Making the most of an RESP


With kids heading back to school, education planning and registered education savings plans (RESPs) are at the forefront of discussions that financial advisers are having with many investors – whether these clients have children in a postsecondary institution or saving for them to go into one in the future.

The RESP is an enticing vehicle for investors because the federal government provides a 20-per-cent matching grant through the Canada Education Savings Grant (CESG), which is subject to both an annual maximum of $500 and a lifetime maximum of $7,200. The unused CESG accumulates each year a child is alive, even if no RESP is open. And if no contribution was made in a year of the child’s life, a double contribution can be made to reach back for a year of the grant. There are no annual limits on contributions, but there is a lifetime limit of $50,000.

When investors contribute toward a child’s RESP, conventional wisdom tells us that they should take advantage of the free money in the 20-per-cent CESG. But is that always the right decision? Let’s consider three scenarios for contributing to the RESP, assuming a 5-per-cent annual rate of return:

Scenario 1: The investor contributes $2,500 a year, beginning when the child is first born, to the maximum of $50,000. The RESP receives $7,200 from the CESG and produces total income and growth of $43,654. The total value of the RESP when the child is 19 years old is $100,854.

Scenario 2: The investor contributes $50,000 into the child’s RESP in the first year of the child’s life. The RESP receives only $500 in CESG, but produces income and growth of $83,492 for a total RESP value of $133,992 when the child is 19 years of age.

Scenario 3: The investor contributes $16,500 into the child’s RESP in the first year, then contributes $2,500 a year thereafter until reaching the lifetime limit of $50,000. The RESP receives the full CESG of $7,200 and produces income and growth of $62,386. The total value of the RESP when the child is 19 is $121,486.

What this shows is that front-loading RESP contributions is more valuable than receiving the government grant. Of course, for many people, putting $50,000 into an RESP in the first year of a child’s life is unfeasible, but the more that could be invested at once earlier on, the better.

If the RESP is maximized and additional educational savings are desired, two other methods can be used to save for a child’s education. First, if the child is 18 years of age or older, she will have contribution room in her tax-free savings account (TFSA). Thus, contributions could be made to the child’s TFSA to supplement the RESP. Second, if the child is under the age of 18, an informal trust could be used to save for her education. (A note on taxes: If the contributions to the informal trust come from the parents, then income from the account will attribute to the parents for tax purposes, but capital gains will not.)

When it’s time for the child to draw down on the RESP, the account is divided into three sections: contributions, CESG, and income and growth. The contributions could be withdrawn tax-free; but the the CESG and the income and growth must be withdrawn as an Educational Assistance Payment (EAP), which is taxable to the child.

There are no restrictions on withdrawing the contributions once the child is attending a postsecondary institution. The EAP does have some additional rules. The main ones are that the child must provide proof of attending a qualifying institution and that the withdrawal is limited to $5,000 in the first 13 weeks when the child begins postsecondary education.

Those restrictions aside, it’s best to maximize the EAP withdrawals over the contributions wherever possible. Any remaining grant is repaid to the government and any remaining income or growth is taxable to the subscriber (parent) as an Accumulated Income Payment (AIP).

The AIP not only has the detraction of being taxed at the subscriber’s marginal tax rate, but also carries a 20-per-cent tax penalty on top of that. The 20-per-cent tax penalty is taken off the top and then the remaining 80 per cent is included as income to the subscriber. The only ways to avoid this tax penalty and retain the value of the assets in the RESP are for the investor to transfer up to $50,000 of these assets to his or her registered retirement savings plan, if he or she has the contribution room, or to another child under a family RESP plan.

Having these EAP payments taxed in the child’s hands is the most advantageous. Even if the child is working while she’s in school and has income in excess of the basic personal amount, her education credits will be enough to offset any taxes owing from the RESP, in most cases.

As much as it’s advantageous to maximize the EAP, in the case of a family RESP, the subscriber must ensure he or she doesn’t exceed $7,200 of CESG withdrawal per child. Each child is permitted only $7,200 of CESG as a maximum. Thus, if more than that amount is withdrawn from the CESG for the older child, the government will demand repayment and take the overpaid grant funds back from the RESP. That, in effect, means those assets are lost to the younger child.

The RESP is a great savings tool. Understanding its intricacies will help to maximize its value. On the flip side, failure to do so could be a costly mistake for investors and their children.

Reprinted from the Globe and Mail, August 28, 2019.

Matthew Ardrey
Written By:
Matthew Ardrey
VP, Wealth Advisor
(416) 733-3292 x230

Buying Low: Investing Strategy in Frothy Times (from the Globe and Mail)


When stock markets have risen significantly, often some of the best investing opportunities is in the sectors that have been unloved and overlooked. Lorne Zeiler, Portfolio Manager and Wealth Advisor at TriDelta Investment Counsel was one of three portfolio managers asked where to look for value investments today by Globe and Mail reporter Joel Schlesinger (February 28, 2017).

As stock markets reach new heights, especially in the United States, investors might be recalling the adage “what goes up must come down.”

But by the same token, what has been down – the unloved, undervalued and overlooked – usually bounces back, eventually. With that in mind, consider these investments.

Health-care stocks

Even though the U.S. equity market has experienced a record-breaking runup, health-care stocks still have attractive valuations, says Lorne Zeiler, portfolio manager and wealth adviser with TriDelta Financial in Toronto.

“The sector was held back in 2016 due to concerns of increased regulation affecting drug pricing, first by a potential Clinton presidency and then from comments by President-elect Trump,” Mr. Zeiler says.

But these fears are likely exaggerated, he says. Earnings are forecast to grow by 8 per cent in 2017, and stocks are trading at about 15 times forward earnings around their five-year average, while nearly every other sector trades significantly higher.

Here are two stocks to consider:

  • AbbVie Inc.: The maker of Humira, a popular drug to treat rheumatoid arthritis, AbbVie has a “strong pipeline of new medications expected to be approved” soon. Moreover it has a decent dividend yield of about 4 per cent and trades at less than 12 times estimated forward earnings. One concern is that the company is heavily reliant on the performance of Humira, which makes up half of its sales.
  • Abbott Laboratories Ltd.: This diversified company earns revenue from generic pharmaceuticals, medical products and nutritional supplements such as Ensure. Abbott is forecasting good earnings growth due to its expanding sales of diagnostic technologies and recent acquisitions. “Risks to the stock price include pricing pressure from competitors and foreign exchange, particularly for its emerging-market sales,” Mr. Zeiler says.

Emerging markets

These generally fast-growing economies have faced a laundry list of problems, says Navid Boostani, a portfolio manager and co-founder of ModernAdvisor, a robo-advisory in Vancouver.

“Slowing growth in China, political turmoil in Turkey and Brazil, and economic sanctions against Russia have all been headwinds,” Mr. Boostani says. “But we think the bad news is already priced in, and long-term investors have a unique opportunity today” to buy low.

Here are two exchange-traded funds (ETFs) for investors who want to tap into emerging-market growth:

  • Vanguard FTSE Emerging Markets All Cap Index ETF: Rather than playing one particular market, this fund provides exposure across the board. It charges an industry-low management expense ratio (MER) of 0.24 per cent (for the TSX) with a distribution yield of 1.24 per cent. Most importantly, this sector has room to grow. “Both [emerging market] currencies and equities are trading at close to historical lows,” Mr. Boostani says. A bumpy ride could lie ahead, though, as the U.S. becomes increasingly protectionist and its dollar increases in value, pushing up borrowing costs in developing nations.
  • PowerShares DB Base Metals Fund ETF: Another play on emerging-market growth is to invest in commodities, and this ETF provides that exposure without the complications and barriers that retail investors face in buying futures contracts directly. Investors in this fund get access to a basket of futures contracts for base metals such as aluminum, zinc and copper, all key to industrial and manufacturing growth. “Commodities came off of a five-year bear market in 2016, with industrial metals leading the charge,” Mr. Boostani says. “The bulk of demand growth is expected to come from robust economic activity in China.” Commodities tend to be very volatile, however, so they should make up only a small portion of a well diversified portfolio, he adds.

Playing volatility

Mark Yamada, portfolio manager and chief executive officer of PUR Investing in Toronto, cites two ways to capitalize on volatility. For those who can handle large swings in price, China has been unloved of late. Yet it offers a lot of upside, he says. At the opposite end of the spectrum, consider low-volatility equities, such as banks, utilities and consumer staples, which have fallen out of favour recently as investors set their sights on recovering energy and other commodity related stocks.

Two to consider:

  • iShares China Index ETF: China is the largest of the emerging markets, so it has great influence on the world economy. “China has been in the doldrums, albeit with 5- to 6-per-cent GDP growth,” he says. With Mr. Trump pushing an America-first agenda, likely increasing barriers to global trade rather than removing them, “the Chinese will benefit,” Mr. Yamada says, filling the void in global leadership for free trade. Moreover its growing middle class is increasingly driving the Chinese economy, meaning China will rely less and less on U.S. consumption. Still, the Chinese marketplace can be a pricing rollercoaster, he notes.
  • BMO Low Volatility Canadian Equity ETF: If the ups and downs of emerging markets make you queasy, consider a low volatility approach that focuses on steady parts of the equity market. Many experts have been down on low volatility stocks of late, arguing that they are overvalued and will be outperformed by growth stocks with greater volatility. But Mr. Yamada contends that high volatility stocks do not add value to portfolios over the long term as much as their low volatility counterparts. This BMO ETF offers investors a diversified basket of Canadian banks, utilities and other defensive stocks. And while it may have “lagged the S&P TSX Composite for the past year because it was underweight energy and minerals … it is a great long-term core holding.”


Lorne Zeiler
Contributed By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
416-733-3292 x225

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


Below you will find a real life case study of a couple who are looking for financial advice on when they can retire and how best to arrange their financial affairs. The names and details of their personal lives have been changed to protect their identities. The Globe and Mail often seeks the advice of our VP, Wealth Advisor, Matthew Ardrey, to review and analyze the situation and then provide his solutions to the participants.

Written by: DIANNE MALEY
Special to The Globe and Mail
Published Friday, Sep.02, 2016

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

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

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

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

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

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

What the expert says

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

Monthly net income: $15,250

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

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

Liabilities: Mortgage $170,000

Matthew Ardrey
Presented By:
Matthew Ardrey
VP, Wealth Advisor
(416) 733-3292 x230

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


Below you will find a real life case study of a couple who are looking for financial advice on when they can retire and how best to arrange their financial affairs. The names and details of their personal lives have been changed to protect their identities. The Globe and Mail often seeks the advice of our VP, Wealth Advisor, Matthew Ardrey, to review and analyze the situation and then provide his solutions to the participants.

Written by: DIANNE MALEY
Special to The Globe and Mail
Published Friday, Jul. 15, 2016

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

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

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

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

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

What the expert says

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

Monthly net income: $8,950

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

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

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

Matthew Ardrey
Presented By:
Matthew Ardrey
VP, Wealth Advisor
(416) 733-3292 x230

TFSA comes of age in retirement strategy


lorne_bnn_24mar16Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor at TriDelta Financial, recently appeared on BNN’S Market Call to discuss when it is more tax-efficient to contribute to your TFSA vs. RRSP.

Click here to watch the interview.

Lorne Zeiler
Posted By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
416-733-3292 x225

TriDelta Investment Counsel – Q2 2015 investment review


Performance Summary – TriDelta clients minimizing the damage

Overall, the second quarter of 2015 was one of the weaker quarters in a long time.
Of interest, there wasn’t really anywhere to turn to find good numbers on the quarter.
Among indices, the results were the following:

Index % Change
S&P/TSX -2.3%
S&P500/US – CDN $ hedged 0.3%
S&P500/US – Unhedged -1.8%
CDN Bond Universe -1.7%
CDN Preferred Share -4.1%

Growth oriented TriDelta clients meaningfully outperformed the TSX, but were still mostly down around 1% on the quarter.
Conservative oriented TriDelta clients were down in the 1.5% to 2% range on the quarter, still outperforming the TSX.
A big impact on client performance was their weighting in Preferred shares. For the most part, clients with a higher percentage of their assets in taxable, non-registered accounts would hold a higher weighting of Preferred shares. Those with very low or no non-registered assets, would have very little in Preferred shares.
We do believe that Preferred shares will see some sunshine over the next year, but they have certainly been an underperforming asset class over the past year.

Greece, China and Iran – What does it all mean for your Portfolio?

Sifting through the headlines to try to find the economic meat, sometimes we find a lot more noise than news.
This is not to say that Greece’s latest brush with bankruptcy, China’s wildly gyrating market, and an imminent deal of some kind with Iran that will remove much of the economic sanctions on the country, are not important.
Each is important in a different way, but how do we use this to our advantage?
Let’s look at each situation:
Greece – a possible default on its debt and departure from the EU

  • A Greece debt default will cause financial stress for holders of Greek debt
  • Life for the Greek people will become harder and some revolt is possible.
  • A Greek default could cause other weak EU members to do the same.

Things we watch for:

  • 10 Year Bond Yields in Portugal and Spain – are just 2.8% and 2.1% respectively. This gives us some comfort that the bond market doesn’t see meaningful risks from these two countries.
  • Stress tests in European Banks over the past three years which would have looked specifically at how they would be impacted by a Greek default. The results showed that unlike in 2012, a Greek default would primarily impact Greece, the German government and the European Central Bank, but would not have a ripple effect throughout global financial markets.

Investment Opportunities:

  • Do not overreact and bail out. Greece is just 1.8% of the EU economy and about 0.4% of the global economy. Given all of the time to prepare, it looks like any result could be contained in the medium term.
  • Possibly invest a little cash on bad news days for Greece.


China – plummeting stock market of late
There is a great summary of the Chinese stock market moves in the New York Times. The link is below.

  • As one of the major drivers of the resource economy, could a stock market collapse in China lead to another hit to the various resource sectors?
  • Could stock market volatility lead to social instability in China?
  • Could the government interference in the stock market (changing the buying and selling rules as they go), turn foreign investors away?
  • Could the decrease in China’s stock market impact global liquidity in other areas?

Things we watch for:

  • Does the Chinese stock market strongly correlate to its economy? Over the last decade, huge stock market volatility has not been particularly connected to economic or earnings growth. While this makes investing in China a real gamble, it does suggest that we shouldn’t look to Chinese stock market performance as a driver of demand for Canadian resources, or equity markets overall.
  • While the Chinese stock market had dropped 32% over four weeks at one point, it has still outperformed North American markets year to date. Is there really any Chinese stock market crisis to consider? Probably not.
  • Is Chinese government interference in the stock market a destabilizing factor? While it doesn’t give most North American investors comfort in the investment space, it doesn’t appear to have any long term impact on the market. Ultimately, the Chinese stock market returns are highly volatile. The companies require greater regulation and transparency, and its stock market performance is not a large factor in our overall investment analysis.

Investment Opportunities:

  • Similar to Greece, it doesn’t make sense to overreact to the Chinese stock market. While the returns do impact our Emerging Market investments, we can absorb the extra volatility as we think it will add some growth to the overall portfolios.
  • The critical items in China relate to GDP declines, and their impact on global demand for various key resources and consumer goods. While GDP growth is slowly declining, it remains in the 7% growth range and a source of meaningful global growth at a time when Western markets are growing in the 0% to 3% range.

Iran – a possible lifting of global economic sanctions as part of a Nuclear deal

  • The biggest risk obviously relates to whether Iran could possibly create and use a Nuclear weapon.
  • Iran holds the fourth-largest oil reserves in the world, and it is sitting on another 20 to 40 million barrels in storage on-shore and in more than a dozen tankers floating off its coast. A deal could increase production and exports of oil at a time when supply is already outstripping global demand.
  • Domestic response to an agreement could be volatile in Iran as well as in Israel, the US, and several other countries.
  • A good overview is provided in this article from US News and World Report:

Things we watch for:

  • Iran’s oil minister pledged to increase the country’s exports by roughly 1 million barrels per day within a year. Experts estimate that the process will take a bit longer, but the numbers are about right in the long run. Worldwide, countries produce about 100 million barrels of crude per day. If that increase does happen, it will certainly put a lower ceiling on the price of oil for the foreseeable future.

Investment Opportunities:

  • With small exceptions, we have kept out of the oil patch over the past number of months. We expect that news of a ratified deal will definitely hit the oil patch, possibly more so than on the real impact to the market. In the short term, it could provide an opportunity for an investment, but we will likely stay very underweight on this sector over the short term.


The Art of Selling Securities: Time and again TriDelta has excelled at selling stocks before big declines

chart2In the past year, TriDelta has sold several companies prior to significant declines. Some sells protected client gains while some were not our best stock picks, but our sells limited losses. Here are 6 examples that were held in clients’ accounts (all clients would have held a few of these names):

Exhibit A: Micron (no dividend)
Purchased for US$33.09 in August 2014
Sold for US$31.55 in January 2015
With currency appreciation, this was actually a 3.8% gain in CAD dollar terms over 5 months.
Today, it trades for $17.56 or 44% lower than our January sell price.

Exhibit B: Suncor (2%+ dividend)
Purchase for $28.42 in May 2012
Sold for $44.65 in July 2014
Today it trades at $34.33 or 23% lower than our June 2014 sell price.

Exhibit C: Corus (4%+ dividend)
Original Purchase for $21.80 in March 2012
Sold for $21.96 in March 2015.
Today it trades for $16.90 or 23% lower than our March sell price.

Exhibit D: Michael Kors
Original Purchase for US$88.85 in June 2014
Sold for US$63.46 in April 2015.
Today it trades for $43.79 or 31% lower than our April sell price.

Exhibit E: Alliance Resource Partners
Original Purchase for US$39.23 in January 2015
Sold for US$38.70 in February 2015
With currency appreciation, it was actually a 4.3% gain in one month.
Today it trades at US$24.76 or 36% lower than our February sell price.

Exhibit F: Aimia (3.7%+ dividend)
Original Purchase for $19.22 in May 2014
Sold for $18.80 in August 2014
Today it trades at $14.24 or 24% lower than our August 2014 sell price

While we had no crystal ball, TriDelta used the same discipline that we always use. This approach gave us the warning signs that there are better stocks to own than the ones we held.

Many investment managers say, “it is easy to buy, but hard to sell”.

We have a theory on why we do much better than most managers in the area of selling. With our industry experience, we note that many investment managers tend to have a strong ego. This is actually an important trait for a business that often requires managers to buy when everyone thinks they should sell, and to sell when everyone thinks they should buy.

The downside of this ego is that they don’t ever like to admit mistakes. In particular, in cases where a stock hasn’t done well, it can be hard for an investment manager to admit the mistake and sell the security. This often manifests itself in holding stocks all the way down so that they sit in your portfolio with 50%+ declines.

Whether a stock is a gain or loss for our clients does not impact our sell decision (other than near year end when we look at Capital Loss selling candidates). Our sell decision is simply based on whether the stocks are no longer acting the way that we expected or certain financials are not what we expected, and we decide to cut the cord and move on. These sell decisions are not emotional ones, but rather based on financial changes. Through this financial discipline, we can eliminate the downside of the ego that causes many managers to hold on to securities for too long.

After all, while we are here to grow your money, we are also here to protect it.


Q2 Overview of the Bond Market

by Edward Jong

  • Our fixed income portfolios have been managed with a shorter duration bias. This means that we will be leaning towards bonds that mature in the next few years as opposed to having most of our bonds maturing in 10+ years. We believe that, even with the cut in overnight rates in Canada, interest rates could retest the recent highs in yields. Volatility will remain a staple in the market place as higher domestic (i.e. North America) interest rates will be pulled lower with anemic growth in Europe and Asia.
  • Greece default or exit from the European Union will not have a disastrous effect on the rest of Europe as financial institutions outside of Greece will have little impact. This leaves the markets to focus on what’s happening in their own backyard.
  • The European Central Bank will defend the EU at all costs – ideally with hopes that Greece remains part of the union. If markets are able to look beyond their nose, it’s reasonable that we could start to see some strengthening in the Euro and higher global interest rates could be the theme for the rest of 2015.


Q2 Overview of the Stock Market

by Cam Winser
TSX Returns by Month were:

Month % Change
April 2.16%
May -1.38%
June -3.07%

Top Performing Sectors were:

Sector % Change
Health Care +12%
Telecom +1%
Consumer Discretionary +1%

Bottom Performing Sectors were:

Sector % Change
Energy -11%
Info Tech -9%
Utilities -9%
  • There were a string of negative economic reports in Canada showing a weaker economy especially out west as declines in crude weighed on investment and jobs in the energy sector.
  • Manufacturing activity continued to lag despite the weaker Canadian Dollar which should have been supportive.
  • Valeant Pharmaceuticals was the major reason for the move in Health Care after a strong earnings announcement and more M&A activity.
  • Utilities underperformed as the market had concerns rates were going to rise and adversely affect the sector by increasing debt payments. Utilities have stabilized and started to outperform. We believe rates may actually be going lower in Canada, potentially helping the sector and are looking to add to some existing holdings after this decline.
  • Energy was weakened by global activity and domestic election results as the NDP won in Alberta, causing concerns of decreased profits due to an increase in taxes. Oversupply and over storage still seem to be an issue but the numbers are getting a bit better during this higher demand season which usually sees a draw from reserves.

United States:
S&P 500 Returns by Month were:

Month % Change
April 0.87%
May 1.05%
June -2.10%

Top Performing Sectors:

Sector % Change
Health Care +3.5%
Consumer Discretionary +2%
Financials +2%

Bottom Performing Sectors:

Sector % Change
Energy -7%
Utilities -5%
Industrials -3%
  • Data in the US was for the most part mixed. Weaker GDP, which was subsequently revised down further, was shrugged off due to poor weather and west coast labour action.
  • Jobs were added at a healthy rate as unemployment fell to 5.3% in June, home sales rose to highest levels post crisis and consumer confidence was up.
  • Stronger US dollar is thought to be a burden on U.S. exports and repatriation of foreign earnings. The strong US dollar has negatively impacted what would have been much stronger earnings from US companies with large foreign operations and sales.
  • Fed officials are still quoted as expecting a rate rise this year. We generally think the U.S. is stable and global growth is showing signs of improvement.
  • Utility companies in the U.S. suffered a similar fate to those in Canada by declining on the expectation of a potentially rising rate environment.
  • Healthcare was strong on M&A activity.
  • IPO activity more than doubled from Q1 to Q2.

Dividend changes continue to be positive, with no declines in payout in our holdings. We saw dividend increases of between 1% and 18% across 9 names during the quarter, with IBM’s 18% dividend increase topping the list. Given our focus in some portfolios on dividend increases, we like to track and report on this quarterly.

What Do We See in Q3 and for the Rest of 2015?

While we certainly don’t want to see more Q2’s ahead of us, we do remain a little more cautious than normal. It is worth noting that a few years ago, nobody would be too upset with a quarter where returns were down 1%. In 2015, it feels like we are expecting markets to only go up, and a flat to down quarter is cause for alarm.
Historically, stock markets are negative about 30% of all quarters.
While there are definitely sectors of the market that we like, there does appear to be a little less positive momentum in the markets overall, and a little more punishment for stocks that don’t meet earnings targets.
In the short term this means that we will be more selective, and more patient with buying new names. We may have higher than normal cash positions, and we may look a little more favourably towards some Alternative Investments that are less correlated to the stock and bond markets.
We don’t foresee any major declines as long as earnings remain strong and overnight interest rates remain low, but sometimes a little extra precaution is in order.

TriDelta Investment Management Committee


Cameron Winser

VP, Equities

Edward Jong

VP, Fixed Income

Ted Rechtshaffen

President and CEO

Anton Tucker

Exec VP and Portfolio Manager

David Oliver

Chief Operating Officer

Lorne Zeiler

VP, Portfolio Manager and
Wealth Advisor