Initial Value $50,000.00
October 25, 2017
Update Value $51,480.92
May 13, 2019
By Gordon Pape
I continue to receive email from readers asking for investment recommendations that don’t carry any risk. There are none – even cash has a risk (inflation).
But there are ways to minimize the risk in a portfolio and that’s what this one is all about. It was created out of the merger of two previous portfolios in the fall of 2017. The goal is to minimize any stock market losses while providing a return that is at least a point and a half better than the top GIC rate. Right now, that is 3.25% at Maxa Financial so our current target is 4.75%.
The portfolio is comprised of the following securities. Here is an update on their performance with prices as of the afternoon of May 8.
iShares Core Canadian Universe Bond Index ETF (TSX: XBB). This ETF tracks the performance of the broad Canadian bond market, including both government and corporate bonds. Bonds rebounded after the Bank of Canada and the Federal Reserve Board suspended interest rate hikes for the next few months. As a result, the unit value of this ETF is up $1.42 since our last review. Also, we received $0.444 per unit in distributions for a total return for the period of 6.2%.
PIMCO Monthly Income Fund (TSX: PMIF). This ETF invests in non-Canadian fixed income securities from around the world. It has also benefitted from the pause in rate hikes and is up $0.49 per unit since the last review. Distributions are paid monthly but they vary significantly. We received a total of about $0.44 per unit since the last update, including a year-end payment of just over $0.20 per unit.
First Asset Enhanced Short Duration Bond ETF (TSX: FSB). This ETF invests in a portfolio that is divided between short duration high-yield securities and investment grade corporate bonds. It gained $0.02 per unit in the latest period and we received monthly distributions totaling $0.12 ($0.02 per month) so we ended up slightly ahead.
Canadian Utilities Rate Reset Preferred Shares (TSX: CU.PR.I). This is a rate reset from a leading utility company. We added it to the portfolio a year ago in anticipation of rising rates that would benefit rate reset preferreds. The change in policy by the central banks has put a damper on that thesis, however. With dividends, we have just about broken even on this position.
Royal Bank (TSX, NYSE: RY). Royal’s share price hit a 52-week low of $90.10 in December. It then rallied to $107.91 last month before retreating slightly to the current level of $106.26. That’s up $11.38 from the time of our last review. The bank raised its quarterly dividend by 4.1% to $1.02, effective with the April payment.
Dream Global REIT (TSX: DRG.UN). This REIT focuses on business properties in Europe. It took a hit in mid-2018, dropping into a loss position in this portfolio. But the units made a modest recovery of $0.50 in the latest period and with distributions included we are now sitting at slightly above break-even.
Sun Life Financial (TSX, NYSE: SLF). This stock was added to the portfolio last May and immediately went into a dive. However, it has since turned things around and is up $7.61 since the last review. We received two dividend payments during the period, for a total of $1 per share.
Apple (NDQ: AAPL). Apple shares dropped as low as US$142 in the December market sell-off before rallying. But we are still down US$16.86 from the last review. We received two dividends of US$0.73 each.
Cash. We received interest of $14.26 from the $1,240.34 held in our on-line account at EQ Bank.
The portfolio gained 5.6% in the latest period, led by the contributions of Royal Bank and Sun Life. Every security in the portfolio gained ground with the exception of Apple. So, for this period we outperformed our target.
Since inception, however, we are up only 3%, which is well short of our goal. Putting a positive spin on that, it’s a significant improvement from the -2.5% we were sitting at last October.
The asset mix remains conservative. Just over 56% of the portfolio is invested in bonds, preferred shares, and cash. Another 26% is in banks and insurance companies. But there are some weak spots that need to be addressed.
We will sell our position in Apple. We have a small profit, but the stock has become too volatile for a portfolio of this type. The sale will give us $4,102.60 to reinvest.
We will also sell out units of Dream Global REIT, which has been weaker than the overall REIT market recently. That will give us $4,458.02. So, the total amount to reinvest is $8,560.62.
We will redeploy this money as follows.
BMO Low Volatility Canadian Equity ETF (TSX: ZLB). This fund invests in a portfolio of Canadian stocks that are less sensitive to overall market moves – in technical terms, they have a low beta. These stocks are not risk-free, but they will normally lose less when the market declines. Conversely, they will tend to underperform in rising markets.
This ETF has been an excellent performer, with a five-year average annual rate of return of 11.2% to April 30. The MER is 0.39%.
The units are trading at $32.82 as of the time of writing. We will buy 120 units for a total cost of $3,938.40.
iShares Edge MSCI Minimum Volatility USA Index ETF (TSX: XMU). This fund also takes a low beta approach to stock selection, but its focus is the U.S. market. Many of the names in the portfolio will be familiar to all investors, including McDonald’s, PepsiCo, and Johnson & Johnson.
The fund has an excellent performance record with a five-year average annual compound rate of return of 16.8% to April 30. The MER is 0.33%.
The units are current trading at $54.12. We will buy 85 units for a cost of $4,600.20.
The remaining $22.02 will be added to our cash account.
We will also buy another 10 units of XBB for a total of $313.70. That will bring our total to 260 units and reduce retained earnings to $38.30.
We are left with cash and retained earnings of $1,240.34, which we will move to Motive Financial, which is currently offering a rate of 2.8%.
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