexed to inflation.

In his plan, Mr. Ardrey assumes the couple have arranged to split Steve’s pension income. After monthly expenses, they have a surplus of $1,800 a month, which they are saving to buy a new car and a motorcycle.

In 2019, Donna and Steve plan to sell their home for about $770,000 and buy a condo worth $415,000. Real estate transaction expenses are estimated to equal at least 10 per cent of the sale price, with the remainder of about $276,000 being invested. The following year, they plan to purchase a sailboat for $25,000.

Steve is contributing $7,440 a year to his registered retirement savings plan, which he should continue to do as long as he is working, Mr. Ardrey says. He has Steve taking Canada Pension Plan and Old Age Security benefits at 68 and Donna at 65, and assumes they both get full benefits. Inflation is forecast at 2 per cent a year.

First, Mr. Ardrey looks at their existing portfolio and its expected rate of return based on historical averages. That would be 2.8 per cent a year net of any account fees. “Though they have stated they would like a strategy for their investments, I felt running an ‘as is’ scenario would be interesting for comparison,” the planner says. Donna will increase her dividend to $11,600 a year to exhaust the funds in the corporation by the time she is 90.

Despite the low investment return, Steve and Donna are able to comfortably meet their retirement spending goal, Mr. Ardrey says. They would leave an estate of $1.7-million at Donna’s age 90.

If, instead, they spent all of their investments, leaving only real estate and personal effects, they would be able to increase their spending to $92,000 a year, the planner says.

Now he looks at how well off they would be if they increased their rate of return to 5 per cent a year and began contributing to tax-free savings accounts. When they downsize in 2019, they could each make a lump-sum TFSA contribution of $63,000 ($52,000 in accumulated room to 2017, plus $5,500 for 2018 and another $5,500 for 2019). “Though these changes may appear minor, their effect on the retirement lifestyle potential is major,” Mr. Ardrey says. In this forecast, Donna increases the dividend she draws to $13,000.

They would leave an estate of $4-million at Donna’s age 90. If, instead, they decide to exhaust all of their investments, leaving only real estate and personal effects, they would be able to increase their spending to $115,000 a year. Donna and Steve could either more than double the size of their estate, spend substantially more, or “some combination of the two.”

Donna and Steve’s entire investment portfolio is cash and Canadian equities. They have so much cash because they sold some stock recently and are hesitant about investing the proceeds. Mr. Ardrey suggests a balanced approach, with 50 per cent stocks or stock funds, 30 per cent fixed income and 20 per cent alternative investments. The equity portion would be diversified geographically (Canadian, U.S. and international) and the alternate investments by strategy (such as private debt, real estate, infrastructure).

While the returns on fixed income are low, “it is important to include it to insulate against equity market volatility,” the planner says. The alternative investments should help offset the low fixed-income returns and provide further diversification because of their low correlation to financial markets, he adds.

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

The people: Steve, 65, Donna, 62, and their two sons.

The problem: How best to prepare for full retirement in three years, including when to draw government benefits and how to invest without undue risk.

The plan: Begin drawing government benefits when they retire fully. Open TFSAs and review their investment strategy to improve balance and diversification.

The payoff: The comfort of knowing they have achieved financial independence.

Monthly net income: $7,965

Assets: Bank accounts $6,500; her RRSP $31,040 (cash); $8,750 (stock); his spousal RRSP $78,015 (cash); $69,280 (stock); her business bank account $158,750; her business trading account $47,390 (cash); $55,450 (stock); estimated present value of his pension $274,000; residence $750,000. Total: $1.48-million.

Monthly outlays: Property tax $340; home insurance $50; utilities $365; maintenance, garden $395; transportation $405; groceries $900; clothing $370; gifts $300; charity $166; vacation, travel $850; other discretionary $100; dining, drinks, entertainment $300; personal care $100; sports, hobbies $100; subscriptions, other $40; health care $150; health, dental insurance $310; life insurance $137; telecom, TV, internet $133; RRSP $620. Total: $6,131. Surplus: $1,834

Liabilities: None

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

Q3 TriDelta Investment Review

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How did Markets do?

The 3rd Quarter report would have had a different feel if it was written in early September.  At that point Bonds were down, Canadian stocks were down, and with a strong rise in the Canadian dollar, US stocks were down in Canadian dollar terms.

Fortunately the quarter ended on September 30th, with Bonds recovering some of their losses and stock markets globally and locally all ending up stronger.

The Canadian dollar, however, had a negative impact on U.S. dollar based investment returns, as the Canadian dollar ended up 4% on the quarter (after posting a 2.8% gain in Q2).

The TSX was up 3.7%, but the U.S. S&P500 in Canadian dollar terms was actually down 0.1%.

Other Non-North American stock markets were strong, in particular Emerging Markets, which were up 8.3% (4.3% after the Canadian currency impact).

The FTSE Bond Universe (previously the DEX Bond Universe) was down 1.8% on the quarter, in large part based on sooner than expected interest rate hikes in Canada.

How did TriDelta do?

The third quarter of 2017 was a mixed bag.  Most growth oriented clients ended the quarter up in the area of 1% to 1.5%.  Most conservative clients ended the quarter closer to flat. 

The difference was twofold.  Growth stocks outperformed Value and more conservative clients had higher exposure to Bonds as well.  Currency negatively impacted all clients.

Our TriDelta Growth Fund had a 2.2% return on the quarter.

Our TriDelta Pension Fund was down 0.1% after a strong first half of the year.

Our TriDelta Fixed Income (Bond) Fund was down 0.2%, but that was in a quarter when the Bond Universe was down almost 2%.  Overall, while the Bond market has done poorly, TriDelta has meaningfully outperformed.

Our TriDelta High Income Balanced Fund was down 0.5%, largely due to its high Bond exposure.

Our Preferred share portfolio continued to do well, led by rate reset Preferred shares, with a 2.1% gain on the quarter.

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, regardless of stock or bond market performance.  This translated into a 1.5% to 2.5% return on the quarter.

Our current view of the world ahead
  1. Interest Rates – Canada has raised rates twice in Q3, and while some believe that another rate increase is coming by year end, we do not believe it will happen. To some degree these rate increases have come from greater confidence in Canada’s economy.  We believe there will not be another Canadian rate increase for several months for four reasons:
    1. 4%+ GDP Growth Numbers are unsustainable and will be coming down, removing some of the support for future rate hikes.
    2. NAFTA uncertainty will take some confidence away from the Bank of Canada.
    3. Canada is a real estate economy these days, and the Bank of Canada and others do not want to risk a real estate decline by raising rates too fast or too soon.
    4. Oil appears to be in oversupply at the moment, especially with the flexibility of fracking production. We believe this limits Canadian dollar upside through price increases.

    The implication of this is that a lack of rate increases should help Canadian bond returns to be stronger this quarter.  No further interest rate increase should also support high dividend yielding Utilities and REITS, but may be a little bit negative for Banks and Insurers. 

    We do expect the U.S. Fed will be raising rates again before year end, and likely again in the first quarter of 2018.  This will impact our U.S. bond positions and will likely have the opposite impact on certain stock sectors that we discussed above.

  2. Canadian Dollar – The Canadian dollar moved from 72.5 cents to 82.5 cents over a period of less than 4 months. In the past month, the Canadian dollar has declined back under 80 cents.

    As per the interest rate discussion, we believe the Canadian dollar will likely lose more ground this quarter.  Rising rates in the U.S. coupled with flat rates in Canada will be the biggest driver.

    NAFTA discussions that have pushed the Mexican peso meaningfully lower, have had little impact on the Canadian dollar thus far, but we believe it will have some negative impact.  However, these discussions could drag well into 2018.

    A last note relates to U.S. Tax changes.  If there is some headway on these Corporate Tax changes in the U.S., we believe it will lead to a sizable repatriation of U.S. Corporate dollars from foreign subsidiaries back to the United States which could translate into special dividends, share buybacks or acquisitions.  This will also strengthen the U.S. dollar.

  3. Stock Markets – We have recently lowered our cash weightings in favour of adding some money to Canadian and International Markets. While we believe that the U.S. economy and corporate earnings remain solid, we will not be adding significantly to a market that has high valuations and is showing signs of being in the latter stages of its long bull market run.

    Canada, Europe, Japan and Emerging Markets all have lower valuations and have certain sectors which are trading below their long term historical averages.  Despite expected increases in interest rates in the United States, we believe that rates will remain very low in these other markets, which will continue to provide a backdrop supportive of stocks.

  4. Preferred Shares – For the past 18 months, Canadian Preferred shares have been an excellent investment, particularly Rate Reset Preferred Shares that have gone up alongside higher bond yields. While we believe that Fixed Rate Preferred Shares may outperform in the period ahead, both Fixed Rate and Rate Reset Preferred Shares continue to provide strong tax preferred dividend yields of 4.5% to 5.5% from some of the strongest companies in Canada. 
  5. Alternative Investments – TriDelta continues to like these high yielding investments that are not correlated (don’t move up and down) with stock markets. Our expertise in this area is allowing us to be exposed to more innovative investments and in some cases receive lower fees than most others in the industry.  This should lead to higher returns for our clients.

    It is worth reminding clients that these investments are less liquid than stocks and bonds.  There is a possibility that during periods of market disruption these investments could be ‘gated’, meaning that withdrawals are restricted until they can be done without hurting the underlying investments.  This is the reason that, even though we are very positive on these types of investments, we like to maintain at least 70% of a portfolio in more liquid securities.

  6.  

    Spotlight – TriDelta’s Top Performing Fixed Income Fund

    Edward Jong, the Portfolio Manager for TriDelta’s Fixed Income Fund, likes to say that there is an ability to make money in Bonds in declining, flat or rising interest rate environments.

    He has worked through all scenarios in his 25 years managing Fixed Income investments, although it would be safe to say that declining interest rates have been the predominant direction during his career.

    Over the past year, Edward’s active approach has led to a 3.6% return.  On its own, that return isn’t overly exciting, but in comparison to the -3.1% return of the benchmark (BMO Aggregate Bond ETF), it is a 6.7% ‘beat’.  As a result, the fund ranked in the top 3% of all Canadian Fixed Income funds in the past year.

    Clients who transitioned to the fund on day 1 (May 2016), are up 8% over the past 17 months – during a time of rising interest rates.

    The fund takes an active approach and that can be seen in the various tools that are used to generate this performance.

    Two months ago the fund had:

    *A shorter duration than the index, meaning that it had a higher exposure to bonds with a short term to maturity, and a lower weighting in long term bonds.  This was done to reduce the funds exposure to the expected interest rate increases.

    *The fund had significant exposure to Corporate bonds and little to Government bonds.  This was reflective of our view that the overall economy was strong, and that the higher yields on Corporate bonds would come with a relatively low level of risk.

    *The fund had some exposure to higher yielding names – again reflecting a comfort in both the names and the overall economic environment.

    *We owned some Preferred shares in the fund as they provided higher yields and Rate Resets actually benefit when interest rates are increased.

    *We owned some U.S. $ bonds, but had a partial currency hedge in place to lessen our U.S. dollar exposure.

    Today, two areas of the fund have changed:

    *Due to our view that Canada will not be raising rates in the coming few months (while the market still believes this is a reasonable possibility), we have extended duration on the fund, essentially selling some short term bonds and replacing them with longer term bonds.

    *We have removed the U.S. dollar currency hedge, and are exposed to currency fluctuations on our U.S. holdings.  We believe that the Canadian dollar will decline, and it will improve our overall returns.

    The bottom line is that in this low yield environment with flat to rising interest rates, it is this active approach to the market that enables our clients to significantly outperform on the Fixed Income portion of their portfolios.

    Summary

    The current mood is steady as she goes, while keeping a firm hand on the tiller.

    The level of stock market volatility over much of the year has been ‘unseasonably’ low.  In fact, in the United States, the largest market decline this year at any point has been just 3%.  Almost every year you will see a decline at some point of at least 5% to 10%.  That is normal.  What we have seen this year is not.

    While we are confident in markets overall, we should also keep in mind that there will likely be a decline in stock markets of 5% to 10% in the months to come.  We should mentally prepare for it.  The good news is that when this happens, a diversified portfolio of Bonds, Alternative Investment Solutions, Preferred Shares and maybe cash, help protect your capital and lower your risk. 

    In cases, where your stock weightings have grown beyond their traditional weights, we will be working to rebalance portfolios by taking a little profit over the coming weeks.  Consider it to be our TriDelta version of the Squirrel busy putting some nuts away for the long winter.

    All the best and our continued appreciation for putting your trust in us.

    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

Protecting Your Retirement Portfolio – in a Down Market

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When I review the portfolio of a new client as part of their financial plan, they almost always have at least one of the following concerns on their mind. They ask how long can stocks continue to climb given it has been an eight year bull market or how can their portfolio earn any income with interest rates being so low. More often than not they ask both.

These are real concerns I hear from real people I meet. More and more I am finding that traditional investment solutions are not enough on their own.

Consider how our investment world has changed since 1990. In 1990, an investor could purchase a Government of Canada bond yielding 9.9%, invest in equity markets with a 15X Price Earnings Valuation and lived on average to age 77. In 2017, that same Government of Canada bond yields 1.5%, the Price Earnings Valuation has increased to 22X and average life span is 82 years.

So the average Canadian investor is now facing a longer life, with fully valued or overvalued equity markets and a fixed income yield that barely keeps up with inflation even before taxes. Traditional investments can offer little in the way of a solution, especially without increasing the risk profile of my client.

This is where alternative investments can add real value to a portfolio.

Many alternative investment strategies provide yields well in excess of the 1.5% bond yield mentioned above, often averaging annual returns in the 6 – 8% range. The income produced from this part of the portfolio can be used to supplement the low current yields on fixed income.

In addition to return enhancements, alternative investments have a very low correlation to traditional investment markets. What this means is, their performance is not meaningfully impacted by changes in the equity markets. This not only provides diversification, but also portfolio preservation in times of negative volatility.

What are alternative investments? They are any investment that is not a public stock, bond or cash security. Some examples would be private debt, infrastructure, real estate and private equity. They invest in private income oriented investments they can generate stable, high levels of income or by using sophisticated equity hedging strategies to reduce volatility.

As with all great things, many investors will wonder, “what’s the catch”? Though there is no “catch” with alternative investments, there are barriers to entry for the average investor. The two main barriers to investing in alternative investments are:

  1. High investment minimums because the investor is not an Accredited Investor (has $1 million in investable assets or $300,000 of income)
  2. Many financial firms do not have the specialized skill set to analyze these investments and thus do not offer them

Though these barriers exist, they can be surmounted by engaging with an appropriate investment counselling firm. The advice provided an investment counselling firm will allow an investor to access the alternative investment even if not accredited. The firm chosen should have a process to identify alternative investment solutions with proven money managers who have strong track records and a disciplined investment process. Thus, they can engage in the relationship with the alternative investment manager on your behalf.

During the past 30 years, pension plans have been achieving some of the highest returns. It is no coincidence that during the same time period their allocation to alternative investments has also increased substantially to enhance returns and decrease volatility risk.

According the annual asset mix report produced by the Pension Investment Association of Canada, which reports on the $1.6 trillion invested by Canadian pensions, the allocation to alternative investments has increased from 10% in 1990 to 33% in 2015. This is an increase of over 200%!

These funds hold the financial future of thousands if not millions of Canadians in their hands. The “smart money” is moving out of the traditional investment world into the alternative one. Now you have the opportunity to do the same.

The world was a very different place in 1990. Brian Mulroney was Prime Minister of Canada, Microsoft released version 3.0 of Windows and The Simpsons first aired on TV. It only makes sense that the investing world would have changed since that time too. If your portfolio isn’t positioned to take advantage of the new investing reality, then my only question is what are you waiting for?

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

Seven ETFs to counter a Canadian portfolio bias (from the Globe and Mail)

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Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor at TriDelta Financial was interviewed by Joel Schlesinger of the Globe and Mail on how Canadian investors can use ETFs to reduce specific Canadian market risks in their portfolios. (Article printed on September 26, 2017).

In the investing world, you can have too much of a good thing. This especially applies to many Canadian investors, who often have too much home cooking in their portfolios for their own financial well being.

“Typically, Canadian equities make up two-thirds or more of investors’ equity investments and, in some cases, all of them,” says Lorne Zeiler, wealth advisor with TriDelta Investment Counsel in Toronto. He often sees this problem with the portfolios of new clients.

According to a 2015 study from Vanguard, Canadian investors have on average 60 per cent of their equity portfolios invested in Canada.

That likely means they are overconcentrated in just a handful of sectors, says Paul Taylor, chief investment officer at BMO Global Asset Management. “The reality is we here in Canada are a trees, rocks and banks-based economy and market.”

About two-thirds of the Canadian equity market, for example, is made up of companies involved in the energy, mining and financial sectors, meaning many investors probably have too much exposure to them.

That isn’t to say Canadian exposure hasn’t served investors well. The TSX Composite Index doubled in value from 1999 to 2015, for example.

But the home country bias has hurt more recently, Mr. Zeiler says. Consider in 2015, “when energy prices dropped substantially, energy stocks fell roughly 20 per cent, but the TSX as a whole was also down over 10 per cent.” Given oil’s uncertain future, this Canadian bias now appears less beneficial by the day.

What’s more is that by sticking mostly to Canada, we are missing out on a whole world of investment – given Canada’s stock market makes up only about 3 to 4 per cent of the global equity marketplace, Mr. Taylor says.

That may leave some investors asking how they can create a truly diversified portfolio.

One strategy they shouldn’t pursue is radically altering their allocation to reflect Canada’s actual share of the global markets, says portfolio manager Michael Job with Leith Wheeler Investment Counsel in Vancouver.

“I think that’s unreasonable, because it assumes people are completely agnostic to currency risk,” he says. “The reality is for most Canadians, our living expenses are predominantly in Canadian dollars.”

The more foreign content you own, the more currency risk you need to manage – and that comes at a cost, Mr. Job adds. A better option is aiming to have half the portfolio allocated to Canadian investment with the other half split between the United States and non-North American investments, he says.

Investors should first look to the U.S. market – the world’s largest – because it is the easiest to access. The United States also offers the widest variety of investments to choose from, including technology and health care – two sectors that are not well represented in Canada’s marketplace.

One way investors can find the lowest-cost, most broadly diversified access to markets beyond our borders is by using exchange-traded funds, or ETFs, Mr. Zeiler says.

“For the U.S., clients should look at ETFs that mimic the S&P 500 for broad-based exposure … or invest in specific sectors that are lacking in Canada, like technology or health care.”

Here are a few ETF picks that can help you dilute any Canadian overconcentration in your portfolio.

SPDR S&P 500 ETF: This fund tracks the performance of the S&P 500, one of the more diverse indices in the world, providing access to large companies based in the United States in a variety of sectors including tech, health care and consumer staples, most with global reach. “SPDR has one of the lowest management fees among all ETFs and provides broad exposure to the entire U.S. market,” says Mr. Zeiler.

iShares Global Healthcare Index ETF (CAD-hedged): This ETF provides diversified exposure to the health-care sector. About two-thirds of its holdings are listed in the United States, and the rest mostly consist of European listings. The “MER fee is higher at approximately 0.65 per cent, which is common with many sector- or style-focused ETFs,” Mr. Zeiler says. “For investors wanting exposure to U.S. dollars, a non-currency-hedged version of this same ETF can be purchased on the New York Stock Exchange.”

Vanguard Information Technology ETF: This New York Stock Exchange-listed fund offers low-cost access to some of the largest companies in the world, let alone the tech industry. It is a “great, single investment solution to gain exposure to the IT industry,” Mr. Zeiler says. The investment consists of more than 300 holdings, “but the top 10 make up over 50 per cent of total weight.”

PowerShares LadderRite U.S. 0-5 Year Corporate Bond Index ETF: This Canadian-listed ETF provides investors with fixed-income exposure to the U.S. corporate bond market, which is the largest in the world. Using a laddered bond strategy, it aims to reduce interest-rate risk. Mr. Zeiler notes the management expense ratio, or MER, is a reasonable 0.28 per cent, but while distribution yield exceeds 3 per cent, yield to maturity is only 2.1 per cent, “meaning many of the bonds in the portfolio are priced at a premium.”

Vanguard FTSE Emerging Markets All Cap Index ETF: This Canadian-listed ETF attempts to reflect the performance of the FTSE Emerging Markets All Cap China A Inclusion Index, providing exposure to large, mid-sized and small-cap companies based in emerging markets. Investors gain access to a diversified basket of stocks across many regions for a relatively low cost – an MER of 0.24 per cent, Mr. Zeiler says. The fund also has fairly good liquidity compared with similar offerings and has more than $600-million in assets under management.

BMO MSCI Europe High Quality Hedged to CAD Index ETF: This one offers exposure to European equities but uses a return-on-equity screen to ensure companies are of high quality while hedging back to Canadian dollars. The ETF provides investors with the opportunity to participate in the euro zone’s most successful firms spread evenly across many sectors including consumer defensive, health care and industrials, Mr. Taylor says.

iShares MSCI EAFE Index ETF (CAD-hedged): This ETF aims to track the performance of the MSCI EAFE Index, which encompasses the largest publicly traded companies in the developed markets of Europe, Australia and the Far East. Mr. Zeiler says the fund is a good way to get “broadly diversified exposure to non-North American developed markets without taking on currency risk.”

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

FINANCIAL FACELIFT: Christopher, 70, wants to ‘ease into retirement’ – and avoid double taxation

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Below you will find a real life case study of an individual who is looking for financial advice on when he can retire and how best to arrange his financial affairs. His name and details of his personal life have been changed to protect his identity. 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 September 29, 2017

Like many in the education field, Christopher loves teaching and is in no hurry to quit. At the age of 70, he is planning to “ease into retirement,” working one more full year and then another three half years. He has been bringing in more than $170,000 a year, plus rental income and Canada Pension Plan benefits.

A year from now, he will begin collecting a work pension, indexed to inflation, of $54,000 a year. With that, plus his part-time salary and CPP, “I assume I won’t have to draw from my registered retirement income funds, and will reinvest the mandatory withdrawals,” Christopher writes in an e-mail. He is single with a grown son.

Two main things concern him: “Maximizing” his retirement income and not being taxed in two provinces – Ontario and Quebec – because he plans to spend time in both.

“I would like to live in my Quebec property during spring, summer and early fall, returning regularly to visit friends and family, and live in Ontario late fall and winter,” where he will teach the winter semester. “I would like to maintain the Ontario address as my permanent one,” Christopher adds. “Will it be possible to continue to be taxed as an Ontario resident?”

His Quebec tenant moved out over the summer, so he is no longer getting rental income. He is planning to renovate the property at a cost of about $80,000. Any monthly surplus he enjoys has been going into a savings account to cover the carrying and renovation costs.

We asked Matthew Ardrey, a vice-president and certified financial planner at TriDelta Financial, to look at Christopher’s situation.

What the expert says

Even with the two residences, Christopher should have no reason to worry about his retirement income, Mr. Ardrey says. With his work pension, government benefits and investment income, he should have more than enough to live on.

In preparing his analysis, the planner first looked at which province Christopher will be taxed in. “The Canada Revenue Agency is very clear on this matter,” Mr. Ardrey says. “A taxpayer will be considered resident of the province they ordinarily reside in on Dec. 31.” Christopher plans to be in Ontario in the fall and winter, so “a clear argument can be made for him being a resident of Ontario for income tax.”

If in the future Christopher is spending most of his time in Quebec, he should check with an accountant to ensure he still meets the residency requirements, the planner says. In the meantime, he should maintain his Ontario driver’s licence, health insurance and bank accounts and have all of his mail sent to his Ontario address.

Next, Mr. Ardrey looks at Christopher’s investments. He holds stocks and a mortgage fund. Based on historical returns of the underlying asset classes, his net return after fees would be 4.67 per cent, the planner estimates. When he retires, Christopher’s savings will go first to his tax-free savings account. “Any further surplus is assumed to be allocated to his non-registered savings.”

Christopher plans to spend $60,000 a year plus an additional $12,000 a year for travel to the age of 80. The planner assumes Christopher will live to the age of 90. “At his age 90, he will have a net worth of $3,348,000, which includes his investments, real estate and personal effects,” Mr. Ardrey says.

If Christopher chooses to draw down his savings instead, he could increase his lifestyle spending by $36,000 a year. His net worth at 90 still would be $1.7-million, comprising real estate and personal effects.

Now for Christopher’s portfolio. He has an asset mix of 28-per-cent equities, the bulk of which are Canadian, and 72 per cent in a single mortgage fund (held in three separate accounts, RRSP, TFSA and non-registered). “I like alternative investments as part of a portfolio, but in Christopher’s situation, the allocation (to the mortgage fund) is too large and lacks diversity,” Mr. Ardrey says. A more balanced mix would be 50 per cent in equities, 30 per cent in fixed income and 20 per cent in alternative investments. “The equities would need geographic diversification and the alternative investments, diversification by strategy,” for example, private debt or mortgages.

“Though the fixed income is predicted to have lower returns, it is useful for Christopher by providing a less-volatile asset class if he needs to make portfolio withdrawals,” the planner says. “Offsetting the lower returns are the alternative investments. They will help to keep the overall portfolio return higher while mitigating some equity volatility because of their low correlation to the financial markets,” Mr. Ardrey says.

“The bottom line for Christopher is that he should be able to keep his return and investing costs similar to today but with improved portfolio risk management,” he says. “Thus he can achieve an improved risk-adjusted return.”

+++++++++++

The person: Christopher, 70

The problem: How to avoid being taxed in two provinces and ensure his investments are suitable.

The plan: Ensure he is living in Ontario on Dec. 31. Keep Ontario driver’s licence, health insurance and address. Make some portfolio adjustments to better diversify holdings.

The payoff: Financial independence.

Monthly net income (past year): $10,715

Assets: Cash in bank $40,000; non-registered $376,265; TFSA $58,000; RRSP $469,840; residence $450,000; second property $400,000; estimated present value of defined benefit pension plan $434,125. Total: $2.2-million.

Monthly outlays: Property tax $270; home insurance $35; utilities $85; maintenance fee $575; transportation $320; groceries $500; clothing $60; gifts $300; charity $500; vacation, travel $500; carrying costs of rental property $580; dining, drinks, entertainment $195; personal care $10; club membership $50; subscriptions $20; drugstore $30; health and dental insurance $580; life, disability $105; cellphone, TV $240; RRSP $50; TFSA $460; pension plan contributions $250. Total: $5,715. Surplus: $5,000.

Liabilities: None

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

Alternative Investments – A proven path to higher and stable returns

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Equity markets have recovered significantly in recent years and are now considered fully valued or overvalued.

Bond markets have experienced 30 years of declining interest rates and are also expected to have low returns for a while.

This suggests it’s time to consider other asset class solutions such as global corporate real estate, infrastructure, private debt and hedge funds.

In fact a review of asset shifts amongst the world’s largest pension and endowment plans reveal that this so called smart money has already shifted their investment allocations significantly to alternative investments and reduced stock and bond exposure.

Alternative investments can complement and add real value to a portfolio by:

  • Providing high income
  • Diversification to reduce risk
  • Lowering portfolio volatility
  • Enhancing returns
  • Protecting capital during periods of market declines

 

The case for investing in alternative investments

At TriDelta we research the marketplace for viable portfolio solutions including an analysis of where leading pension and endowment funds invest. They have been reducing their bonds and, to a lesser extent, their publicly traded stock portfolios. Under the catch-all phrase of alternative investments, many pensions and endowments have instead been investing between 25 per cent and as much as 75 per cent (Yale University Endowment Fund) in alternative investments.

Consider that the top 1,000 pension plans in Canada shift allocations to various asset classes each year. Of particular note is that allocations to alternative investments have nearly doubled over five years since 2011.

What are Alternative Investments?

Alternative investments are essentially any asset that is not a public stock, bond or cash security. Alternative investments often provide higher returns than traditional assets by focusing on less efficient or private asset classes, such as infrastructure and private equity.

They can generate stable, high levels of income by investing in private income oriented investments, such as real estate and private debt. Hedge Funds, such as Market Neutral Hedge Funds can also reduce volatility by using sophisticated hedging strategies.

 

1. Returns can be meaningfully improved and risk reduced by including alternative investments

According to JP Morgan research, portfolio returns were improved by more than 10% p.a. and volatility was significantly reduced by adding 20% to alternatives.

A balanced investor with 50% invested in stocks and 50% invested in bonds would have seen their return improve and their risk reduced by moving to an asset mix of 40% stocks, 40% bonds and 20% in alternative investments.1

Growth oriented investors with a 70% stocks, 30% bonds asset allocation would also have benefitted by including alternative investments to earn higher returns and reduced risk.

2. Invest where the ‘smart money’ invests

The ‘smart money’ generally refers to professional investment managers. We research where they invest given that they have consistently achieved superior investment returns versus more traditional models. We then fine tune our own investment allocations and strategies.

The Pension Investment Association of Canada, which includes Canada’s largest pension plans and nearly $1.6 trillion of assets under management, provides an annual asset mix report. As the chart below highlights, in 1990 alternative assets comprised only about 10% of the total asset mix. By 2015, alternative assets comprised over 33% of the asset mix, an increase of over 200%.

Years ago a Canadian Government bond portfolio could fund a long, prosperous retirement when the yield was between 8 & 12% (1980 – 1990s) and a few years ago they delivered about 5%, but this is certainly not the case today.

The new normal of ultra-low global yields and interest rates poses an unprecedented challenge for all investors and it’s no wonder that endowment giant Harvard only has a 12% portfolio allocation to bonds.

U.S. Endowment funds, such as Harvard and Yale University and Canadian Pension Funds, such as the Ontario Teacher’s Pension Plan have achieved some of the highest returns for their clients over the past 30 years. During that time, they have been significantly increasing their allocation to Alternative Investments to enhance overall returns and reduce volatility.

3. Changing Times

The world has changed in recent years; investors need to look beyond only traditional investments to achieve their goals of income, stability and growth. As the chart below demonstrates, in 1990 an investor could earn 9.9% on a 10 year Government of Canada bond vs. only 1.5% today.

The equity market in 1990 was also much cheaper with a Price Earnings ratio of only 15 times vs. over 22 times today.

Investors are also expected to live much longer, meaning that their investments have to work harder to meet their cash flow and spending needs.

1990 2017
Bond Yield* 9.9% 1.5%
Equity Market P/E Valuation** 15 x 22 x
Baby Boomer 35 years old 61 years old
Retiree (OTPP) Worked for 29 years; Retired for 25 years Worked for 26 years; Retired for 30 years
Life Expectancy*** 77 years 82 years

Sources: *bankofcanada.ca **S&P500 average P/E based on historical ***statcan.gc.ca

The world is different and we believe it’s time for your portfolio to change as well.

4. The TriDelta Strategy

TriDelta’s Alternative Assets Investment Committee focuses on putting the odds in our clients’ favour by focusing on:

  • Proven managers with strong track records and disciplined investment philosophies
  • Earning more stable returns
  • Generating premium yield in less liquid investments
  • Solutions that lower clients’ portfolio volatility
It is often difficult for investors to access these investments for three reasons:

  1. Alternative Investments are often restricted only to Accredited Investors (those with family income of $300,000+ or an investment portfolio of $1 million+)
  2. Many large Canadian financial firms simply do not make them available to their clients because alternative investments are often more complex and require a specialized skill set to analyze, review and select managers; and
  3. Many of the best alternative managers provide only restricted or limited access to their funds.

At TriDelta Investment Counsel, we solve all of these problems.

As an investment counsellor, we are able to offer these investments to all clients on a discretionary account basis. Alternative investments are a key element of our overall investment strategy.

 

Contact to Discuss:

Ted Rechtshaffen

President and CEO
Toronto
416.733-3292 X 221
tedr@tridelta.ca

Anton Tucker

Exec VP and Portfolio Manager
Oakville
905.330-7448
anton@tridelta.ca

 
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