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This alternative to stocks and bonds is gaining a following among wealthy investors

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Ted Rechtshaffen: If your portfolio is 100% in publicly traded investments, know that most pension plans think you’re making a mistake

I hear a lot of the following these days:

“The stock market is too volatile and there is a recession coming. I am nervous about stocks.”

“With interest rates so low, I will lose money owning bonds after tax and inflation.”

“Preferred shares have not performed very well over the past few years so I don’t want those.”

What often comes next is a question similar to, “If I don’t want to put money into those, do you have anything else you might recommend?”

As it turns out, we do have a lot that we would recommend, and it generally comes under the category of “alternative investments,” which are not publicly traded on markets. Most of the investments that we have in this area have been providing steady returns in the six per cent to 10 per cent range annually over the past several years.

Before you think that these are some strange and extreme types of investments, it is worth noting that according to Benefits Canada, almost 40 per cent of Canadian pension plans are now invested in alternative investments. The plan managers are doing this for all of the reasons raised in the opening three quotes. They are worried about volatility and risk-adjusted returns from stocks. They are especially concerned that in a low interest rate world, the plans can’t generate the required returns with only traditional conservative government or high-quality corporate bonds.

While alternative investments include infrastructure, commodities and private equity, much of our investment focus is in the areas of private debt and real estate. In a nutshell, private debt is lending that is not done by traditional banks and does not include bonds traded on public markets. Ever since 2008, the banking landscape has changed and their lending strategy narrowed. This left many companies and individuals who required debt to look for alternative sources of funds. Over the past decade, private debt has grown over four-fold and is now close to US$1 trillion in assets globally, according to the alternative credit council. Our real estate investments, meanwhile, tend to be focused on managers that lend to developers and building owners and who have a global reach.

To help understand the increase in interest in alternative investments, and why the returns are higher than most publicly traded bonds, here are some examples of how private debt works. In some cases, the borrowers can be higher risk than traditional banks are comfortable with, but often the borrowers fall into a variety of buckets that banks can’t or won’t service for other reasons.

Examples include a business that requires a loan to close an acquisition. The business may be a perfect candidate for a loan but requires the funds in 3 weeks, while a traditional bank may take 3 to 6 months to approve it. Eventually the company may shift its borrowing to a bank at lower rates, but in the short term, the company is fine paying a high interest rate for the benefit of having the financing completed quickly. In other cases, a company may be in an industry that a bank may not lend to for reputational reasons, but which might otherwise be a great candidate for lending. For personal borrowers, sometimes they are business owners with a lot of assets and good credit, but low personal taxable income. A bank may not give them a mortgage but a mortgage investment corporation may think they are a great loan candidate, especially if they are only lending them 70 per cent of the value of their house, and the house is the first collateral on the loan.

In all of these cases, the borrowing rates would be higher, and often could be anywhere from six per cent to 20 per cent depending on the situation. It is these borrowing rates, along with strong risk management practices and full collateral that can provide steady returns at rates much higher than public bonds. These represent just a few examples of the many situations where someone is willing to borrow at high rates, for the ability to get the lending that they require.

The benefits to the investor are significant. First, they provide investment diversification and very low connection or correlation to the stock market. Second, over the past five years (as many funds were not around prior to this), returns have been quite steady with very low downside volatility. Having said that, a full investment cycle of 10 to 20 years would probably provide a little better test. And third, returns are often relatively high, with many funds providing returns in the six per cent to ten per cent range.

The main negative to private debt investments is that they are not very liquid. While publicly traded securities are often easily sold daily, many private debt investments might require anywhere from 30 days to a full year to redeem. This is one of the main reasons why private debt might only be one component of an overall portfolio. Because the risks on lending are often only as strong as the operational skill of the manager and the security against the loan, it is important to be able to assess whether any particular manager has top level skills to minimize the risk of losses.

While every person is different, in the 2019 investing world, we often have 10 per cent to 35 per cent of a clients’ overall portfolio invested in a diversified mix of private debt and other alternative investments. If your portfolio is 100 per cent invested in publicly traded investments, it is worth noting that many wealthy individuals and most pension plans believe that you are making a mistake. Now may be the time to consider looking beyond traditional investments to meet your long-term goals.

Reproduced from The Financial Post – November 18, 2019.

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

If you’re retired, is now the time to sell your house?

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ted_bnn_15sep16cTriDelta President Ted Rechtshaffen appeared on BNN TV as a guest speaker to discuss retirement income from selling a house in Toronto.

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

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

TriDelta Investment Counsel 2014 Forecast

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As 2013 comes to a close, we thought that it would be a good time to share our expectations for 2014 and discuss our views on the current year.  In 2013, we expected US equities to outperform Canadian equities.  Our fairly large exposure to US equities (vs. many other Canadian Investment Counsel and brokerage firms) benefitted clients.  In the Canadian market, dividend paying, low volatility stocks, such as utilities, banks, insurance companies and telecommunications significantly outperformed natural resources.  Industrials, such as Magna International and Air Canada also performed extremely well.  On fixed income, while the Canadian Bond Index (DEX Universe) had a slightly negative return, our focus on corporate bonds has enabled our clients to earn slightly positive returns during the year.

As we approach 2014, we are hopeful that the US clarity on bond tapering will give the market confidence, that Europe will finally experience GDP growth, that Abenomics will provide a further economic boost in Japan, that Canada will continue to expand and be known for innovation and growth instead of just for Rob Ford, and that we at TriDelta will continue to provide strong returns for our clients to meet their investment and financial goals.

 

2014 Predictions:

TriDelta Financial 2014 Predictions
TSX Total Return 6%
S&P 500 Total Return (in US$) 8%
DEX Canadian Bond Index Total Return 1.75%
Canadian Bank Prime Rate 3% Remain Unchanged
10 Year Gov’t of Canada Bond Yield 2.50% to 3.00% Little meaningful rate increase
Canadian Dollar vs. US$ at year end 90 cents

US Equities over Canadian Equities – While we do not expect a repeat of last year, we do expect US equities to produce medium to high single digit returns (6-9%).  Historically, the US equity market has experienced positive returns following a strong performing year like 2013.  The difference is that while 2013’s equity returns were based mainly on valuations, with Price-Earnings multiples expanding and roughly 6% earnings growth, 2014 will be mostly earnings growth as companies try to meet or beat the lofty 10% growth expectations.   We expect that the US economy should grow at a faster pace than in 2013.  We also anticipate that with 2014 being an election year, there will be little in the way of significant debt reduction agreements, removing a further concern against equity markets going higher.

Due to the extent of the recent increase, we think there could be a pullback in the near-term hence our holding of the S&P500 Inverse ETF.

Canadian Equities – We expect positive returns for the TSX in 2014 as well.  Valuations for many of the dividend payers remain quite reasonable, especially in a low interest rate environment.  We again expect the non-resource sectors, such as financials, telecommunications, transportation and industrials to outperform.  Having said this, we believe that the TSX will still likely underperform the US markets.

Sectors to Outperform – The last few years have been all about dividend paying stocks.  We think next year could see a number of cyclical companies outperform, such as Industrials hence our weighting in Goodyear Tire & Rubber US (GT) and Magna International (MG).  While the overall technology sector is trading at high multiples thanks to companies like Twitter, there are a number of bellwether technology companies, such as Cisco Systems (CSCO) that are trading at relatively low multiples, offering strong balance sheets, good dividends and cash flow.  2014 could also be the year when mining stocks finally hit bottom.  While we think there may be some excellent opportunities in the sector, we also believe that it is presently too early to invest.

World Economy to Expand Moderately – The IMF is predicting 3.6% growth for the world in 2014, a significant increase from their current forecast for 2013 of 2.9%.  Overall, a greater portion of this growth is expected to come from the developed countries.  Europe and Japan are both projected to grow by over 1% and North America by 2.5%.  Emerging markets are forecast to grow by 4.5%; China will account for a significant portion of that growth at 7.3%.

2014 will also mark the 100th anniversary of the beginning of World War I.  We need to sometimes remember that the first European Union, the European Coal and Steel Community (ECSC) in 1951 was not only founded to encourage economic growth, but as French Foreign Minister Robert Schuman stated, the ECSC was “to make war not only unthinkable, but materially impossible”.  We believe that the European economy may have turned a corner recently and with equity valuations a little lower than in North America, this may be an area we add strategically to client portfolios.

Bonds – We favour equities over bonds in 2014.  Within fixed income (bonds) we favour corporates and high yield over governments.  We expect that the US Federal Reserve will begin to taper its quantitative easing bond buying process in the Spring of 2014 or earlier; however, any acceleration of timing would not be a shock to the market,  and the process will be very gradual.  To temper any fear and confusion that tapering is not tighter monetary policy, we do not expect interest rates to rise meaningfully in 2014.  As a result, we think that interest rates on the 10 year Canadian government bonds are range bound between 2.50% to 3.0%.

Corporate bonds will continue to offer favourable returns in a low interest rate and inflation environment.  Investment grade corporate bonds in the 10-year to maturity area are offering yield premiums of around 150 basis points (bps)  vs. comparable government bonds.  High yield bonds in the  universe are typically offering yield premiums of roughly 425 bps.  There is a need to be selective in terms of credit and allocation along the yield curve to provide the highest potential return vs. risk, but in general Canadian and US issuing companies are in strong financial positions with solid balance sheets.

Currency  – The US dollar ended 2012 at a slight discount to the Canadian dollar, but has appreciated by over 7% during 2013 into December.  We expect that the US dollar will continue to appreciate as the longer term trend is turning 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.     

Alternative Investments  –  Over the past year, we have begun supplementing alternative investments to the portfolios of certain accredited investor clients, to gain access to asset classes that cannot easily be purchased on public markets, such as mortgages, real estate, infrastructure and private credit or strategies that can cost effectively use options and leverage.  Recently we launched our first pooled fund, TriDelta High Income Balanced Fund, which employs institutional investment strategies, such as options and leveraged fixed income.  We believe that our new fund and other alternative strategies can add to client returns, while reducing volatility.

While we expect 2014 to be a positive year overall for clients, we do expect volatility to increase from its low levels this year.   As such, we will continue to review economic indicators, trends and relative value to proactively take advantage of opportunities and reduce risk when deemed appropriate.

 

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

Members include: Cameron Winser, VP, Equities; Edward Jong, VP, Fixed Income; Lorne Zeiler, VP, Wealth Advisor; Ted Rechtshaffen, President and Wealth Advisor; and Anton Tucker, EVP, 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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