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What Happened to the Preferred Shares Market?

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The stock market suffered a big market drop in the Fall / early Winter, but has since had a substantial recovery. Bonds posted solid returns this past year. Preferred shares have had a very different experience. They declined last year, had a modest recovery and have sold off again in the past few months, leaving many preferred share investors wondering what has happened to the preferred share market and will it ever recover.

The Past Year

Preferred share returns have been anything but preferred over the past few years. In the past 12 months to May 31, the BMO 50 Preferred Share Index has declined by nearly 13.5% on a total return basis (including dividends received), with Fixed Rate Resets down 15%, Floating Rate Preferreds down an incredible 27% and only Perpetuals providing a positive return of 4.3% (price only return is still -1.3% for the past twelve months). On a five year basis, preferred share returns, including dividends have been essentially flat, but on price alone basis, preferred share prices have dropped nearly 23%. Fixed Reset preferred shares have seen their prices drop by over 30% in that same period.[i] Weren’t these investments supposed to be safer than stocks? Does it make sense to still hold them and when can investors expect a positive return?

Preferred Share Structure

Preferred shares are considered to be a hybrid security as they pay a fixed coupon payment (although sometimes the coupon payment is reset at specific intervals) similar to bonds. They also rank between bonds and equity in terms of security, i.e. a preferred shareholder is paid out after the bondholders, but before equity holders and preferred shares offer daily liquidity as they trade on the stock exchange (TSX). For these reasons, they were considered safer and less volatile than equity, but not as safe as bonds.

For many years, preferred shares were an income focused investment that either paid a consistent dividend amount (perpetuals) or the dividend amount changed with short-term interest rates (floating rate). These preferred shares offered a higher yield than equivalent bonds, but the yield premium today is substantially more than it has been historically. Many perpetual preferred shares are paying yields of 5.5%, a 3.8% premium over 30 year Government of Canada bonds that yield only 1.7%.

Things changed dramatically in the preferred share space when fixed reset preferred shares entered the market. Fixed rate reset preferred shares, which pay a fixed dividend rate for 5 years from date of issue are structured in the issuer’s favour. On the 5 year anniversary date, the dividend rate is reset based on the yield of the 5 year Government of Canada bond plus a specific premium yield that was set out at inception. But, if yields have gone up or if the issuer can finance at a cheaper rate, the preferred share can be called at par value.

The rate reset preferred shares became very popular with investors following the 2008 financial crisis, as they were looking for shorter-dated, higher yielding hybrid securities. Fixed resets now comprise approximately 75% of the entire preferred share market.

Many investors thought in 2008 – 2010 that they were buying a 5 year fixed rate preferred share, either not understanding or caring about the rate reset structure. In many cases, these preferred shares may have been mis-sold as 5 year fixed investments without contemplation of the risk that the dividend rate could be reset lower (reset risk) on the anniversary date.

In late 2014-2015 when oil prices cratered, Alberta went into recession and the Bank of Canada cut interest rates, many rate reset preferred shares dropped substantially in price. For example, a preferred share with a 5% yield, but with a rate reset formula of 5 Year Government of Canada plus 2%, saw the new dividend rate drop to 3% or less as 5 year government of Canada bond yields slipped below 1%. Prices on some rate reset preferred shares dropped over 30% within a year. While prices of rate reset preferred shares did go up when the economy started to improve and bond yields started to climb, the sheen had come off rate reset preferred shares.

This Last Year

There have been a few causes for the drop-off in preferred shares over the past year, but the drop has likely been too far and too fast, making many preferred share bargains, offering fairly high yields and the potential for price appreciation (see chart). The causes for the drop are below.

Bond Yields: The biggest investment change over the past year has been the shift in sentiment about interest rates. Early in 2018, the question was how many more times rates would rise and the yield curve reflected this. For example, 5 Year Government of Canada bonds were yielding 2.1% one year ago, but only about 1.35% presently. The yield curve has inverted for much of 2019. This is a scenario when longer-term interest rates are lower than short-term rates. The inverted yield curve often indicates that rate cuts are expected in the short-term and that the economy is slowing. Yet in this environment, stocks have gone up, bonds have gone up, while preferred shares have sold off dramatically.

As investors are supposed to be forward-looking, many have demanded higher current yields for their preferred shares, particularly rate resets, to offset the potential risk that the dividend rate will be reset lower. In many cases, the price drop has been overdone. Enbridge preferred share series D (ENB.PR.D) has seen its share price drop by over 20% in the past year. Yet, its dividend will not be reset for nearly 4 years and is currently paying a yield of 7.2%, nearly 6% higher than the 5 year Government of Canada bonds.

Index Funds: ETFs (Exchange Traded Funds) offer many advantages to investors, such as low cost, liquidity and diversification, but many investors assume that the underlying investments within the ETF are just as liquid as the ETF itself. In the case of preferred shares, this belief is wrong. Preferred shares are often smaller issues of $200 million or less and since many investors have a buy and hold mentality, they do not necessarily trade much. When preferred share ETFs experience sell-offs, the underlying preferred shares have to be sold down, regardless of price. This can make a small decline in the market much more substantial.

Investors Fleeing the Asset Class (Once Bitten, Twice Shy): Many investors who lost money in 2015 on preferred shares have decided to sell their remaining preferred shares or to simply avoid the asset class, by allocating their money to stocks and bonds instead. The last time preferred shares experienced this huge sell-off, institutional investors, like pension funds, began to buy into the market. So far, these investors have not yet returned to this asset class, but at some point low prices and high yields should attract greater interest.

Are Preferred Shares Worth Buying Today?

In general, I think the answer is yes, but some areas offer more compelling value.

Perpetual preferred shares – As mentioned previously, these preferred shares pay the same rate in perpetuity with no risk of the rate being reset. The vast majority of issuers are high quality, investment grade companies, such as the Banks, Life Insurance companies, and Utilities. While their sell-off has been much less than other parts of the market, their prices typically go up when bond yields are dropping, as the consistent high dividend rate should be of greater value to income investors in a low rate environment. For example, as 30 year bond rates have dropped over 0.5% in the past year, long-dated fixed income investments should have experienced price increases of over 10% based on financial math.

As a result, many of these perpetual preferred shares are offering dividend yields of well over 5%, a premium of over 3.5% vs. government bonds. Considering that many investors who are in or near retirement need income from their investments and are targeting return rates of 4% – 6% in their financial plans, shouldn’t an investment that pays consistent, tax-advantaged dividends at a rate of between 5%-6% be in high demand? Yes. They should. For long-term income investors, these preferred shares offer yields high enough to meet their spending needs and an opportunity for capital appreciation.

Deep Discount Rate Reset Preferred Shares. The rate reset market, which has caused most of the problem, also offers great opportunities. Currently, there are many rate reset preferred shares offering yields of 6.5% or more, are likely 3 or more years away from being reset and are likely to be reset at similar or higher rates, so you are getting more than fairly paid for the interest rate risk.

Selected Opportunities in Perpetual Preferred Shares

ISSUER Current Yield [ii] Premium over Bonds [iii]
WN.PR.D (George Weston) 5.5% 3.8%
BAM.PR.N (Brookfield Asset Management) 6.0% 4.3%
ELF.PR.F (E-L Financial) 5.5% 3.8%
IFC.PR.F (Intact Financial) 5.5% 3.8%
SLF.PR.D (SunLife) 5.5% 3.8%

 

Selected Opportunities in Rate Reset Preferred Shares

ISSUER Current Yield Premium Over Bonds [iv] Reset Date Projected Reset Rate [v]
BPO.PR.T (Brookfield Properties) 7.6% 6.3% Dec. 2023 6.3%
ENB.PR.D (Enbridge) 7.3% 6.0% March 2023 6.0%
FFH.PR.E (Fairfax Financial) 5.4% 4.1% March 2020 6.5%
NA.PR.S (National Bank) 5.8% 4.5% May 2024 5.3%

 

Preferred Share – Case to Buy Them Today

Warren Buffet has often said that the key to investing is buying good companies at fair prices. I believe anytime that you can invest in high quality assets at a cheap price is equally effective. Preferred share issuers are typically investment grade companies, so there is limited credit risk. The dividend payments rank in priority to equity holders and most importantly, they are trading today at substantial price discounts relative to the yield premium investors can collect over bonds. Perpetual preferred shares are paying premiums of nearly 4% over long dated bonds. Typically, this premium is closer to 2%. Rate resets do carry some interest rate risk but that can be reduced substantially by buying issues with different maturity dates while investors can collect premiums of 5% or more over bonds.

In late 2008 through 2009, I bought preferred shares for myself and my clients to earn a high dividend rate with minimal risk of default based on the high quality of the issuers. I also figured that there was a good chance for price appreciation when more normal market conditions returned. By 2011, many of those preferred shares were up over 20% and had paid over 10% in dividends. Preferred shares are unloved today, but definitely offer significant value and a high rate of tax advantaged income. Income investors who do not own them, should definitely consider adding preferred shares to their portfolios, while those that do own them presently will continue to receive high levels of income and may be rewarded for their patience.

[i] Source: BMO CM 50 Preferred Share Index – May 2019. BMO Capital Markets
[ii] Based on June 18, 2019 market prices
[iii] 30 Year Government of Canada Bond
[iv] 5 Year Government of Canada Bond
[v] Based on 5 Year Government of Canada Bond at June 18, 2019 and reset spread

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

A proven path to higher and stable returns

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The global equity markets have been very volatile and have understandably rattled investors confidence. The ‘winds of change’ to one of the longest bull markets have arrived and our portfolio safety metrics are being tested.

At TriDelta we set out to construct conservative portfolios designed to deliver in all market cycles for financial peace of mind.

Investors understandably remain nervous as year end approaches and we expect more volatility as concerns over the China trade deal, elevated market valuations and Brexit uncertainty. Other concerns include the inverted yield curve and rising interest rates that may stall any ‘Santa Claus’ rally this year.

At TriDelta Financial we come well prepared and deliver highly diversified portfolios that typically include a significant allocation to Alternative Investments that include global real estate and private debt.

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.

We have long held the view that traditional equity and bond investment portfolios simply do not deliver consistent wealth accumulation. Portfolios require more diversification to ensure uncorrelated, multi-factor protection against downside risk. We manage our clients wealth in the same way pension funds do by strategically building portfolios that include a number of investment types and strategies.

We use stocks, bonds and preferred shares, but also include Alternative Investments such as global real estate, private debt solutions and hedge funds. Alternative investments compliment and add real value to portfolios by:

  • Provide high income
  • Diversification to reduce risk
  • Lowers portfolio volatility
  • Enhances returns
  • Protects capital during market weakness

The major pension portfolios are constructed in a very similar way. Here is an Extract from the CPP Investment Board 2018 Annual Report on how they diversify and reduce portfolio risk:

Diversifying sources of return and risk – the Strategic Portfolio

As noted, we manage the Investment Portfolio to closely match its total absolute risk with that of the Reference Portfolio. But that does not mean that we simply hold 85% of the Fund in equities, or even in equity-like exposures. This would be imprudent, as the portfolio’s downside risk would be almost completely dominated by a single risk factor – that of the global public equity markets.

We can, however, build a portfolio with a superior return profile for a similar amount of risk by blending a variety of investments and strategies that fit CPPIB’s comparative advantages. Each of these strategies offers an attractive return-risk tradeoff of its own, and their addition clearly reduces the dependence on public equity markets.

First, we can invest in a higher proportion of bonds and add two major asset classes with stable and growing income: core real estate and infrastructure. By themselves, these lower the risk of the overall portfolio. This risk saving then allows us to add a wide variety of higher return-risk strategies, such as:

  • Replacing publicly traded companies with privately held ones;
  • Substituting some government bonds with higher-yielding credits in public and private debt;
  • Judiciously using leverage in our real estate and infrastructure investments, along with increased investment in development projects;
  • Increasing participation in selected emerging markets; and
  • Making significant use of “pure alpha” investment strategies, which rely on the skills and experience of our managers.

CPP Investment Board 2018 Annual Report

To help put the current market turmoil into perspective, here are a few opinions from the large US investment firms:

JPMorgan Chase see the pessimism in equity and high-yield bond markets as overdone, as it sees only a 20% to 30% chance of a recession in 2019, with an increased probability in 2020.

The bank’s strategists, led by John Normand, analyzed equity valuations and credit spreads for high-yield bonds in the period leading up to past economic recessions.

The team continues to favor stocks over corporate bonds in developed markets and takes a neutral view on emerging markets.

“It is right to anchor portfolio strategy in a late-cycle framework that anticipates below-average returns into and through the next recession, but we note it is also excessively pessimistic to price so much downside now as equity and HG credit markets are doing,” the analysts wrote.

Goldman Sachs generally believes the bull market will continue in 2019, but it could get choppier as the year continues and investors begin to worry about a recession in 2020.

Here are some of the investment bank’s predictions for next year:
The S&P 500 will rise 5 percent to 3,000 by year-end 2019 (after closing 2018 at 2,850).
Investors should raise cash.
Investors should be defensive.
The market could be in for big trouble from tariffs.

Bank of America ML believes that “the long bull market cycle of excess stock and bond returns is expected to finally wind down next year, but not before one last hurrah.

Their Research team forecasts 2019 to deliver:
Modest gains in equities.
A weaker US dollar.
Emerging markets are cheap and under owned, they could be a big winner in 2019.
Higher levels of volatility.
A notable slowing in global earnings growth.

Morgan Stanley believes US stocks will underperform and Emerging Market stocks will outperform.

They see a number of macro changes as a result of slowing global growth in US and developed markets, rising rates, higher inflation and tighter policy. They believe these shifts will result in reversals of some key market sectors as follows:
US dollar strength will weaken once the Federal Reserve pauses on rate hikes.
US stocks outperformance will change to underperform.
US and European rates will converge.
Emerging markets have underperformed, but will retake the lead and outperform once China easing starts working.
Value portfolios will start outperforming growth.
Emerging market sovereigns will start outperforming US high yield bonds.

The TriDelta Approach:

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.

Anton Tucker
Written By:
Anton Tucker, CFP, FMA, CIM, FCSI
Executive VP and Portfolio Manager
anton@tridelta.ca
(905) 330-7448

The Financial Media Can Be Harmful to Your Wealth

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“Success in investing doesn’t correlate with I.Q…. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

– Warren Buffet

As Warren Buffet and countless other investment gurus have observed, one of the most important factors for being a successful investor is the ability to control your emotions.  While there are numerous analytical tools that can be used to assess the quality, value, cash flow and potential future returns of an investment, they are often trumped in decision making by an investor’s emotions, particularly greed and fear.

Fear of loss is by far the more powerful of the two emotions.  In fact, behavioural economists have found in multiple studies that investors view the pain associated with losses as twice as emotionally powerful as the joy experienced from gains.  When equity markets drop, investors become more and more risk averse as a result.  The aversion is heightened if the drops are meaningful (5%+) and if they happen over a short time period.

The media, while an excellent source for timely details on the economy and company specific information, is also known to sensationalize stories that play on an investor’s emotions.  By dramatizing a story, the news source can attain a much larger audience, meaning more clicks, views and interest.  Unfortunately, these stirring stories can lead investors to become more emotional and to make bad investment decisions.

During rising markets, stories are often tilted positively to build on an investor’s greed and desire for quick wealth.  During down or volatile markets, stories tend to focus on risks and negative factors that play upon investor’s fears.  These fears often can lead investors to react by indiscriminately selling their portfolio holdings, regardless of that investor’s goals, needs or even whether the investment is of good quality, offers attractive value or needed income.  This indiscriminate selling can result in lower long-term returns and the risk that the investors do not reach their retirement goals.

One recent example was an article on Bloomberg’s website on March 8, 2018 titled “JP Morgan Co-President Sees Possible 40% Correction in Equity Markets”.   While the title was factual, it only told part of the story and in this case, the part it did not tell was far more important.

Daniel Pinto, the co-president of JPMorgan stated that within the next 2-3 years,  there is likely to be a deep correction in US equity markets of 20-40%, so the headline is factual, but it is nuanced to indicate that the correction is imminent or at least likely to occur in the near-term, not in 2-3 years AND the headline uses the most extreme scenario of a 40% correction vs. the range of 20%-40%.  The other element the headline does not include is Pinto’s short-term views, as JPMorgan has generally been positive on the short to medium term prospects for equity markets, i.e. JPMorgan anticipates that the market will rise further prior to a correction.  For example, if Pinto sees the market going up 20% in the next two years prior to a correction and the market then drops 20%, the investor’s return is closer to 0% (including dividends earned).  A near zero percent return is likely insufficient to meet most investors’ near-term goals, but that is a lot less scary than losing perhaps 40% of their current wealth.

While the headline could incite fear in investors, a more thorough reading of the facts presented in the article should instead yield some caution and reflection.  The article highlights that we are in the latter stages of a bull market and due to the low volatility and strong performance of the equity market in late 2016 – early 2018, many investors’ expectations have become too high.  During this later stage of a rally, investors should take a breath and reflect to see if their portfolios are in line with their target asset allocations and risk tolerance.  It is also a good time for investors to meet with a financial professional to review their goals, cash flow needs, taxes, risk tolerance, time horizon and unique circumstances to create a customized and detailed financial plan and investment policy statement.  Investors with formal financial plans and investment policy statements are more likely to stick to those plans and be less swayed by emotions.

Reading a full financial article, not just the headlines, is a good way to uncover useful information for investing.  Coupled with a comprehensive financial plan, thoughtfully reading full articles (not just the headlines), is a proven way to control your emotions and to protect your wealth.

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

Lorne Zeiler on BNN’s The Street – March 21, 2018

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Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor, TriDelta Investment Counsel, was the guest co-host on BNN’s The Street on Wednesday, March 21st discussing the following:

Income Investing Strategies in the Current Environment

Given the expectations of rising interest rates and renewed market volatility a traditional bond or dividend focused portfolio may be incapable of generating sufficient income at low volatility needed by investors. Lorne Zeiler, Portfolio Manager, discusses how to design a stable, income producing portfolio in this environment on BNN’s the Street.
Click here to view

Keeping Calm and Profiting from Volatile Markets

When markets drop significantly in short periods investors often let emotions take over and make bad investment decisions. Lorne Zeiler, Portfolio Manager, discusses how to take emotions out of investing by designing a stable, diversified portfolio, including alternative assets, on BNN’s the Street.
Click here to view

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

Lorne Zeiler on BNN’s Market Call, February 7, 2018

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Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor, TriDelta Financial, was the guest on Market Call last night (February 7, 2018).

Below is a link to Lorne’s top picks, market commentary and past picks

Click here to view

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

2015 Financial Forecast & Review of Solid 2014 Predictions

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TriDelta Financial forecasts good but weaker returns in 2015 than 2014
 
Accountability – someone recently told me that this word seemed to be disappearing in society. It made me think how predictions are easy to make, especially if there was no accountability for how they did.
 
At TriDelta Financial – we believe in being accountable to our clients. We are even accountable for our predictions – which will not always be correct.
 
Here is what we said last year:
https://www.tridelta.ca/tag/2014-forecast/
 

  • US Equities over Canadian Equities – both for Total Return and also because of Currency.
  • We preferred Industrials and Technology and mentioned 3 stocks that we liked for 2014:
    • CISCO – Total return in Canadian dollars for 2014 is 41.7%
    • Goodyear Tire – Total return in Canadian dollars for 2014 is 32.0%
    • Magna – Total return in Canadian dollars for 2014 is 48.4%
  • Equities over Bonds – We were correct in not seeing interest rate increases in 2014 and that the Prime Rate would remain unchanged (this was different than most opinions of rising rates). However, we did not see the meaningful declines in long term yields that took place during the year, and it turned out that Bond returns (while not as strong as stocks), were better in 2014 than we thought.
  • Canadian dollar would continue to decline. We correctly predicted that the Canadian dollar would fall from 94 cents, but thought it would end the year at 90 cents. It turned out that the decline would be greater than we predicted.

Overall, our 2014 Financial Forecast was mostly correct. In fact, these beliefs helped us to deliver a return of over 15% in 2014 on our one fund, the TriDelta High Income Balanced Fund.

 
Now for our 2015 Financial Forecast

TriDelta Financial 2015 Year End Predictions
TSX Total Return 5% A little lower than 2014
S&P 500 Total Return (in US$) 8% A little lower than 2014
DEX Canadian Bond Index Total Return 2.25% Lower than 2014
Canadian Bank Prime Rate 3.5% 50bps higher in 2nd half
10 Year Gov’t of Canada Bond Yield 2.25% to 2.50% Moderate increase
Crude Oil (WTI) $70.00 Decent increase
Canadian Dollar vs. US$ at year end $0.84 Small decline

US Equities over Canadian Equities – Again we expect the US equity market to outperform Canada. While we do not expect a repeat of the outsized U.S. returns that have occurred over the last two years, we do expect US equities to produce decent single digit returns (7-9%).  Last year we had thought that returns in the U.S. would be mainly based on earnings growth as earnings multiples seemed to be at a reasonable level. Analysts were expecting 10% growth in earnings and as it turns out earnings grew about 7% despite currency headwinds and continued global strife.   The multiple also expanded a bit to deliver the roughly 13% US$ return. The major concern in Canada revolves around oil. If oil decides to hang around the $50 – $60 level it looks like earnings estimates could come down and the expectation of 16% earnings growth that is currently in the market could easily fall.

Canadian Equities – As noted above we still expect positive returns for the TSX in 2015, but oil and the trickledown effect of its precipitous decline especially in western provinces is the big question mark.   Valuations for many of the dividend payers (especially the banks) continue to remain reasonable especially in a low interest rate environment and could have some multiple growth and earnings growth to pick up the slack from a poor energy market.. 

Sectors to Outperform –Two stocks with some cyclical US exposure we think will do well next year are 3M and Allegion as the US economy continues to gain traction. Health Care stocks could be another solid performer next year as the fears around Obama Care subside, mergers continue and demographics are favourable. Another name that we see both strong earnings growth and dividend growth in 2015 would be Apple.

Oil  – It would be great to say that we see a big rebound this year but we think we are going to stay at reasonably depressed levels for some time. The question is whether approximately $50 oil is a new price driven by supply and demand, or the result of more complicated components of the market. While we don’t see a bounce back to $100 oil, we still believe that the pendulum has swung too hard in one direction, and we will see some bounce back from here. However, the bounce back won’t be as large as many predict. Hopefully we have seen the worst for oil and we will be able to capitalize on a couple of tradable rallies but we don’t think we will have many major long term holdings in the sector this year. We will also be looking at related industries such as Western Canada real estate and some potential impact to bank earnings.

Currency – USD/CAD  – Despite all the positive momentum in the US we think the majority of the move off the bottom has now occurred and we are mostly due for a pause. The U.S. dollar bottomed in late 2011 and has gained 23% adding significant gains to our U.S. equity holdings. The range we are looking at is $0.80 to $0.90. The expectation for further gains in the US dollar will continue as the longer term trend for the US is positive, the improving economy has helped bolster the U.S. government balance sheet and net export numbers continue to improve providing less of a headwind.  This currency trend will put additional pressure on Canadian investments vs. US investments – but we believe this pressure will be pretty small at this stage.

Interest Rates  – Similar to our views in 2014, we do not believe there will be significant moves higher on either the short or long end of the curve, but we do see some small increases later in the year. Global economic growth continues to have its challenges, deflationary concerns abound. Developed nations’ interest rates will remain near historical lows.

Bonds  – Do higher interest rates mean poor bond returns? The reality is that it depends on how you manage bonds. The first issue relates to higher interest rates. How much higher? We believe this will be limited to small increases. With the yield curve, do we focus on the short end (1 year or overnight) or the long end (10 years plus)? Much of the ‘flattening’ has already happened with sizable declines in long term rates in 2014. We see small changes at both ends. What about Government bonds vs. Corporates vs. High Yield? These decisions will shift throughout the year.

At TriDelta, we believe in an active bond strategy in order to take advantage of the shifts within the bond market, as much as the general trend. For 2015, this would likely mean taking advantage of some late 2014 trends. High yield bonds had a weak end of the year with worries in a few corporate sectors. We have taken some gains on Government Bonds of late, and will be looking at some Corporate and High Yield names that will benefit from a robust domestic economy. As for moving to the long end or short end, we have leaned longer and benefited by this for most of 2014. With the 10 year Canadian yield currently at 1.82%, we are taking a small pause as we feel there may be a better entry point for long bonds than we are at today.

Global markets – At TriDelta our focus is firmly on North American markets (US & Canada) and this for good reason as it is where the best risk adjusted returns have been in recent years. We do however monitor global markets and relative opportunity, and it is likely that our portfolios will reflect more of a global flavour as and when opportunities arise.

Global capital markets remain largely unattractive relative to the US & Canada. Most strategists cite the poor global GDP growth, which appears to have been priced into equity markets to a significant degree and this is a pre-requisite for future opportunities, particularly if, as and when growth & stability returns. For now we believe better risk adjusted opportunities exist in North American markets.

The Eurozone for example is fraught with uncertainty as they struggle with a multitude of issues such as high unemployment, Greece potentially exiting the euro and the more recent Russian risks and fallout. As a result these markets trade at a discount and may be headed even lower in the near term.

The emerging markets also remain an area of concern although we did invest a small amount due to its relative valuation in 2014. We do see opportunities particularly in markets that are commodity importers or energy importers.

Alternative Investments  –  Our view is that new investment asset classes are always worth reviewing. If we find something that we are comfortable with, we will incorporate it into our overall recommendations. If regulatory changes come about in Ontario in 2015, we will be able to offer some of these solutions to non-accredited investors as well. These strategies can include real estate, mortgages, business lending, factoring, and many others that emerge over time. With professional due diligence, there is an ability to find alternative income strategies that fit an investor’s goals, and that are not closely correlated to other investment markets.

We expect 2015 to be a positive year overall for clients, but with lower returns than most clients enjoyed in 2014. While these are predictions for the year, as information changes we will adjust our approach to take advantage on behalf of our clients. The key is to provide an investment portfolio that is open to all investment options available – and not limited to a small subsection of opportunities. In tandem, we need to be consistent with each client’s profile, what their goals are, and what their risks are. This investment discipline will serve clients well in sunny and stormy conditions. We are quite certain that 2015 will see some of both!

This report was written by the TriDelta Investment Counsel – Investment Management Committee.

TriDelta Investment Management Committee

Cameron Winser

VP, Equities

Edward Jong

VP, Fixed Income

Ted Rechtshaffen

President and CEO

Anton Tucker

Executive VP

Lorne Zeiler

VP, Wealth Advisor

For more information – please contact Ted Rechtshaffen, President and CEO, TriDelta Financial at 416-733-3292 x221 or tedr@tridelta.ca

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