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TriDelta Investment Counsel – Q2 2015 investment review

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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
 
Risks:

  • 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.
http://www.nytimes.com/2015/07/07/upshot/how-to-make-sense-of-chinas-plummeting-stock-market.html?abt=0002&abg=0
 
Risks:

  • 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
 
Risks:

  • 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: 
    http://www.usnews.com/news/articles/2015/07/13/crude-estimate-how-ending-iran-sanctions-may-impact-oil-markets

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
 
Canada:
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

Less than half of Canadians will contribute to an RRSP this year

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ted_bnn_23feb15According to a recent poll done by a leading Canadian bank, more than half of us won’t be contributing to an RRSP this year.

BNN invited Ted Rechtshaffen to discuss the findings and share his insights on saving for our retirement.

To better assist you in making effective savings decisions and as importantly how best to invest it, we invite you to connect directly for a no obligation discussion – simply click here and we will have one of our Wealth Advisors connect with you.

We also recently outlined the differences between an RRSP and TFSA (Tax Free Savings Account) contribution.

Other key findings of the bank sponsored poll include:

  • 54 per cent of Canadians indicate that they will not make an RRSP contribution for the 2014 tax year
  • 32 per cent of Canadians intend to contribute
  • 16 per cent have already made their RRSP contribution
  • 16 per cent say they plan to contribute
  • 14 per cent say they are undecided about contributing
Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

TriDelta High Income Balanced Fund delivers 15.9% first year return

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income-fundThe TriDelta High Income Balanced Fund was developed to deliver strong results while providing something that many Canadian income investors are missing – diversification.

The Fund achieves this through:

  • Institutional investment strategies such as put and call options to lower volatility
  • Leverage on the fixed income portion of the portfolio to increase income
  • Actively investing in foreign exchange, hedging strategies and global bonds

 
The TriDelta High Income Balanced Fund completed its first year of operations on November 30, 2014 with a very strong return of 15.9% (F-Class shares). Unlike most alternative investment or hedge funds, TriDelta High Income Balanced Fund charges no performance fee and its management / advisory fee is lower than most mutual funds.

The fund is managed by Edward Jong, Head of Fixed Income and Cameron Winser, Head of Equities at TriDelta.

TriDelta’s fund delivered excellent overall results in the hedge fund sector as outlined in this news item, http://hedgefundgroup.org/tag/tridelta-high-income-balanced-fund

Performance:
The Fund was a steady top performer throughout the year. Its 1 year return was 15.9%, earning 6.5% over the past 6 months, 2.2% during the past quarter and 3.8% in the month of November. The Fund generated positive returns in 10 of the past 12 months.

From a performance perspective, the Fund was in the top 2% of all Growth and Income Funds (7,200 funds) found on GlobeFund, and among the top performers in that group, had among the lowest equity weightings, and highest risk adjusted returns.

The Fund is offered by term sheet and subscription agreement. Prospective investors must be Accredited Investors.

Class F Shares are owned by clients of TriDelta Investment Counsel Inc. These clients pay an advisory fee to the firm, typically based on their assets under management. An investment fund must prepare disclosure documents that contain key information about the Funds. You can contact TriDelta Investment Counsel Inc. for copies of these documents and more information on the Fund at 416-733-3292. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.

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

Why older seniors should rent instead of buy

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ted_banner

After 18 years of ups in many Canadian markets, you always should wear armour before telling someone to rent instead of buy. With armour firmly in place, I believe that there are times when this definitely makes more sense.

Don’t get me wrong. I believe that your principal residence is usually a great investment, and one with the obvious advantage of being an investment you can actually live in as opposed to just being a line on a statement. The biggest problem with buying a home is that the transaction itself can be very costly and depending on where you live, it can be very difficult to sell in a timely manner if you need to.

If we take a 76-year old-couple who are considering selling their current home and downsizing — one of the basic questions is are you looking to buy something new or rent?

Some people fear renting because they may be forced to move from a property. While this can be a legitimate concern, it largely depends on who you are renting from. If you are renting from an individual for whom this is their only rental or they are planning to take over the space personally at some point, then it is a real risk. If, however, you are renting from a professional property manager with a long track record, then the risk becomes very small.

In addition to this, “the Residential Tenancies Act is actually extremely helpful with respect to protecting the tenure of a tenant” says Michael Baum, a real estate lawyer in Toronto with the firm Harris, Sheaffer LLP. He goes on to say “landlords have very limited rights of termination even on expiry of term. This makes it very favourable for such a renter.”

For those who have been home owners for the past 50 years, it is sometimes an odd concept to consider renting. It is almost a point of pride. “I am a home owner, not a renter.” I understand that sentiment, and if it is important to someone then that should clearly factor in the decision.

But before letting pride be the driver of the decision, let’s look at a few facts:

  • Prices can indeed fall and take years to recover. In 1989, the average sale price of a Toronto home was $273,698. In 1996 it had fallen over 27% to $198,150. It took 13 years for the 1989 sale price to be reached again. In Vancouver, a detached home cost $180,000 in 1981 and dropped 39% in just over a year to $110,000. It took 7 years for prices to recover to their 1981 level.
  • You can easily lose $40,000 in land transfer tax, and other ‘special fees.’ This depends greatly on where you live. In some places, this isn’t an issue. If someone in Toronto wants to buy a $1-million condo, they will pay $32,200 in land transfer taxes. In addition, especially with condos, there can be a variety of gas and electricity hook-up fees, development fees, deposit verification fees, that add up to several thousand dollars.
  • What happens when you eventually sell the condo? The biggest thing is that you are faced with another set of real estate commissions for selling the condo that wouldn’t have existed if you rented. If you are paying 5%, then you would have $50,000 in selling fees on top of the money you might spend to prepare the condo for sale.
  • What if you need to move for health reasons? This is a big concern. If someone’s health declines, sometimes there is a need to move fairly quickly. This doesn’t necessarily mean that a condo or house must be sold immediately, unless the sale is needed to free up cash flow. While in some markets, a sale can happen in a matter of days for a good price, in other markets it could take months, and if there is some pressure to get it sold, the selling price will likely take a hit – costing even more.

Based on the issues above, my sense is that you should really plan on living somewhere for at least six years if you are planning to buy a property. That will at least give some time to amortize the big costs of buying and selling. If you think there is a decent chance of being in a property for less than six years, then financially you are betting on strong real estate growth for it to make financial sense. While that is certainly possible, it is a financial bet that may not pay off.

There is no clear right or wrong answer on the buy versus rent discussion, but for those with greater uncertainty over the next five to 10 years, you may want to consider renting for financial reasons as well as greater overall flexibility.

Ted can be reached at tedr@tridelta.ca or by phone at 416-733-3292 x221 or 1-888-816-8927 x221

Reproduced from the National Post newspaper article 30th September 2014.

Renewing your mortgage? Here’s why you should pick up the phone

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ted_banner

It is mortgage renewal time in my house.

I am one of those debt loving people who believe I can do more with my money by carrying a big debt at 3%, than by paying off my house and using up all that cheap capital – but that financial idea is a story for another column.

So, even though my mortgage comes due in October, I decided to lock in a rate four months earlier at a different institution at 2.79% for 5 years fixed. I was thrilled to have another five years of cheap money.

Even though I had already locked in elsewhere, I was interested in what my current mortgage lender would provide. I waited and I waited. Just four weeks before it was due for renewal they sent me a mortgage renewal notice. They could have sent it to me two or three months before my mortgage came due, but they may prefer to leave consumers less time to shop around and more inclined to just renew.

Here is where it gets interesting. “Please indicate which option you are accepting by signing your initials in the appropriate area indicated and return your signed agreement,” the letter stated.

I could just initial the 5-year fixed rate — for the princely rate of 4.79%.

14022838_sFurther on in the letter under a section called “Get the best rate,” it offered to extend to you our special interest rate hold guarantee provided if I signed by my renewal date. But all this says is that if the rate went down between now and about three weeks from now, I would get the lower rate.

This is a full 2% higher than what I am actually going to get somewhere else. If I had a $500,000 mortgage, this would cost me $47,600 more over 5 years by ‘just signing here’ vs. going to a mortgage broker three months in advance.

Just to be sure that I wasn’t missing something I called to make sure that I had the correct instructions and rate on my renewal. An interesting thing happened when I called. In about 30 seconds they said “I can actually get you a rate of 2.99% for 5 years.” I asked why my rate was 4.79%, and they said that this is the standard rate, but I can get this better special rate.

Doing the math, that phone call, using the same $500,000 example, would have saved me $42,800 over 5 years. That was a pretty valuable phone call.

I asked the kind sir on the phone how often people just sign the renewal form, and he said ‘quite a few.’

If a bank gets 5,000 people in the same $500,000 example to sign the renewal, that adds $42.8-million in profit to their bottom line each year.

Please do not automatically sign the friendly mortgage renewal form. At a minimum call to negotiate or call a mortgage broker to get the best deal for you. If you feel some sort of loyalty to your current mortgage provider, then be sure to see someone in person and ask for the very best rate that they give their very best customer. Your future net worth will be glad that you did.

Ted can be reached at tedr@tridelta.ca or by phone at 416-733-3292 x221 or 1-888-816-8927 x221

Reproduced from the National Post newspaper article 16th September 2014.

Tax time

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It’s almost Tax Time. Here is a list of some items worth noting for this year’s tax filing.

  • RRSP contribution deadline:  March 3, 2014 to be able to deduct on your 2013 tax return.
  • Due Date for filing: Taxes owing on all personal tax returns are due April 30, 2014.
  • Life Changes: Newly married/separated, moved, started a family, etc? These changes can affect your tax outcome.
  • Direct Deposit: CRA will stop issuing cheques as of sometime in 2016. Direct Deposit can be set up with your 2013 tax filing.
  • Ontario Healthy Homes Reno Tax Credit: Over 65, or do you live with someone over 65? You may qualify for a tax credit when you make your home more accessible.
  • Foreign Income Reporting: Taxpayers who own foreign property NOT used for personal use and/or are assets used in an active business, may need to file a separate “Foreign Income Verification Form”. Specified Foreign Property includes: amounts in foreign banks, shares in foreign companies, real estate holdings outside Canada, and others. The penalties for non-compliance are severe.
  • U.S. Status: Please advise us of your U.S. Status.
  • Ontario Trillium Benefit: If you qualify for this benefit you can now choose to receive a single payment in July of 2015, or monthly beginning in July 2014.

Given the ever changing landscape of tax regulation research shows that approximately seventy percent of individuals and small businesses use tax preparers to file their taxes. We believe that it is money well spent to consult a professional and should be viewed as money well spent. Preparing tax returns can be complicated and understanding each taxpayer’s unique situation is crucial in ensuring the best tax outcome.

At TriDelta we work with many accountants and tax experts and will be happy to refer you to a specialist depending on the complexity of your financial situation.

Shoebox Tax Prep & Accounting Services compiled this list of tips to get you thinking about your tax return www.shoeboxtaxprep.ca

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