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TriDelta Financial Webinar: What key opportunities are we acting on today – April 6, 2020

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We will discuss:

  • Is the market bottom behind us?
  • A great stock to own today
  • A great preferred share to own today
  • Opportunities Private Debt managers see in this market
  • A rare opportunity today for those with a Defined Benefit pension

Hear from:

Alternative Income Update: Lorne Zeiler, CFA, MBA, SVP, Portfolio Manager
New Opportunities for Bridging Income in tighter lending markets: David Sharpe, LLB, LLM, MBA, CEO, Bridging Finance Inc.
Stock Market Update: Cam Winser, CFA, SVP, Equities
Bond and Credit Update: Paul Simon, CFA, VP, Fixed Income
Pension and Borrowing Opportunities Ted Rechtshaffen, CFP, CIM, MBA, President and CEO

Canadian investors have toughened up, and more lessons my clients have taught me during this crisis

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Over the past few weeks I have been having some interesting conversations with clients.

While the conversations usually include discussions about investments, we often spend more time discussing family, health, today’s challenges and tomorrow’s hopes. If it ever wasn’t clear before, it is very clear now that our investments are here to serve a broader purpose — which is to allow us to live as full a life as we can.

As I talk to more clients I will no doubt be learning more from each of them.

Here are my big five takeaways to date:

From a Canadian perspective — COVID-19 truly is unique

Turbulent global markets due to covid-19 In a recent chat with a 99-year-old client who was born in Canada, I asked him if he had ever seen anything like what we are experiencing today. I was surprised when he said “Never in my life.” He did say that things were clearly difficult during the Second World War, but we were never so totally shut down like we are today.

His comment was definitely a jolt to me. This is historic. It is obviously not business as usual. We need to treat it very seriously from a health and investment perspective.

From a non-Canadian perspective — COVID-19 brings back other memories

Another client in his 50s related a story from his childhood, growing up in a war-torn nation. He remembered staying at home, being warned about going outside. He said that he could now better relate to his father’s worries about supporting the family when almost everything was under siege and there was no work to be had.

COVID-19 is clearly bringing memories of war and sacrifice. It is a reminder that life can be hard, unfair and unyielding. The fact that this brings comparisons to terrible times of war is a reminder of how significantly strange times have become.

The Financial Crisis of 2008/2009 has created a tougher investor

During the Financial Crisis, there was fear that big banks would collapse. There was a worry that stocks would drop 90 per cent before it was over. Few if any investors had lived through such a broad and deep investment crash. At the time, there were a meaningful number of clients who had to be convinced not to sell out their portfolios with large losses.

Yet, they ultimately saw how markets eventually recovered and thrived.

Today, most investors lived through 2008 and 2009. Their reactions to COVID-19 related declines have been much calmer. This isn’t to say that everyone feels that way, but a much higher percentage recognize that this pandemic will end, whether in a couple of months or a year. Likely, before it ends, stock markets will make a sizeable comeback.

There remains an overconfidence that people can time the bottom of the market

Some clients have expressed frustration over missing the great investment opportunity of 2009. They have said that they want to take advantage of this new great opportunity. I am with them. They are absolutely correct. The problem is when is exactly the right time to jump in?

The reality is that these markets move extremely fast. As we saw from March 18 to 26, some beaten down stocks jumped 50 per cent or more. However, in order to have achieved all of those returns, you would need to have bought in not just on the right day, but the right hour. To have purchased in that right hour, you would have needed the guts to buy when markets were in free fall. It is possible, but you need to be significantly lucky and have the willingness to go where almost nobody else is going.

On the flip side, many people think that there is another meaningful drop ahead, so they will wait for that one before buying. They may be right, but if they are wrong, then they will have almost entirely missed the ‘once-in-a-decade’ buying opportunity.

If you really want to take advantage of weak markets you have to be willing to buy in at a certain price, accept that it will likely go lower in the short term before it recovers, and keep focused on a year from now. You won’t get it perfect, but you will get it mostly right.

Health, family, friends, investments — in that order

As I mentioned at the top of the article, COVID-19 is a big threat to everyone, but it is clearly a health threat above all else. There are definitely financial fears — and for some these are pressing. Yet, for most of our clients they understand that for now, their goal is to look after themselves and each other. If they do that, everything else will take care of itself.

Several clients have had a consistent message. Their comments sound something like this, ‘We are blessed to be in Canada. We are blessed to still have reasonably good health. We have food. We have shelter. We even have spring. We are thankful to have someone like you to help with our finances, and we are not worried. This too shall pass as long as we have patience and do the right things.’

As big and as bad as this situation has become, I thank my clients for bringing their life wisdom and perspective to this time. I know that they are right and this too shall pass.

Reproduced from the National Post newspaper article 3rd April 2020.

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

Investing for the Long-Term

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Long term investingOne of the things that often frustrates investment clients is the language used by investment professionals when markets go down. While the terminology is meant to soften the blow or put the current situation into context, the client is often left annoyed and confused. To help bridge the gap in understanding, I want to explain one of the main terms that you are likely to hear over the next few weeks, “investing for the long-term” or having a “long-term focus,” and why this is the perspective that clients should take during times like these.

Bull and Bear Markets

During bull markets (when stock markets are moving higher), the economy is typically growing, people are seeing their employment prospects and income increase, their assets (home and investments) are rising, so investors and corporate managers feel optimistic about the future.

The stock market is supposed to be priced on a forward looking basis. This means that the price of a stock is supposed to reflect future earnings and cash flow that the company will generate. In fact, one of the main valuation methods used is the Dividend Discount Model – a stock’s price is calculated based on future dividends investors expect to receive. During bull markets these forecasts are rosier, so higher stock prices are justified by assumptions of high growth in corporate earnings. In addition, because everyone is optimistic and does not want to miss out on the perceived easy gains, they are willing to pay higher and higher multiples to buy today.

During bear markets, as we are currently experiencing, everyone thinks of a worst case scenario. They assume that the expected economic downturn will remain for a very long period and often cannot foresee the inevitable recovery that takes place months later. As a result, they assume earnings will drop dramatically and stay low forever and therefore heavily discount the price they would be willing to pay for the same stock that only months ago they thought was a great purchase at a much higher price. In this environment, the emotion of fear and worst case scenarios are exacerbated by the negative news reports, leading many people to just want to exit the stock market no matter the price. Consequently, nearly all stocks and other risk assets (REITs, preferred shares, corporate bonds) drop in price regardless of the stability of their business model, their financial strength or if they had a reasonable valuation prior to the panic.

While I believe we are likely to have at least a technical recession in Canada (2 quarters of negative economic growth) and I think the number of cases of coronavirus and its associated stresses on the health care system and the economy, is likely to get worse in the short-term, this is the period where a long-term perspective is necessary.

What Is a Long-term Perspective?

Your investment portfolio is designed to grow not only until you reach retirement, but also to generate income (or dividends) and capital gains that will support your lifestyle in retirement. Given current lifespans, this could be 20-40 years and even possibly the lifespan of your beneficiaries, so your portfolio has a very long timeline. During periods of market declines bargains start to appear that can lay the foundations for ensuring that your long-term goals are met. I will provide a few examples below.

Canadian Banks

One of Canadians favourite pastimes is to complain about the record profits of the banks and their high service charges. Over the past few weeks, investors have only seemed to care about the risk to these banks’ loan portfolios due to the increase in credit provisions for bad loans or reduced capital market activity that occurs during recessions. Bank of Montreal (TSX: BMO) recently dropped over 40%. As a result, on Thursday, March 12th, it was offering a dividend yield of over 7% and was trading at an earnings multiple of only 7 (historical average is closer to 12 times earnings). While it is quite likely earnings will decline in the near-term, considering that the Canadian banks have an oligopoly on the Canadian financial markets and highly diversified asset bases (wealth management, lending, international operations), it is highly likely that in just a few years, if not sooner, Canadians will once again be complaining about their record profits, which will be reflected in higher share prices. On Thursday close, most of the Canadian banks were offering similar bargain prices, e.g. Bank of Nova Scotia was trading at 7.7 time earnings with a 6.7% yield. TD was trading at 8 times earnings with a 5.9% yield and CIBC was trading at 6.7 times earnings and offering an 8.4% yield. Buying in this environment provides a high current yield and likely capital gains in the future.

Pipelines

There is no question that Alberta and Saskatchewan are feeling real pain once again due to the massive price drops in oil prices from the expected economic slowdown and the game of chicken being played by Saudi Arabia and Russia, but only a few months ago the media was complaining about there not being enough pipeline capacity to handle all of the Canadian oil and gas production. In addition, hundreds of thousands of barrels of current production is being handled by higher price and less safe railway network – if there are near-term cuts, this is where it will likely come from. As a result of the current fear, Enbridge Inc. (TSX: ENB) had dropped over 35% and at end of day Thursday was offering a yield of over 9%. Enbridge has numerous projects expected to come on-line in the next few years and has provided guidance that it intends to raise its dividend each year into the near future. Other pipelines, such as Interpipeline (TSX: IPL), Pembina (TSX: PPL), TransCanada (TSX: TRP) have had similar and in some cases larger price declines with some of these companies offering current dividend yields of over 10%.

REITs

One of the more stable asset classes for income oriented investors in the past few years has been Real Estate Investment Trusts (REITs), which are actively managed portfolios of real estate holdings. Over the past few weeks, REITs have not been immune to the drop in the stock market, even though the real estate market is holding up well. As a result, many REITs have dropped 30% or more, offering compelling opportunities. For example, Northwest Healthcare (TSX: NWH.UN), which is a global REIT focused on health care related real estate (hospitals, doctor’s offices, etc.), recently saw a price decline of over 25% despite recording record profits just last week. The net asset value of the REIT’s portfolio is estimated at $13.17 per unit (35% higher than current trading price), its occupancy rate is 97.3% and the average tenant’s lease term is 14 years.1 The current yield is 8.3%, which is fully covered by the REITs cash flow. Many other REITs have seen price drops of 30% or more in the past week despite excellent fundamentals, strong management teams and a portfolio of real estate assets that would make institutional investors like pension plans salivate.

Preferred Shares

This is an asset class that is a hybrid security, meaning that it has some attributes similar to stocks and some similar to bonds. Preferred shares trade on stock exchanges, like stocks, but preferred share investors receive priority vs. equity holders in terms of dividend payments and capital protection. Unfortunately, they are also typically less liquid than many stocks and as a result do not have a lot of institutional ownership, but that also means they can and presently do trade at compelling prices. Enbridge Preferred Share Series D (TSX: ENB.PR.D) recently experienced a 35% price drop. This preferred share is a fixed rate reset, meaning that it pays the same dividend rate for 5 years and then that dividend rate is reset based on the yield of the 5 year Government of Canada bond plus a spread. As of Thursday, March 12, it was offering a dividend yield of over 11%. There is the risk that the dividend rate will be reset lower at its next anniversary date, but to put this in perspective, that date is 3 years into the future. Prior to the reset date in March 2023, an investor buying at Thursday’s closing price of $10.50 would receive $3.48 in dividends prior to the reset date and the new reset rate based on current yields would be 7.26%, still pretty high. Based on the recent price drops in the market, investors can currently buy rate reset preferred shares offering yields similar to the Enbridge example above and perpetual preferred shares, which consistently pay the same yield forever at yields of over 6%.

The Long-Term Perspective

While equity markets are likely to be volatile over the next few weeks to months and could even potentially go lower than Thursday’s lows, investors can find bargain investments similar to the ones listed above to help secure their financial future and long-term goals. For example, a one million dollar portfolio invested into some of the securities listed above would result in an annual income stream of over $70,000 plus the potential for significant price appreciation when markets return to normal. Considering that most financial plans are based on an average return of 4%-6%, this is the environment, despite the massive fear, when investors need to remain calm, not be forced sellers, and remain focused on that long-term income stream they want to support their future lifestyle.

During this period, the greatest skills your financial advisor can have are to remain calm, use a rational mind to assess the situation and clearly communicate with clients to relieve their anxiety and fear. The greatest asset a client has is time – the time to withstand this period of weakness to build a strong portfolio offering a high level of income and potential for growth.

[1] https://web.tmxmoney.com/article.php?newsid=6210584082240133&qm_symbol=NWH.UN.

 

Lorne Zeiler
Written By:
Lorne Zeiler, CFA®, iMBA
Senior VP, Portfolio Manager and Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

TriDelta Financial Webinar: State of the Investment Markets Today – March 23, 2020

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We will discuss:

  • How investments have been performing
  • Update on our view forward
  • Examples of investments for the long term
  • Q and A opportunity

Hear from:

Alternative Income Update: Lorne Zeiler, CFA, MBA, SVP, Portfolio Manager
Stock Market Update: Cam Winser, CFA, SVP, Equities
Bond and Credit Update: Paul Simon, CFA, VP, Fixed Income
Update on RRIF and Tax changes from Government: Ted Rechtshaffen, CFP, CIM, MBA, President and CEO

Hear a recording of today’s (March 12th) TriDelta Investment Conference Call

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After markets closed today, TriDelta Financial did an investment conference call to outline what we were doing heading into

2020, what signs we are looking for today to reinvest some funds, and what we might be investing in.

You will hear from:
Ted Rechtshaffen, MBA, CIM, CFP, President and CEO
Cameron Winser, CFA, Senior VP, Head of Equities
Paul Simon, CFA, VP, Head of Fixed Income

 

 

We hope that the call will give you a little comfort during a very uncomfortable time.

If you have questions about your personal situation, please don’t hesitate to contact your Wealth Advisor.

 

Thank you,

TriDelta Financial

Markets are fearful and history tells us that means the time to buy is right now

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Knowing what to do in the middle of a highly stressful and uncertain time is very difficult for investors. You have experts on TV telling you to horde cash, while others say today is the best day to buy. They all believe what they are saying, and everyone is really left to guess.

At our firm there are two things that guide us at times like this:

1. Have the right asset mix for you, and stick with it. Market changes should not meaningfully change your asset mix. Your asset mix should change mostly when your personal situation changes. Things like retirement, major purchases, divorce, or significant health changes — all of these might be times for a change to your asset mix.

This work on the correct asset mix insulates those with the least tolerance for losses from some of the damage when things go bad. For those not so insulated, they are OK with it because they understand that this is the price to be paid to get the upside as well.

2. Use data to minimize emotional investing. Our Sr. VP, Equities, Cameron Winser reviewed similar pullbacks over the past 70 years. Since 1950 there have been eight periods on the U.S. S&P 500 when there has been a decline of at least 15% in a 30-day period. Picking the absolute bottom is a guess each time, but at the end of that 30-day period of declines, the immediate and mid-term future was almost always positive.

These are returns without dividends, so they underestimate the actual returns.

Even without dividends, we can see the following:

  • Next 20 trading days (roughly 1 month) — the average return was 9.0 per cent and 7 of 8 were positive.
  • Next 40 trading days (roughly 2 months) — the average return was 12.3 per cent and 8 of 8 were positive.
  • Next 60 trading days (roughly 3 months) — the average return was 10.6 per cent and 7 of 8 were positive.
  • Next 260 trading days (roughly 1 year) — the average return was 28.7 per cent and 7 of 8 were positive.
  • Next 720 trading days (roughly 3 years) — the average cumulative return was 50.1 per cent and 8 of 8 were positive.

We looked at the same scenario for Toronto stock markets. We found nine situations of 15+ per cent declines in a 30-day period. The findings were largely the same.

  • Next 20 trading days (roughly 1 month) — the average return was 6.7 per cent and 8 of 9 were positive.
  • Next 40 trading days (roughly 2 months) — the average return was 8.0 per cent and 8 of 9 were positive.
  • Next 60 trading days (roughly 3 months) — the average return was 8.5 per cent and 6 of 9 were positive.
  • Next 260 trading days (roughly 1 year) — the average return was 21.8 per cent and 8 of 9 were positive.
  • Next 720 trading days (roughly 3 years) — the average cumulative return was 47.9 per cent and 9 of 9 were positive.

Fearful markets are a buying opportunityThis data tells a very important and clear story. Big pullbacks represent good entry points. As I write this, the S&P 500 has crossed the 15 per cent line from peak to trough this month.

This tells us that based on a pretty long history, if you buy into the market after a 15 per cent drop, you may suffer further declines over the next few days, but as you look further out, you will very likely be pleased with the timing of your purchase. It also tells us that if you are fully invested in stocks at a reasonable weighting for you, then now is definitely not the time to be selling.

People will say on each of these events “this time is different.” They are right. Each time the cause of the decline is different, but the constant is human emotion. Fear and greed. Human emotion is the same and it leads the markets to repeat patterns again and again.

The lesson of this fear and greed is that now is likely a good time to be invested in stocks. It may not be the perfect day, but it is very likely to be a good day, as long as your investment timeline is at least a year.

Other things to note is that of the list of 15+ per cent declines in the U.S., six of the eight had further declines of only zero per cent to five per cent after the 15 per cent point.

In October 1987, the decline was worse, but most of it happened on one day. On Oct. 19, Black Monday, the Dow fell 22.6 per cent. In this case, our theory still holds true, in that once that day was done, even though markets were very volatile over the coming weeks, the trend was clearly positive.

The other time with a larger decline was in October 2008. While many of us remember that it wasn’t until March 2009 that things actually bottomed out, let’s say you bought into the market in October 2008 after a 15 per cent decline. You would have had a pretty rough ride for several months, but you still would have been comfortably ahead by October 2009.

The 2008 example also leads to an important lesson at times like this. Patience is a key for investment success. We are currently in a very volatile market situation where every day is a roller coaster. This will likely continue for a few more days, maybe even weeks. It will not continue for months. Panic selling is not a long term activity. It feels like it when you are in the middle of the days or weeks that it goes on, but it will not continue for long.

The other reaction from many people at this point is they say that they will reinvest cash once things settle down. To borrow from Ferris Bueller: “Markets move pretty fast.”

“Once things settle down,” usually means that the market has had a solid recovery. Over the ‘Next 20 Days,’ six of the eight periods saw significant one month gains. You can certainly wait until some meaningful gains have returned, but there is often a sizeable cost for waiting.

Our key message here is that based on long-term historical data that has seen how actual investors react after a 15 per cent decline, this is a time to be adding to or sticking with your stock investments, and not a time to be selling out. Guarantees do not exist, but data, human emotions and history guide us on what to do.

Reproduced from the National Post newspaper article 6th March 2020.

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