Three times when it’s ok to change your asset mix



In some ways your investment asset mix is kind of like the luggage you pack for your vacation.

For some people they are more ‘lounge at the beach’ kind of people and their luggage will have a bikini and sun dress, sandals and maybe something for rain. Other people will be hikers and want great climbing shoes, shorts, and water bottles. Some vacations will be great for kids and others purely for adults. Some places have wide ranges of weather so you want winter coats along with a sweater. Some people travel light and take a bit of a chance, while others pack everything just in case. The key is that each person has different goals and is headed to a different type of vacation, and must pack their bags based on that.

Your investment portfolio is no different. It will look different for some people than others – depending on the type of people they are, and the stage of life they find themselves in.

Your mix of stocks and bonds is the foundation of your future investment returns and level of portfolio volatility that you will face.

asset2Of course, there are many other pieces of the puzzle – such as income levels, tax treatments, leverage and a wide range of risks within the word ‘stocks’ or ‘bonds’. However, let’s stick with the foundational asset mix for now, because this is the piece that gets questioned the most when times are not so good.

The most common question asked when markets pull back would be “is now the time in the market to change my asset mix?” I believe the answer is almost always no.

There are certainly times to rebalance because markets have caused some imbalance in your target portfolio. If you think about it, if stocks have had a great run and they now represent 68% of your portfolio instead of 60%, rebalancing is essentially a selling of something that has done well and buying of something that hasn’t done as well. But rebalancing is different than meaningfully changing your asset mix.

What I am talking about is someone who was 100% in stocks deciding that markets have dropped so now they will sell half their stocks and put it in cash or bonds. I am talking about the person who was 60% in bonds, but saw stocks doing well so decided to become 80% in stocks. These are the kinds of moves that usually come back to haunt someone because they are driven from market movements and not from a change in a person’s own situation. They are usually a problem because timing the move to get out and get back in is extremely difficult, and usually late. The other problem is that it leaves someone with a portfolio at various times that is not the right one for them as individuals. It is only right for what the market had been doing recently.

I believe that there are only three times when one should change their asset mix:

  • If they have been living an investment lie – by that I mean that their current asset mix doesn’t fit who they are today. Examples might be the investor who wants investment income, but whose portfolio has lots of growth stocks that don’t pay a dividend. Another might be the person who says they are uncomfortable with too much risk, and wouldn’t be able to sleep if their portfolio was down 10%, yet are sitting on mutual funds that are 80% invested in stocks. These are people who have the wrong asset mix for their needs (emotional and/or financial), and should make changes to get it right. These people packed the wrong luggage.
  • If they need to draw more money than they did before – This impacts the short term cash needs of a portfolio, and might necessitate a higher percentage in cash or short term bonds in order to prevent a sudden sale of stocks or long term bonds at a bad time in the market. This usually occurs when there is a change in employment (retirement, unemployment) or a sudden increase in expenses (often health or education changes). This would usually necessitate taking a step or two back in risk. If you had a portfolio with 80% in stocks, now maybe it might move to 50% or 60%. You may also want to increase the amount sitting in a high interest savings account or money market fund to help cover off your cash needs for a year without any market risks. Here, the 4 star vacation that you hoped for, has to be downgraded to a 2 star.
  • If their investment world just improved meaningfully – this situation can come about when someone sells their house and rents or downsizes meaningfully. It can happen with a sizable inheritance or taking a pension in a lump sum of cash as opposed to the traditional monthly payments in retirement. The reason this changes your asset mix is because you now may have more assets that may never get spent in your lifetime or which will be invested for a long term before they are needed. Quite often this growth in a portfolio allows you to increase the risk of your overall investments to try to achieve a larger estate. One way to think of this might be to look at your portolio and determine how much you need to invest safely to cover your needs for the rest of your life. If the number is $1 million, and you have $800,000 in assets, then you can’t afford to be too aggressive with your investments. If the number is $1 million, and you have $3 million in investments, then this can guide you to a 67% stock portfolio, which you can afford to ride the stocks up and down, with the educated goal that they will be worth more in say 25 years than if it was invested more conservatively.

Time for an upgrade in your wardrobe for the upcoming vacation.

In all three of these examples, you will notice that none mentioned a sudden 10% drop in the TSX. Asset mix changes made because of great or bad investment markets usually do not pay off in the long run. What tends to pay off is having done your homework on what your financial needs are, to truly understand your ability to handle downside risks in the portfolio, and then to build a portfolio that will allow you to weather the investment sunshine and storms that will inevitably come in the future.

Reproduced from the National Post newspaper article 25th October 2014.

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
(416) 733-3292 x 221

TriDelta Launches High Income Balanced Fund – for Accredited Investors


hibfInitial Investments close November 30th

At TriDelta, we have watched closely as Canadians search for income in a low interest rate world.  One issue we have found is that many Canadian income funds are overly concentrated – with a heavy weighting in Canadian REITs (Real Estate), Canadian Financials, and Canadian Utilities.  This over concentration in a few sectors adds unnecessary risk to investors.

This month, we are proud to launch our High Income Balanced fund.  Initial investments will need to be in by the end of November.  This unique fund will feature a 6% annual target distribution, and will generate income and returns through a few diverse investment strategies.

  1. U.S. Stock strategy – We are using an options enhanced index strategy that has generated higher long-term returns by reducing (or minimizing) losses in a down market.
  2. Canadian Stock strategy – Manager has flexibility to invest in quantitative strategies and sectors offering best total return opportunities, enhanced by a variety of options based strategies to add tax efficient income. Because of the use of options we are able to generate income from all sectors of the market – not just traditional real estate, utilities and financial services.
  3. Enhanced Fixed Income – We are able to generate yields today of over 8% on conservative bonds.  Within our fund, we are able to borrow at just 1.65%.  This variable rate is based on a rate that is 0.65% plus the Bank of Canada Overnight Lending Rate, which is currently at 1.00%.  Outside of the fund, for individual accounts borrowing costs are currently at 4%.For example: We invest in a conservative BCE bond trading at par ($100) with a coupon of 3.95% & maturing in:


    Bond Interest 3.95%
    Spread on Borrowing 2.30% (3.95% – 1.65%)
    Spread on Borrowing $2 4.60% (2 times 2.30%)
    Total Income if we borrow $2 8.55% (3.95% + 4.60%)

    While the borrowing cost is variable, according to the latest from the Bank of Canada announcement, they now have a ‘neutral’ stance on growth, and we don’t believe there will be a meaningful rise in short term interest rates for some time.  There is also an additional opportunity to boost gains by investing in Global bonds with higher yields.

  4. Institutional Style Income Investments – We plan to add institutional investments that generate steady income.  These are pension-style investments in real estate or infrastructure that are not available to individual retail investors – usually because they require several million dollars from each investor.


Who Can Buy The Fund

This fund is available to anyone but with some hurdles.

If you are an accredited investor (this usually means your household has over $1 million of investable assets or your personal annual income is over $200,000 or household annual income is over $300,000), you can invest in the fund with a minimum initial investment of $25,000.

If you are not an accredited investor – the minimum initial investment is $150,000.

We are capping the initial investment at $500,000 per household.

Why Have We Launched a Fund?

As noted, there are a few investment strategies that we feel are very beneficial to our clients, but are more efficient or lower cost in a pooled fund structure.  These would include certain options strategies, the significantly lower borrowing costs which allow us to take advantage of advanced income strategies, and lower trading costs on larger bond transactions.

Investment Fees

The TriDelta High Income Balanced Fund is structured to benefit TriDelta clients.

For TriDelta clients, the fund itself will have a 0% management fee.  Clients will be charged a fee as per our current fee schedule.  This means that depending on the size of your household assets at TriDelta, the fee could range from 0.75% (for assets above $5 million) to 1.95% (for the first $250,000 of investment assets).  In certain cases, this will also make the fund fees tax deductible.

For those investing only in the fund (or with less than $250,000 of investments with TriDelta Investment Counsel), the management fee will be 2.00%.

There will be an administration fee within the fund for all investors that is capped at 0.50% per year.  This administration fee includes all trading costs as well as other costs to the fund such as legal and accounting.

It is worth noting that most funds managed with these advanced strategies have a fee of 2% PLUS what is known as a performance bonus, which can meaningfully add to the fees.  Our fund will have NO performance fees and for TriDelta Investment Counsel clients, will have a fee of under 2%.


The TriDelta High Income Balanced Fund will aim to add to income returns, with a 6% distribution target, and a goal of 6% to 10% long term returns (over a 5 year plus time horizon).  This fund is appropriate for those with a medium-high risk tolerance, and it is intended to be a good complement to your existing portfolio and goals.

If you are interested in learning more about the fund, please contact TriDelta Financial through your Wealth Advisor or through our offices in Toronto at 416-733-3292 x221 or in Oakville at 905-901-3429, so we can include you in our November 30th investment.

For more information on the fund, view our Fund Overview here.

Risk Management Series – Bonds, Part 2


Why Do Bonds Trade at a Premium?

Bond pricing is a function of a number of moving parts: namely, coupon rate, market interest rates, credit quality, and term to maturity.  As a result, bonds often trade at a premium or discount to their maturity value (usually $100); this can cause confusion and frustration for investors.

We outline some of the key elements of bond pricing and its relationship to current market interest rates so that you can better understand how bonds are priced.  As mentioned in Part 1 “Risk Management Series – Bonds”  in between the date when a bond is issued until its maturity date, its market price (the price at which the bond trades in the market) will fluctuate.

When a bond is issued, its coupon rate (interest rate paid on the bond) is reflective of the current market interest rate environment for bonds of similar quality and that have a similar term to maturity.  E.g. if Royal Bank of Canada issues a 5 year bond maturing on September 30, 2018 and the market interest rate for similar bonds is 3.0%, then the coupon rate on the Royal Bank of Canada will be approximately 3.0%.

iStock_000000674097XSmallIf interest rates decline after a bond was issued, then any bond paying a higher coupon rate than the market interest rate should have a premium value.  For example if market interest rates for 5 year bonds decline from 4.0% to 3.0%, then a bond that pays a coupon rate of 4.0% is now worth more, because the investor is receiving 1.0% more in payments per year than the market rate.  Consequently, the bond with the 4.0% coupon should trade at a premium (trade at a higher price than it was issued at) to balance out the higher fixed interest payments.

In order to determine how much of a premium (or discount) each bond should trade at, fixed income (bond) portfolio managers compare bonds of similar quality with similar maturity dates using a calculation called Yield to Maturity (YTM).  This calculation determines the total return an investor can earn on a bond purchase based on: 1) the bond’s current market price, 2) its coupon rate, 3) maturity date and 4) maturity value (usually $100.00).

For example, let’s say Royal Bank issued a 10 year bond in September 2008 paying a 5% coupon rate with a maturity date of September 30, 2018 (Bond A).  Royal Bank also issues a 5 year bond on September 2013 that matures on September 30, 2018 with a coupon of 3.0% (Bond B).  So even though the bonds were issued on different dates, they currently have the same maturity date and as such are quite comparable.

Bond A should trade at a premium because from now until maturity, Bond A investors will receive 2% more each year in interest income than Bond B investors ($10 in total benefit over 5 years).  Based on the yield to maturity calculation, Bond A would have to trade at the premium price of $109.22 to offer a total return of 3% per year for the investor (the higher price offsets the higher interest payments).  Consequently, bond investors today may notice that many of the bonds in their portfolios were bought for prices well above their $100 face values, but that these bonds likely have higher coupon rates.  Bond A’s premium will decline each year (also known as price decay) as it approaches maturity, because it is one less year that you are collecting the higher coupon rate.      To get a fuller picture, investors need to look at both purchase price AND the coupon rate offered by each bond.

The objective of the portfolio manager is to provide the greatest total return to the investor, which includes both the loss (or gain) on the value of the bond PLUS the interest payments received.  If the portfolio manager feels they can earn a higher total return by buying a bond with a higher coupon rate, but it trades at a premium, they will do so.  In the example above, if he can buy Bond A for $108, they could earn 3.25% per year for their clients vs. just 3.0% by buying Bond B.  A large part of a fixed income portfolio manager’s job is to perform these types of comparisons to try to attain higher total returns for clients.

Accumulated Interest

Another reason that a bond may trade at a premium is to reflect accrued interest.  Most bonds only pay interest two times a year (semi-annual payments).  For example if the bond was issued in December, it will make coupon payments in June and December; if the bond was issued in March, it will make coupon payments in March and September.  But, if you buy the bond on the market in between those coupon payment dates, you essentially are getting additional payments.

For example, if a bond makes payments in June and December and you buy the bond in May, you will have held the bond for one month, but you will have received 6 months’ worth of interest.  Bond prices reflect this benefit, typically by adding the accumulated amount of interest owing to the purchase price of the bond.  For example, if a $100 bond is paying a 6% interest rate (paying $3 twice a year) and the investor buys that bond at the end of April, there is $2 of interest already built up, so the bond should trade for $102.

Bond pricing, performance and payments are often quite complex and difficult to understand, because unlike equities where investors generally look primarily at its current market price vs. purchase price to see if they made money on their investment, bonds require analyzing both the purchase price AND coupon payments received.  As described above, there are many times when a bond investment may appear to have a negative return from a price perspective, but has often provided a positive return once you have included the coupon payments.

Illustration of Pricing of Bonds A and B from the article

Bond A Pays a 5.0% coupon.  Bond B pays a 3.0% coupon.  Both bonds mature in 5 years, September 30, 2018.

Annual Coupon Payments Bond A Bond B
September 30, 2014 $5.00 $3.00
September 30, 2015 $5.00 $3.00
September 30, 2016 $5.00 $3.00
September 30, 2017 $5.00 $3.00
September 30, 2018 $5.00 $3.00
Total Payments: $25.00 $15.00
Difference: +$10 Bond A trades at premium due to higher coupon payments
Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
Lorne can be reached by email at or by phone at
416-733-3292 x225

Risk Management Series – Bonds


Are Bonds Still Safe?

Investors have historically been told that bonds, while generally offering lower returns, are the safe portion of their investment portfolio. Over the past few months through mid-September, nearly all bond (fixed income) investors have lost money and in many cases these losses have been greater than 5%. So this raises the following questions: are bonds still a ‘safe’ investment? Why had they gone down recently? What do we expect in the future? Should they still be included in your portfolio?

What are Bonds?

Bonds are a contractual obligation by the borrower (issuer). The borrower (usually a government, government agency or corporation) agrees to pay a specified amount of interest (coupon) for a fixed period of time and to return the principal amount to the investor on the maturity date.

Why are bonds considered Safe Investments?

If you buy a bond issued by a financially strong company or government and you hold that bond until maturity, you nearly always make a positive return, as the bond issuer repays your principal (amount that you originally invested) AND interest. Bonds are considered safer than stocks, because all that has to happen for an investor to earn this positive return is that the company or government not go bankrupt, i.e. if the company is still an operating business on maturity date, the bondholders have to be paid their principal investment and their interest earned. Even in the event of a bankruptcy, bond holders often get paid in part or in full since bond investors have priority to the company’s assets.

Stocks by contrast are not a contractual obligation. Investors buy stock (equity) based on that company’s future earnings, i.e. the company’s ability to increase profits. If the company is unable to increase its net income (profits) over time, its stock is likely to decline in value.

Why have bonds gone down recently?

In between the date that a bond is issued and the date it matures, its price fluctuates based on a number of factors, including: interest rates, general economy, market sentiment and volatility, default risk, liquidity and for foreign bonds, changes in currency values. As a result, investors can earn more or less than the coupon amount (or even experience a loss) during periods of time in between the purchase date and maturity date of the bond. While the two main factors that typically affect bond prices are credit and interest rates (more will be discussed on these factors at the end of the article), the recent price decline has largely been a result of central bank policy, particularly quantitative easing.

iStock_000010237072XSmallQuantitative Easing – The Main Reason for the Recent Drop

Quantitative easing was initiated by the U.S. central bank, the Federal Reserve, as well as the European and Japanese central banks, amongst others, to help stimulate their economies following the Financial Crisis in 2008. These central banks, in addition to setting overnight interest rates near 0%, bought longer maturity government and mortgage bonds to increase money supply and flatten the yield curve. For example, since September 2012, the Federal Reserve has been purchasing $85 billion of longer-date U.S. treasury bonds and mortgage backed securities each month, which equates to over $1 trillion per year .

The aim of quantitative easing is to suppress interest rates for longer-dated bonds. This forces investors into riskier investments to earn a reasonable return, such as corporate bonds, equities and real estate and encourages businesses to invest and consumers to spend because of the low cost of credit. As a result, interest rates on 10 year bonds have been held near historic lows since 2009 and were between only 1.5% to 2.0% for most of the past year.

This changed in April 2013 when the Federal Reserve Chairman, Ben Bernanke and other officers started talking about tapering (reducing) these bond purchases, i.e. reducing and then eliminating the quantitative easing program. Investors feared that without the central bank as buyers that longer-term interest rates might go way up in the future, so many began to sell (i.e. if supply of bonds remains the same and demand (central bank purchases) goes down, yields go up). The interest rate on the 10 year US Treasury for example has gone from 1.62% in early May to 2.94% as of Friday, September 6th. Holders of those 10 year bonds have lost more than 10% during that three-month period as bond prices have gone down, i.e. for current 10 year bonds to move from a yield of 1.6% to 2.94%, their price must drop by over 10%. TriDelta’s own fixed income portfolios experienced losses during that period of 3.4% for Core and 4.7% for Pension.

What Do We Expect for the Future?

While we at TriDelta believe that interest rates are likely to go up in the future, we expect that this process will take much longer than most people believe, perhaps a number of years. We also believe that bond yields have gone up too high and too fast over the past six months. The performance of bonds over the past two weeks seems to back-up this view. The Federal Reserve decided on September 18th to not taper its quantitative easing program. Since then bond prices have gone up over 3% as reflected by the US 10 year bond. We at TriDelta believe there could be a further opportunity over the next number of months to generate more gains as bond yields continue to decline. We also believe that corporate and high yield bonds provide attractive returns as many of these companies are in a strong financial position with low overall level of debt and offer a premium yield to government bonds.

Why Include Bonds in an Investment Portfolio

In addition to being considered the safe part of the portfolio, bonds provide a reliable income stream and have a low and negative correlation with equity markets.* This means that if the equity market declines, bonds are likely to increase in value, providing downside protection for a portfolio. Investors often sell their equity holdings due to fear, these same investors buy bonds during these periods for security. By including bonds in a portfolio, they reduce overall volatility and often enhance overall returns. Lowering volatility also has the benefit of helping investors stick to their financial plan. While we do expect equity markets to be higher in the long-term, there will be periods where we could experience drops, bonds should help protect client portfolio values, enabling them to attain their investment goals.



Key Risks to Consider for Bonds in Normal Markets

Credit Risk reflects the potential that a bond could go into default, i.e. declare bankruptcy or issuer is unable to refinance. In that case, the investor would not be paid their interest and could lose some or all of their principal investment. This potential risk is reflected in the interest rate paid by the issuer. The higher the perceived credit risk (risk of a default), the higher the coupon (interest) rate. Typically, when the economy declines (recession) or growth slows, investors become more worried about the risk of default. Consequently, investors during those instances demand a higher interest rate (coupon) from corporate and high yield bond issuers.

Bond managers can often enhance returns by buying more corporate or high yield bonds when the economy is improving or growing and credit spreads decline and can protect returns by owning more government bonds when the economy is declining. Typically, government bonds pay the lowest interest rate as they are considered the lowest risk, then high quality corporations pay slightly higher, but still low rates, such as BCE, TransCanada Pipeline and the Royal Bank of Canada, with riskier companies, such as Barrick Gold Corpoation, paying a higher coupon.

Maturity Date / Interest Rate Risk – Bonds with longer maturity dates tend to pay a higher interest rate than those with shorter maturity dates. This is because there is more certainty in what will happen in the short-term, so investors are willing to accept a lower interest rate. In the longer-term, there is more uncertainty (will rates go up? will there be higher inflation?), so investors expect to be compensated with a higher interest rate to take on the risk of this greater uncertainty. When short-term interest rates increase as a result, yields on bonds go up (bond prices go down), but not in a uniform way. Yields on bonds with a longer maturity dates could go up more, meaning that their prices drop more. For example, if interest rates go up 1%, a 5 year bond will likely see its price drop by 4-5%, while a 10 year bond will likely see its price drop by 8-10%. The inverse happens when short-term interest rates go down – longer dated bonds prices go up more.

Portfolio Managers who can anticipate when short-term interest rates may rise or drop and adjust the maturity dates of their bond holdings to reflect their views, can enhance returns for their clients.


Lorne can be reached at or by phone at (416) 733-3292 x 225.

Edward can be reached at or by phone at (416) 733-3292 x 229.

TriDelta Investment Counsel Q2 Review – Interest Rates are only part of the picture


How did the markets perform?

The second quarter of 2013 was very mixed across the globe.

  • The Toronto indices were all negative for the quarter, the TSX was down 4.1% and the TSX Small Cap was down 8%.
  • The Canadian Bond Universe was down about 2.4%
  • The U.S. stock markets continued to perform well. The S&P 500 was up 2.9% in local terms and 6.5% in Canadian currency as the Canadian dollar was weak during the quarter.
  • Global stocks were generally down in local terms but still positive when factoring in the weaker Canadian dollar. The EAFE Index (Europe, Australa, Far East) was down almost 1% in local currency and up 2.8% when priced in Canadian dollars.
  • The MSCI Emerging markets index was down 8% and down 4.7% with currency.

So the message for the quarter:

Many markets were down and the Canadian markets were in the middle of the pack.


How did TriDelta perform?

Overall, the second quarter was fairly flat for TriDelta clients – but very positive in comparison to the Canadian market for stocks and bonds.

Virtually all clients outperformed the Canadian Stock and bond markets during the quarter with a range of returns from 1.0% to -2.5%.

The range of performance was primarily determined by model selection and asset mix. The Core (Growth) bond and equities portfolios outperformed the Pension equivalent and portfolios. Those with higher stock allocations outperformed portfolios holding more bonds.

The rationale for Pension underperforming Core during the quarter relates to some of the more defensive and stable dividend paying sectors like Utilities and Telecom which were two of the three worst performing sectors down 5.5% and 9.4% respectively. The worst performing sector for the quarter was Materials which includes mining stocks, was down 23%.

Once again all of our portfolios performed reasonably well under poor stock market conditions.

The key reasons for our decent performance would include:

  1. Meaningful stock exposure to the U.S. Market. At some point this may decline if we feel that the US market valuations are getting ahead of themselves, but we do not believe that is the case today. In addition, the US market gives us strong global exposure to several sectors that Canada lacks.
  2. Very low exposure to Materials stocks, especially precious metals. We never say never when it comes to sectors of the market. There may come a time when we begin to build more in these sectors.
  3. Growth outperformed Value. In general stocks with strong earnings growth profiles performed much better than stocks with very cheap valuations as investors looked for more certainty during the volatile quarter.

What are we doing about rising interest rates?
This seems to be the big question of the day. Clearly one of the big challenges in the quarter was the significant increase in long term interest rates.

This increase that reached a full percentage point for 10 year government bonds was the largest short term increase since 1994.

The immediate impact was for bond prices to fall. Longer term bonds fell more than short term, and corporates fell a little more than government bonds.

In addition, stocks that are deemed interest rate sensitive such as utilities and telecom stocks also fell with the rise in interest rates.5197885_s

The first thing to know is that we believe that the interest rate moves were overdone, and expect bonds to actually perform quite well over the next quarter. We do believe that interest rates will ultimately rise, but it will happen over time and not in major jumps. As a result, we expect the major jump in yields that we just experienced to slowly move lower over the coming months, before it moves ahead further.

We did make a move in late April to shorten the term of our bond holdings, and that helped our performance. We are now moving again to lengthen the term of bond holdings. This is not necessarily a long term move, but one that we believe will bring outperformance through the rest of the year.

In terms of stocks, we continue to believe in dividend growers, strong balance sheets, and consistent earnings, but we are also looking at some sector shifts within these parameters. From a historical perspective, certain sectors do tend to outperform during mid stages of a market recovery and in rising interest rate scenarios. We will continue to be looking for some opportunities in sectors like technology and energy. This is a slow shift that we believe will position portfolios better for growth in 2014.

For those who believe that it is time to sell all bonds and go into stocks, keep in mind the purpose of bonds is both for income and stability of the overall portfolio. Bonds can go down in value as they did last quarter, but in the last 61 years, the very worst period was from June 1980 to July 1981. During this unique time of soaring interest rates and high inflation, the prime rate surpassed 20%.

The total return for the bond market during that period was minus 11%. This is certainly a poor return, but keep in mind how different the inflation scenario is that we see today. In most years, bonds provide steady single digit returns. Stocks have been much more volatile. This basic fact leads to a fundamental investment belief.

The right mix of stocks and bonds for an individual can see some shifting based on markets, but in general, if you are risk averse, and holding 30% in stocks, we do not believe you should make a radical shift. The market will do its thing regardless of everyone’s beliefs, and you need to maintain your appropriate asset allocation and risk profile. To make major changes (often after the fact) is usually one of the biggest investment mistakes people can make.

More thoughts on Bonds

  • The latest bond sell-off was due to a combination of news that the US Fed sees “diminished downside risks to the outlook” and Bernanke’s comments that the Fed may trim its $85 billion bond buying initiative. The timing suggested it could start this year and end around mid-2014 if the economy grows in line with their forecast. This was not new news. This news has been in the market place as early as the turn of 2013. However, it certainly triggered a flight from bonds.
  • Fast money, ETF trading, and new pricing levels were the catalyst for the extreme ranges traded in such a short period. Get me out – now – mentality prevailed, and once that trade has passed, more rational trading ensued.
  • Tame inflation expectations and mixed economic releases argue for a new trading range with 10-yr yields between 2.00% and 2.50%, but not for the higher yields doomsayers are suggesting. If the recovery continues, ending of Quantitative Easing is still not tightening of US monetary policy. It’s a move to neutrality, and if history is a guide, central banks could be neutral for quite a while.
  • As active managers, and with an extremely liquid portfolio of holdings, we have positioned our portfolios to take advantage of the volatility that will be the norm until the markets enter the next interest rate cycle.

Why less Quantitative Easing is Just a Shell Game

We believe that a reduction in Quantitative Easing purchases will potentially overlap with reduced borrowing requirements of the US government. How ironic would this be if the pay down of debt matches the gradual reduction to Quantitative Easing? At some point, the disappearance of Quantitative Easing will overshadow the reduction of supply; however, by then, market participants will be focused on the next big issue.


What about the rest of the year?

For the rest of 2013 we expect the markets to move around in the ranges already established during the first half of the year. In other words we see limited upside and a couple of short term corrections that will provide some decent buying opportunities.

The risks and news items that may cause a correction are many and are well know to the market as they have been climbing these walls of worry since late 2012 and include the following:

  • The U.S. Fed slowing quantitative easing
  • Sequestration in the U.S. continues and is a drag on economic growth
  • Portugal, Italy and Greece continue to struggle
  • Growth in China slows
  • Continued political turmoil in many Emerging Market economies

Overall we continue to see the positive side winning out in the longer term:

  • Earnings growth continues to be positive
  • The U.S. jobs and economic data continue to improve
  • Stocks are still attractively priced
  • Few alternatives for investment dollars since GIC and cash rates are still very low
  • Global support from central banks to stimulate the economy continues to be in place

We have been raising cash in all portfolios recently and are continuing to looking for opportunities to sell call options for some clients on a number of holdings to help generate excess return and income if the markets pull back.

Dividend changes

Many of our holdings continued to increase their dividends during the second quarter. The following nine companies increased dividends and none of our holdings decreased their dividend paid over the last three months.

Company Name % Dividend Increase
Suncor Energy 53.80%
Potash Corp 25.00%
Apple Inc. 15.09%
Exxon Mobile 10.53%
Weston 10.50%
Baxter Intl 8.90%
Johnson & Johnson 8.20%
National Bank 4.80%
Canadian Imperial Bank 2.10%



Investment management is never easy, and the rush to get out of bonds is a great example of emotional decision making. It can be very hard to act against the emotional pull to sell something when everyone seems to be bailing.

When we step back and look at the world in July 2013, we see reasonable market valuations. Keep in mind that from deep recessions come long recoveries. We believe we remain solidly in this recovery phase. It won’t rise in a straight line, and we may very well see more volatility this summer, but the general trend remains positive for stock markets, with room for decent bond returns on an actively managed basis.


TriDelta Investment Management Committee

Cameron Winser

VP, Equities

Edward Jong

VP, Fixed Income

Ted Rechtshaffen

President and CEO

Anton Tucker

Executive VP

TriDelta Investment Counsel – Q1 2013 Investment Review and Outlook


How did the Markets Perform?

The first quarter of 2013 was one of degrees of good for stock markets.

  • For the U.S. stock markets it was great. S&P 500 was up 10.5% (in Canadian currency).
  • For Global stock markets it was very good. The Global (outside of the Americas) EAFE was up 8.3% (in Canadian currency).
  • For the Toronto stock market it was good. The TSX ended the quarter up 3.3%.

The Canadian Bond Universe was up about 0.6%.

So the message for the quarter:

Everything was up, but Canada was a bit of a laggard versus the rest of the world.


How did TriDelta Perform?

The first quarter of 2013 was a very good one for TriDelta.

Virtually all clients outperformed both the Toronto Stock market and the Canadian bond index. Returns ranged from 3% to 7%.

This range of performances is tied closely to the clients risk tolerance.  Those with more of a stock & growth focus have outperformed to a larger extent than those with a conservative, fixed income weighted portfolio.

What is key for TriDelta is that our portfolios overall have a lower risk profile designed to outperform in poor stock markets. This is why we are particularly pleased that we also managed to outperform in strong markets.

The key reasons for our strong performance would include:

  1. Meaningful stock exposure to the U.S. Market. This has been a focus for TriDelta, and will likely continue for the foreseeable future. Among the reasons is that for risk management, we believe that Canadians need greater diversification than the Toronto market provides, and that at this point, there still remains many cases of better value outside of Canada.
  2. Focus on corporate bonds vs. Governments, and a belief that greater returns will be found in longer term bonds. We believe that long term interest rates will continue to remain low for the near future, and will allow us to deliver better bond returns than in the short term end of the market. This view may change during the course of 2013, but not today.
  3. Focus on companies with growing cash flows, which leads to growing dividends. This is not a get rich quick strategy. This is a ‘slow and steady wins the race’ strategy. This quarter, 16 of our holdings raised dividends and not one lowered. These are signs of stable growth.


Will we see Good Markets the rest of the Year?

In 2iStock_000000674097XSmall010, markets were up over 10%. However, there was still a period of over 15% decline during the year.

In 2012, the S&P 500 was up over 10%. During the year, it still had a 10% decline during the year.

The answer to the question is that at some point in 2013 there will likely be a meaningful decline. Possibly trading down to a 10% decline from its high. We’re unlikely to see consistently good markets for the rest of the year, but the key word is ‘consistently’. The markets remain volatile as they trend higher or lower, but we see many reasons to be positive for the rest of the year.

They include:

  • The U.S. economic trend is positive. There is growing house prices and an improvement in the unemployment numbers.
  • This positive economic trend is coupled with U.S. Government economic stimulus which is allowing companies (and individuals) to borrow funds at incredibly low rates. This combination is very rare and leads to extra strong stock market returns. The U.S. government is essentially committed to most of this stimulus through the end of the year.
  • If not investing in the market, you can only earn 1% or 2% (if invested well) on GICs and cash. The safe alternative is looking much weaker.
  • Europe is bad but stable. The Cyprus banking ‘crisis’ was met with a yawn from Global markets.  This was because of the confidence that is now in place in the European Central Bank and major governments to be able to stick handle their way through. Perhaps this confidence is unfounded, but it seems to be in place.
  • Asian growth appears to be on track despite some bumps over the past year.

One other note might be helpful for those looking for more positive signals.

There have been nine years since 1960 in which the S&P 500 rose more than 5% in January. 2013 is the tenth year it has happened. In eight of those nine instances, the market finished those years higher, with the lone outlier coming in 1987, due to the October crash.

The S&P 500 has averaged a 13% gain from February through the end of the year in those nine years.


When will Canadian Markets catch up?
This is a tough one to answer. Because of the concentrated nature of the Toronto Stock Exchange, the question really is, “When Will Energy, Mining and Precious Metals Do Better than the US Market?”

There are certainly components of the Canadian market that remain strong and steady, but Energy and particularly Mining and Precious Metals has underperformed. The Global Gold index is down 22% over the last year!! The Energy index is down 2%, while the Global Mining Index is down 12%.

These areas of the market are very cyclical and because of their volatility, tend to be areas that TriDelta is often underweight. We’re typically overweight companies that are under-valued, have good balanced sheets and have growing dividends. While these aren’t the hallmarks of energy and metals stocks, because of the downturn, there are several names that are looking more attractive.

While we are not going to predict when this cycle will turn, the catalysts will include strong growth signs from China and India, along with the natural sector rotation from a hot sector like Health Care (up 28% in the past year) to a cold sector. We consistently seek value among names regardless of sector, and look to sell some winners that become expensive. Given what has been happening in the market, this may involve some new money going into energy and metals in the coming months.


Dividend changes

We are strong believers in the power of dividend growth, and look to hold stocks that based on our analysis, are good bets to grow their dividends over time. This quarter was no exception, with 16 companies increasing dividends, and none decreasing.


Company Name % Dividend Increase
Cisco Systems 21%
Magna International 16%
Canadian National Railways 15%
Atco 15%
Rogers Communications 10%
Colgate Palmolive 10%
Canadian Utilities 10%
United Parcel Service (UPS) 9%
3M 8%
Pason Systems 8%
Lorillard 6%
Bank of Nova Scotia 5%
TD Bank 5%
RBC 5%
Transcanada Corp. 5%
BCE 3%


At TriDelta we look forward to providing our current clients and new clients with three key deliverables:

  • A financial plan that gives you a roadmap, financial peace of mind to do more with your wealth and smart tax planning.
  • An investment plan that fits within your larger financial plan. An investment plan that will help you to achieve the long term life goals that you have set out.
  • An investment approach that lowers volatility, delivers increasing income, and uses proven financial discipline and mathematics to underscore buy and sell decisions.

The first quarter extends our strong 2012 performance, and has been a great example of achieving above average risk adjusted returns. In a world of low interest rates and low growth, we strongly believe our investment approach and philosophy is well suited to outperform.

We look forward to the challenges and celebrations in front of us in the remaining 9 months of 2013.


TriDelta Investment Management Committee

Cameron Winser

VP, Equities

Edward Jong

VP, Fixed Income


Ted Rechtshaffen

President and CEO

Anton Tucker

VP, Business Development