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Financial Post / Rechtshaffen: Avoid these five mistakes when estate planning to preserve family peace

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Some decisions can lead to terrible family rifts that never mend

Family feuds get ratings. Just look at Prince Harry and Meghan Markle.

But we’re more interested in promoting peace and harmony within families, especially when it comes to estate planning. This can often be more difficult when an estate is larger in value.

Some estate planning decisions can lead to terrible family rifts that never recover. Here are some of the biggest mistakes we see.

Treating family members differently

Family members are different. They have different skill sets and different levels of responsibility and maturity. Some are kind and giving, others take and take. But if you want to create big family fights, leave your assets to your children in an unequal manner. Leave 45 per cent to Joe and 45 per cent to Susie, but 10 per cent to Bill.

People do this all the time, and they may have very valid reasons for doing so, but it is still a recipe for disaster. The best scenario is if you can comfortably tell Joe, Susie and Bill in advance why you are doing this. To do so without explanation will very likely lead to anger and jealousy between the children when they find out.

Our general recommendation is to try to leave assets equally even if you don’t think it is fair.

Pass the family cottage to multiple children

You love the family cottage and your wish is to keep it in the family for your kids and grandkids to enjoy for decades to come. This can be a very dangerous part of the estate plan, because your children may not necessarily feel the same way about the cottage that you do. Or they may really like the cottage, but could use the cash instead.

It is rare for the next generation to be fully in line on this issue. Sometimes it is just geography: one child moves away and won’t use the cottage much. But even if they all like it, they might get into issues about repairs and renovations or scheduling who uses it when. Families can sometimes get along fine with a little distance, but spending too much time under the same roof can create problems.

We generally recommend either selling the cottage in your later years or, if you keep the cottage, make sure it is openly discussed. Some solutions can include setting up life insurance set up to specifically pay taxes and perhaps one or two children, so that the remaining children can afford to keep the cottage. Open communication is key, but often a sale is the cleanest approach.

Don’t tell the kids anything about your money

You might think your money isn’t their business. They can find out your true net worth after you are dead. This approach is akin to lighting a bomb with a very long fuse.

One of the biggest problems here is that there may have been times in your children’s lives when they really needed financial help, but they don’t really need it any more. Children who now realize you could have easily helped during the difficult times, but chose not to do so can get angry.

It is true that it isn’t the children’s or beneficiaries’ money to spend in advance. Yet there is often a sense of betrayal at keeping such a significant secret, as well as a sense of missed opportunities to do more during one’s life.

This silent approach also often eliminates any ability to understand what might be most meaningful to your children or beneficiaries. Maybe less so in terms of cash, but in terms of family heirlooms or property. Perhaps a piece of art or furniture was really important to two children, but there was never any discussion about it, so it is now completely left to them to fight over. This may sound like a small issue, but many families have split up forever over just this type of scenario.

If you sense a theme here, it is that communication is key. Don’t keep things so private that you avoid having the discussions that need to take place.

Purposely or inadvertently leaving most or all assets to a new spouse

This sometimes happens by accident due to poor planning around ownership titles, lack of pre-nuptial agreements or the unintended naming of beneficiaries on investment accounts or life insurance. Other times, it is meant to hurt the children … and it will. The hurt can certainly go both ways and is often a major issue when a spouse is not fairly treated.

Either way, you want to be extra careful in these situations to first understand what you hope to accomplish, and then make sure your documents are aligned to achieve this.

Significant charitable giving

Of course, you are more than entitled to give all your money to charity, but if it isn’t discussed with your so-called traditional beneficiaries, there can be fights with the charity that can last a long time. There have been cases where intended charitable gifts have been overturned because it wasn’t deemed fair to the other beneficiaries.

An old colleague referred to wills as the last words a parent says to a child. If that message leads to questions or misunderstandings, a child will sometimes think it means a parent didn’t really love them, or loved them less than others. This is the foundation of many family fights.

My best advice is to communicate what you are doing and why, and to do so while you can still explain your rationale to your family. If it feels very difficult to do, then imagine the reaction when you are not there.

Put another way, if it seems too difficult to have this discussion now, maybe that is the push to make some changes to your estate plan to make it easier on those left behind.

Reproduced from Financial Post, November 9, 2022 .

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

Financial Post / Rechtshaffen: Mo’ money, mo’ problems: Even the wealthy are worrying about their financial future

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There’s a list of problems that are only created with more money

They say the best time to plan for the future is when things are going well.

Of course, that’s in a perfect world. In today’s world, people are nervous and concerned about their finances, and so we are seeing an increased demand for financial planning. In some ways, this makes perfect sense. If someone’s financial future looks good when things are bad, they can be fairly confident they will be OK under most circumstances.

The increasing demand at our firm is from what most would consider wealthy Canadians, generally those with a net worth of $3 million to $30 million. Now, I can see some eye-rolling and groaning right about now. “What do these rich people have to worry about?” Well, there is an old saying (and a newer song): Mo’ Money, Mo’ Problems.

Some issues and concerns are similar across the wealth spectrum, while others are unique to those with a lot of money. Let’s take a look at one area that would affect the wealthy differently than most, but may be of particular concern at the moment: gifting to children or grandchildren.

Gifting to family is simply not on the agenda for many Canadians. Just like the instructions on the airplane tell you to put safety gear on yourself before helping a child, your financial plan should look after yourself first before seeing if you can help others. But if you are in the position to easily help others, then this is likely a consideration, especially when it comes to real estate.

To look at a fictional example, if you have three middle-aged children and nine grandchildren, ranging in age from five to 25, things can get worrying if gifting to them was part of your planning.

What sometimes happens is that the oldest child is looking to buy a home, and the parents may decide to contribute $200,000 to the down payment. However, the question isn’t how much they can afford to contribute to the oldest child; it is how much they can afford to equally contribute to all three children.

If they can’t afford to gift $600,000 ($200,000 to each child), then they can’t afford to gift $200,000 to the first child. Not all parents will contribute equally to their children, but many will plan to.

Often, the gift to the oldest child will take place several years before the gift to the youngest child. What happens if there is a lot of inflation over that time? Do you gift more than $200,000 to the youngest, given the $200,000 is now worth much less than it was maybe eight years earlier? What if you simply don’t feel you can afford to give that much money today to the youngest? Is there a way to give less?

It can be even harder when it comes to grandchildren. There are nine of them in our example, and a gift of $50,000 can easily be perceived as a $450,000 commitment. Given the 20-year age gap, how will that be managed effectively? What if the first four grandchildren receive this gift and the last five don’t?

Yes, these are first-world problems of the wealthy, but they are real issues. Families can split up over favouritism from parents, and these types of gifting issues can sometimes be the cause of it.

To help manage this process, we encourage families to work out a financial plan that will provide greater insight into their financial future on an annual basis. With this information, they can better plan out potential gifts and see what they truly can or can’t afford. They can also determine which types of accounts or holdings are best used to fund these gifts.

Maybe the result of this planning is to be a little more cautious at the beginning to help ensure an ability to fund gifts in good and bad times. As we say, you can always choose to gift more in the future, but it is tough to get a gift back if you gave too much.

My firm has put together a free report on the 10 key financial planning questions of high-net-worth Canadians, along with some thoughts on how to best answer those questions. Some people will look at these questions and directly relate to them. Others will be in a different place and say they wish they had those problems.

But there are some universal concerns regardless of wealth. These relate to making sure you and a partner will be OK, trying to make the most of what you have and how you can best help the larger family.

That core is the same, but there’s definitely a list of problems that are only created with more money, and there needs to be some good planning to deal with them, especially in this environment.

Reproduced from Financial Post, October 5, 2022 .

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

Financial Post / Rechtshaffen: Interest rates are still rising, but investors should start preparing for when they come back down

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Variable rates will likely be a benefit once again in the midterm

The Bank of Canada over the past 30 years has had six periods of interest-rate hikes, ranging from 1.25 to 3.2 percentage points, before this most recent set in 2022.

The one thing they all had in common was that it didn’t take long for each of them to be followed by a period of declining interest rates, ranging from 1.25 to 5.125 percentage points.

One logical reason for this is that rate rises are meant to slow down the economy, and rate declines are meant to boost the economy. There is a general view that the increases typically start too late, and so rates are still rising after the economy is already slowing. Once they really start to take effect, the impact can be too much, and the central bank has to do a quick about-face.

Let’s do a quick review of the six rises and falls since 1994.

In October 1994, the Bank of Canada’s overnight rate was 4.94 per cent. Over the next four months, it rose significantly to 8.125 per cent — a rise of 3.2 percentage points. Over the following nine months, it declined to 5.94 per cent, and one year later it was sitting at three per cent. This was a large rise and fall historically, but it outlines how quickly rates can rise and how steep the ultimate decline can be.

The next period of rate adjustments saw the overnight rate rise to 5.75 per cent from three per cent over a 15-month period in 1997 and 1998. The subsequent decline wasn’t as steep, but it did drop over the following nine months to 4.5 per cent in May 1999.

In October 1999, the rate was still 4.5 per cent, but then rose to 5.75 per cent by May 2000. One year later, it was back to 4.5 per cent and it was all the way down to two per cent by January 2002.

Over a 25-month period from March 2002 to April 2004, the rate went from two per cent to 3.25 per cent and back to two per cent.

During a relatively prosperous time, the rate rose to 4.5 per cent in July 2007 from 2.5 per cent in August 2005. But the financial crisis of 2008 started to rear its head, and rates fell first to three per cent by April 2008 and all the way to 0.25 per cent a year later.

More recently, the rate in June 2017 was at 0.5 per cent, rose to 1.75 per cent by October 2018, and then dropped to 0.25 per cent by March 2020 when COVID-19 began.

What does this mean for today? So far, we are 1.25 percentage points into an interest-rate-hiking cycle. Some think there are another one or two more points in front of us. Others think it will be less than that. What if the overnight rate goes from 0.25 per cent (where it was in February 2022) to 2.75 per cent? For many of us, that would be a bad thing because our borrowing costs would be meaningfully higher. However, if we were somewhat confident that rates would soon be heading down from there, would that ease our concerns?

History suggests this will happen. The six hiking cycles averaged 13 months in length. The current one is four months in. The six declining cycles began on average 5.7 months after the hikes stopped, but it happened within three months in three of the six scenarios. The average interest rate hike was 1.95 percentage points and the average decline was 2.85 percentage points.

History can be a guide, but certainly not a clear roadmap. If all we did was simply look at the averages here, it would suggest that we have another 0.7 percentage points of rate hikes, which would take another nine months to reach. Interest rates would then start to decline by September 2023 and eventually drop all the way back to 0.25 per cent (or more if it was possible).

Of course, each scenario is different, so things won’t simply follow these averages. The causes are different and the starting point on interest rates is different. That said, this cycle has been very repetitive over the past 30 years.

If I had to guess, I would expect the rate-hiking timeline will be shorter than 13 months, but that rates will move up by more than just 0.7 percentage points. I believe the start of the rate declines might happen sooner than September 2023. The implied policy curve for Canada currently suggests that rate hikes will peak in six months and then start to decline with the following year. This doesn’t mean that this is a fact, but it shows that even today, the implied policy rate is giving some indication of the same cycle we have seen several times before.

Another clue as to why the next cycle might look like the past is that even the Bank of Canada has said one of the reasons for increasing rates is so it will have some greater tools and leverage to help the economy by lowering rates if we go into a recession or something similar.

If that is the future, what does that mean for investors and borrowers?

Variable-rate borrowers will feel more pain in the near future, but it isn’t a one-way road. Variable rates will likely be a benefit once again in the midterm.

If you are looking at buying guaranteed investment certificates, annuities or bonds, it may still be a little early to lock in or invest, but there will likely be a sweet spot to do so later this year or in the first half of next year.

High inflation and higher interest rates seem like the obvious situation today, but this may shift in the not-too-distant future, so don’t go overboard with this investing thesis as it can turn on you. You want to be nimble.

The key message here is that we should not panic about runaway rate hikes. They will continue to rise, but it is also very likely that we will see rates fall shortly after the hikes stop. Maybe this rollover will happen by the end of this year or at some point in 2023, but being prepared for this scenario will allow for some investment opportunities and debt opportunities to be maximized.

Reproduced from Financial Post, July 12, 2022 .

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

Financial Post / Rechtshaffen: Hang on a minute: Inflation is actually good for some people

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Don’t fear inflation if you have low or no debt, higher assets and are receiving some form of indexed income

There are few words in the financial world scarier than inflation.

Many remember the early 1980s and mortgages of 20-plus per cent, but if you are a student of history, or even lived in certain countries during periods of hyperinflation, you might recall these unbelievable cases: in Venezuela, consumer prices grew at 65,000 per cent from 2017 to 2018; in Zimbabwe, the daily inflation rate was 98 per cent from March 2007 to mid-November 2008; in Hungary, the daily inflation rate was 207 per cent between August 1945 and July 1946. Now that is an inflation problem.

In North America, our inflation rates have never really topped 20 per cent annually. I am not suggesting 20 per cent is nothing to be afraid of, but for many of you, inflation may actually be your friend.

One of the fundamental components when we do a financial plan for clients is a fair estimate of annual spending. If the client doesn’t have any debt, then this annual spending number is the only part of the plan that is negatively affected by higher inflation. For example, if someone spends $100,000 a year and inflation is 10 per cent, then the same level of spending would be $110,000. They now have an extra $10,000 of costs to worry about.

Now let’s look at parts of the plan that will be helped by higher inflation.

Let’s say this same client, a couple both aged 70, does not have a defined-benefit pension to fall back on, but they receive full Canada Pension Plan (CPP) and partial Old Age Security (OAS) benefits that total $50,000 a year. This income is fully indexed to inflation and, based on the 10-per-cent inflation rate, it will now go up to $55,000 a year. This couple would have $5,000 of that extra $10,000 covered by index increases in their government pensions.

Next, the couple has $2 million in investment assets and likes to keep $150,000 in high-interest savings accounts and money market funds. These were earning one per cent in a low inflation environment, but in a 10-per-cent inflation world, they are now perhaps paying six per cent. The extra five percentage points on $150,000 is $7,500, which puts them in a positive cash flow position.

Next, they have another $1.85 million of investments. In a high inflationary world, you want to invest differently than in a low inflationary one. It isn’t as easy to mathematically show a net benefit or negative in this part of the portfolio, but there are some ways that we would manage investments differently (we are doing so to some extent now) that can add net dollars.

Let’s start with bonds. For most clients, we have already been holding significantly lower weights in bonds than usual. The reason was that yields on bonds were so low, and there was a heightened risk that rising interest rates would hurt bond returns. This has been the case.

However, there will be a time when holding bonds goes back to traditional weights or even higher. If inflation is 10 per cent, yields on bonds will be much closer to 10 per cent than they are today. Simply owning bonds and collecting the coupon payments will generate much higher income. In addition, at 10-per-cent inflation, the odds of interest rates going back down to more normal levels from there would be much greater, and this would also add to bond returns.

We aren’t there yet, and may not get there, but the point is that when inflation and interest rates reach a high enough level, bonds once again become a good investment option for almost all clients and that hasn’t been the case for a few years.

As a quick example, the Fidelity Canadian Bond Fund in its first five years from 1988 to 1993 returned an annualized 8.7 per cent. The same fund is negative over the past five years, with a five-year annualized return of -0.31 per cent. If $200,000 was invested in this fund during higher inflationary times than we’ve had during the past five years, the difference at the end of five years is more than $106,000, or over $21,000 on an annual basis. That would certainly have a big impact on the extra $10,000 in costs that high inflation brought to bear.

In terms of other investments, you traditionally want to be more in value than growth stocks during high inflation periods. The main reason is that growth investments rely on a high value of their future potential. If interest rates are high, a dollar in five years will be worth much less than if interest rates were low. As a result, many growth stocks (good and bad ones) are getting hit hard this year.

Value stocks generally include sectors such as utilities, consumer staples, some real estate and commodities. These hard assets have traditionally been less reliant on high future growth, and more reliant on quarter-to-quarter profits and stable-to-growing dividend payments. As a firm that leans towards value investing, we certainly don’t mind a little inflation.As a quick aside on value vs. growth, a 2016 study by BofA Securities Inc. found that the average annual price return of value stocks since 1926 was 17 per cent versus 12.8 per cent for growth stocks. It found that value outperformed growth in roughly three out of every five years during this period. Since 2016, there is no question that growth has meaningfully outperformed value, but that has turned in the past year. We believe, based on this history, there might be a long period of value outperformance ahead.Getting back to real estate, this is one hard asset that people sometimes say will benefit from inflation, while others say it will decline due to higher interest rates. Both are right, which means you need to be careful in terms of how you invest. For example, a real estate investment trust with a larger ratio of debt would be in for a rougher ride than one with lower debt.

One private REIT we currently invest in is Rise Properties Trust, which is focused on residential rental properties in suburban Seattle and Portland. Its rental income is tied much more to inflation than Canadian residential properties, because of the relative lack of rent control in those markets and a culture that moves more frequently, thereby allowing average rental income to be more closely tied to current (inflationary) rates.

Of course, many people do suffer from rising inflation. If you have high debt and low assets, as many younger people do, rising inflation is a real risk and concern. However, don’t fear inflation if you have low or no debt, higher assets and are receiving some form of indexed income (including CPP and OAS). It is actually your friend.

Reproduced from Financial Post, June 14, 2022 .

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

22 financial thoughts on what’s to come in ’22

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Predicting the future has always been a challenge, and it has become almost impossible with Omicron. That said, I’m optimistic things will considerably improve on the COVID-19 front in 2022, at least from the second quarter onward.

This belief is based on a mix of hope and science that there will be a high enough percentage of people who are fully vaccinated and/or been infected with the Omicron variant so that the tide will turn on this pandemic.

My belief certainly colours my 22 thoughts for 2022 below.

1) Interest rates will stay low. Yes, interest rates will likely rise from extremely low to very low in 2022, but don’t confuse rising rates with high rates. Act as though we are in a very low interest rate world.

2) Energy and metals likely have more room to run. Oil has been so unloved that the valuations on some big 2021 gainers remain super low. Many in the sector have forward price/earnings ratios in the seven range, which is much lower than their historical average and much lower than the overall market.

3) Canada should outperform global markets. This is based in part on having a very small percentage of high-growth/no-profit tech stocks, as well as an overweight to commodities.

4) Increased immigration should help lower wage inflation. This assumes COVID-19 doesn’t hold up this process for too long. More workers at all levels will reduce some of the wage inflation we are currently seeing.

5) Increased immigration should keep residential real estate prices up. Low interest rates, a steady economy and high immigration rates are the three-legged stool for increasing residential real estate prices. Prices went up even without the sizeable net immigration piece during the past two years. The immigration numbers should compensate for the slightly higher rates.

6) Cottage country real estate prices may slow down a little. I say may since it is very much COVID-19 related. As more people work from the office and more people are comfortable travelling internationally, I truly believe there will be a real slowdown on vacation property real estate in Canada. How long it will take to see those drops is the question.

7) Spending will grow. Many people have considerably dropped their spending levels in the past two years. If you kind of feel like you have lost two years of your life, you will try to make up for it — COVID-19 willing.

8) Your car will be more important. There will likely be a significant lag in the comfort level of going back to public transit as more people head back to the office. This will lead to more money being spent on cars, and likely more traffic jams.

9) Your house will be less important. Of course, this is all relative, but we will likely be spending less time in our homes (although it doesn’t feel like it right now). This means more money for concerts, restaurants, travel and experiences, and less for home gyms, swimming pools and gazebos.

10) Living life can mean indulging in things that aren’t so good for you : alcohol, drugs, tobacco, sex, gambling, etc. Sin stocks may do well as the return to living (and spending) has to go somewhere.

11) Fitness and wellness may slip in importance. This isn’t to suggest there are any major negatives in these areas, which have experienced sizable growth over the past few years, but it is somewhat the corollary of thought No. 10.

12) Online shopping and food delivery are here for good, but not with the same buzz. The stock market is forward looking and is always looking at momentum. I believe some of the momentum in this area will decline.

13) Build back better … sort of. There remain some aggressive infrastructure projects and spending that will happen, but it will likely end up being Build Back Better Junior Edition if the United States is any example.

14) Taxes may not be headed higher . There is a clear rationale to raise taxes to help get us out of the huge debt situation, but there are two things in the way. The first is the belief we can grow ourselves out of debt, which may be partially true. The second is the current government is much more comfortable giving money away than asking for more.

15) Demand for mortgages and home equity lines of credit will continue to grow . Even with some increase in rates, the only thing that will stop this area of growth is a flattening or decline in real estate values. This can certainly happen, but it likely won’t be this year.

16) Rent costs will rise . As residential real estate values rise and interest costs rise, the desire among landlords to boost rental rates will be very high. Lack of overall supply will simply make this worse.

17) Retirement residences will still manage to grow. There is no question the pandemic has increased the desire for many seniors to stay at home. Yet with older baby boomers now clearly in this market, the costs of staying home increasing, and the lottery ticket of housing values waiting to be cashed in for many, don’t be surprised if this market continues to grow — in some cases with the ability to buy as opposed to rent.

18) Cryptocurrencies will exist. I know this is a cop-out thought, but the only thing I know for certain is that governments are going to significantly increase the regulation and taxation of this space. Beyond that, I won’t predict anything.

19) Investment fundamentals will return. Something is broken when the IPO of Rivian Automotive Inc., an electric car company with no sales, values it at more than three times that of Honda Motor Co. Ltd. In a world of uncertainty, there will be greater value placed on actual profits and dividends, and less on the companies priced for perfection five years out.

20) Bonds will still struggle. This asset class is broad enough to find some winners, but the core vanilla bond space will find it hard to deliver returns with a combination of low yields and rising interest rates.

21) Inflation is here to stay … for now. I don’t want to use the word “transient” here, but at some point later in the year, inflation will pull back to the range of two to three per cent. This is largely because inflation is measured year over year, and it will be much harder to see five-per-cent inflation rates when compared to the fourth quarter of 2021.

22) The search for investment yield will grow. Many investors like the steady income from an investment portfolio, but there will be an increasing focus on staying ahead of inflation and taxes. This will likely put even more of a premium on investments that can deliver this type of yield.

Reproduced from the National Post newspaper article 31st December 2021.

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

What is our Investment Thinking Today?

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Are Stocks Expensive?

If you are talking the Nasdaq U.S. market, the answer is yes.  If you are talking the S&P500 U.S. market, the answer is probably yes.  If you are talking other markets, then the answer may be no.

One measure of valuation is the Forward Price/Earnings multiple, or P/E multiple.  The higher the number, the more expensive the market.

The S&P500 is at 21.3.

The Nasdaq is at 24.6.

In comparison, the Canadian TSX Composite is only at 14.9.

The British FTSE100 index is at 12.4.

The broader Euro Stoxx index is at 15.5.

The Emerging Market index is at 12.5.

Of interest, the TSX has a lower Forward P/E at the moment than it has had for most of the past 3 years.

Another view of the U.S. large cap S&P500 is what is known as the Shiller PE ratio.  This is a different way of measuring valuation.  The Shiller PE is currently at 38.6, which is considered 49% higher than the 20 year average, and very close to the 20 year high.

What Sectors are Less Expensive that we like?

While the process is definitely not as simple as more expensive and less expensive, it should be noted that the five least expensive sectors are Financial Services, Energy, Consumer Defensive, Utilities and Industrials.  The most expensive are Consumer Cyclicals, Real Estate and Technology.

In an environment of rising interest rates and inflation, we continue to like Financial Services, Energy, and Industrials.  These are sectors that should also see some benefits from increased infrastructure spending.

While we are not making significant Geographic shifts, we are very focused on avoiding too much exposure to sectors that we deem expensive and more heavily impacted by interest rate hikes.

Where do dividends fit in?

According to the Hartford Funds, dividend income’s contribution to the total return of the S&P 500 Index averaged 41% from 1930–2020.  Clearly dividends matter.

At a time when bond yields are lower than inflation, there is a greater demand for stocks that can pay a higher dividend.  Of course, that doesn’t even include the benefit of owning Canadian Dividends in a taxable account – which has a much lower tax rate than interest income.

In summary, we like dividend growers with good balanced sheets, we will lean a little more heavily here in 2022.

TriDelta Equity Funds

In 2021, our TriDelta Growth Fund had a return of 28.5%.  This outperformed our equity benchmark of 23.2%.

The Growth Fund is an active fund that looks to adjust its approach throughout the year to be properly positioned for where we see the market today.  We use quantitative analysis as the foundation along with a historical review of how market sectors reacted previously to similar market environments.

Our TriDelta Pension Fund had a return of 16.4%.  While not as strong as the Growth Fund, this fund has a different mandate.  Also using quantitative analysis as a foundation, we focus very much on balance sheet strength, and on long term dividend growers.  This approach aims at less variability, downside risk and higher dividend yields.

The Bond Market is difficult in this environment

Financial heavyweight Citi says that bonds Globally will return negative 1% to 0% in 2022.  This asset class is broad enough to find some winners, but the core vanilla bond space will find it hard to deliver returns with a combination of low yields and rising interest rates.

Where we own bonds, we are leaning shorter term, as they will provide some protection as the market is pricing in too many rate hikes.  What we mean by this is that the market is now pricing in nearly 6 hikes over the next year. We do not see anything near that happening.  It still means rates are going up, but not nearly as much as some think it might.

We do believe that there will be some tactical opportunities here in “next-best” companies like the Rogers/Shaw deal.  Sometimes M&A activity can lead to opportunities.  We would expect more leverage as companies try to borrow as much cheap money as they can, while they can.

Bonds are not cheap but most things are not either, so selective and tactical is our approach.

The Preferred Share Market has fewer opportunities than 2021

Fixed Rate or straight preferred shares are bumping up against a ceiling for enhanced returns.  Many are yielding decent dividends in the 4.5% to 5.25% range today, but have prices at or above $25, with the risk of being called at $25.  This doesn’t mean it is a bad place to invest, but the very strong returns from 2021 be very unlikely to be repeated in 2022.  In 2021, Rate Reset preferred shares saw returns of 29.5%, while straight preferreds had a 9.2% return.  While the 9.2% number pales in comparison, it was still a very solid return for this asset class.  We still see some good opportunities in rate resets but expect both of those return numbers to be meaningfully lower.

One of the challenges in the preferred share market is that the market is shrinking as banks and some oil and gas names redeem issues in favour of cheaper financing via  specialized bonds.  What this means is that investors have to put a premium on the surviving issues, pushing their valuations into and often above their redemption prices.  This is a sector of the market where understanding the details of the company, their capital requirements and the specific terms of a preferred share is extremely important.  It can add meaningful value to buy specific securities vs. the index and some ETFs (although ETFs can be of value for smaller transactions).

Relatively speaking, resets and floaters (this is a pretty small market in Canada) enter the year as a better value than straights due to the rising rate outlook.  We would be looking to avoid reset and floater issues with large reset spreads and approaching reset dates. They are likely to be called and are probably trading at a premium to redemption price. For now, non-bank and non-oil and gas prefs are less likely to be redeemed as issuers have fewer refinancing options and should be safer places to invest.

We will continue to buy straights on dips, especially when rates are moving in a volatile fashion to the upside.  Barring an inflationary mistake, the rate hiking cycle will be a short and small one.

Inflation will be high for the short term, but should come down later in the year and early 2023

Inflation will remain in the mid single digits for much of the year, 4-5%, give or take, but may weaken late in the year.  Whether it is COVID restrictions, sustainability compliance efforts, speculation in commodities, low unemployment or consolidation-induced pricing power, there will be pricing pressures through 2022, but below peak levels seen in 2021.

Alternative Income Strategies – Most are performing well

While Bridging Finance was the big story in this space in 2021, the rest of the industry continued to deliver solid gains.

Alternative Real Estate funds had a good year, with our top fund returning over 26%.

Mortgage funds continued to perform, with returns in the 6% to 9% range.

Our top Private Debt funds should end the full year in the 11% range, with others solidly in the 7% to 8.5% range.

As greater transparency and valuation standards are in place, we continue to see this sector of investing as a key part of most investors portfolios.

 

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