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TOUGH TIMES FOR CONSERVATIVE PORTFOLIOS
By Gordon Pape, Editor and Publisher
RRSP portfolios should err on the side of caution. Ideally, your strategy should be never to lose money in a retirement plan.
But sometimes being too conservative can backfire. Like, right now. All interest-sensitive securities are taking a beating and that will likely continue until we finally hear our central bankers proclaim victory over inflation and an end to rate hikes.
That may take a while. Last spring, it looked as though the fight was almost over. It turns out, it wasn’t – the latest CPI numbers show inflation is creeping higher again. That has produced a range of undesirable effects, from growing labour unrest over wages to skyrocketing rents and unaffordable house prices.
Not to mention the erosion of RRSP values.
Our RRSP Portfolio was launched in February 2012. It has two main objectives: to preserve capital and to earn a higher rate of return than you could get from a GIC. The original value was $25,031.92.
As of the last review, about 30% of the portfolio was in bonds, preferred shares, and cash. The balance was in growth-oriented assets that offer exposure to the Canadian, US, and international equity markets. Most of the equity exposure was to interest sensitive stocks like pipelines, utilities, and telecoms. The combination isn’t working well in the current environment.
The portfolio contains a mix of ETFs, stocks, and limited partnerships so readers who wish to replicate it must have a self-directed RRSP with a brokerage firm.
These are the securities currently in the portfolio with comments on how they have performed since the last review in February. Results are as of the afternoon of Aug. 24.
iShares 0-5 Years TIPS Bond Index ETF (TSX: XSTP). This ETF invests in short-term US Government inflation protected notes. They pay a low rate of return, but both the face value and the interest increase as inflation rises. This provides downside portfolio protection. The units are up $0.22 since the last review in February. We received distributions that totaled $0.665 per unit, including the Aug. 25 payout. Note that while distributions are monthly, they vary considerably and some months the payout is zero.
iShares Canadian Universe Bond Index ETF (TSX: XBB). This ETF tracks the performance of the total Canadian bond universe including government and corporate issues. Bonds staged a modest rally early in the year but have fallen back recently as stubbornly high inflation has sparked concerns of more interest rate hikes to come. The units are down $0.99 since the last review. We received distributions of $0.491 per unit, including the Aug. 25 payment.
iShares Convertible Bond Index ETF (TSX: CVD). This fund invests in bonds that can be converted into common stocks under certain conditions. It offers a play on the stock market while providing cash flow. The units lost $0.86 in the latest period. That was partially offset by distributions of $0.507 per unit, including Aug. 25.
iShares S&P/TSX Canadian Preferred Share Index ETF (TSX: CPD). This ETF invests in a portfolio of preferred shares, mostly rate reset issues. These should tend to rise as interest rates move higher, but we didn’t see that in 2022 as the units dropped 18.4%. It’s been a similar story this year, with the fund down 2.3% as of Aug. 23. This has become a minefield for investors. Distributions totaled $0.314 per unit.
BMO S&P/TSX Banks Equal Weight Index ETF (TSX: ZEB). This ETF invests in shares of the Big Six Canadian banks. Banking stocks normally fare well in a rising interest rate environment, but recession fears are outweighing the improvement in loan margins in investors’ minds. The units lost $4.40 since the last review. Monthly distributions totaled $0.84.
iShares Edge MSCI Minimum Volatility USA Index ETF (CAD-Hedged) (TSX: XMS). XMS invests in low-beta US stocks such as Eli Lilly, Oracle, Cisco Systems, and IBM. Low beta means they are less sensitive to broad market movements and, in theory, less risky. The fund posted a gain of $0.72 in the latest six months. Quarterly distributions totaled $0.199 per unit.
BMO Low Volatility Canadian Equity ETF (TSX: ZLB). This ETF invests in a portfolio of large-cap Canadian stocks that have a low beta history. It’s down $0.85 since the last review, but well ahead since it was added to the portfolio. We received two quarterly distributions for a total of $0.56.
BMO Low Volatility International Equity Hedged to Canadian Dollar ETF (TSX: ZLD). This ETF focuses on international stocks and is hedged to Canadian dollars, so the currency risk is removed. It gained a modest $0.05 in the latest period. Distributions totaled $0.34 per unit.
Brookfield Corporation (TSX, NYSE: BN). At the time of our last review, we sold our positions in the two Brookfield limited partnerships (energy and infrastructure) and bought shares in the parent corporation. The idea was to gain more diversity by adding exposure to other aspects of the business such as real estate, asset management, and insurance. So far, it hasn’t worked well but I believe that this will be a money-making addition to the portfolio over the long term.
Enbridge (TSX, NYSE: ENB). We added 100 shares of Enbridge to the portfolio at the time of our last review. The stock offers an attractive yield (currently 7.6%) and modest capital gains potential. However, interest sensitive stocks are currently out of favour so we’re in negative territory thus far. I expect that to change over the next 12-18 months.
Fortis Inc. (TSX, NYSE: FTS). Here’s another interest sensitive stock that is under pressure, although this one pretty much held its ground in the latest period, losing just $0.10 a share. Dividends more than made up for that. Due to timing, we received three payments for a total of $1.695 per share.
BCE Inc. (TSX, NYSE: BCE). BCE was also driven lower by the rapid interest rate hikes. The stock is down $4.46 since the last review. We received two quarterly dividends for a total of $1.935 per share.
Interest. We invested $2,473.03 in Duca Credit Union, which was offering a special promotion rate of 4.25%, increasing to 4.75%. We received $55.64 in interest.
Here is how the RRSP Portfolio stood as of Aug. 24. Commissions have not been factored in. All amounts are in Canadian dollars.
IWB RRSP Portfolio (a/o Aug. 24/23)
| Security | Weight
% |
Shares | Average
Price |
Book
Value |
Current
Price |
Market
Value |
Retained
Income |
Gain/
Loss % |
| XSTP | 9.2 | 130 | $40.00 | $5,200.00 | $39.95 | $5,193.50 | $368.03 | +7.0 |
| XBB | 10.5 | 220 | $32.82 | $7,170.21 | $26.81 | $5,898.20 | $108.02 | -16.2 |
| CVD | 3.2 | 110 | $18.20 | $2,002.50 | $16.39 | $1,802.90 | $215.30 | +0.8 |
| CPD | 5.1 | 280 | $13.86 | $3,880.80 | $10.22 | $2,861.60 | $255.36 | -19.7 |
| ZEB | 9.9 | 170 | $42.46 | $7,218.20 | $32.58 | $5,538.60 | $391.00 | -17.9 |
| XMS | 8.3 | 150 | $28.19 | $4,228.50 | $31.16 | $4,674.00 | $237.75 | +16.2 |
| ZLB | 11.4 | 160 | $31.97 | $5,114.80 | $40.06 | $6,409.60 | $191.28 | +29.1 |
| ZLD | 4.8 | 110 | $24.08 | $2,649.30 | $24.58 | $2,703.80 | $37.40 | +3.5 |
| BN | 15.7 | 200 | $49.53 | $9,886.00 | $43.99 | $8,798.00 | $28.00 | -10.7 |
| ENB | 8.3 | 100 | $52.90 | $5,290.00 | $46.42 | $4,642.00 | $177.50 | -8.9 |
| FTS | 6.7 | 70 | $57.67 | $4,050.90 | $53.52 | $3,746.40 | $343.35 | +1.0 |
| BCE | 6.0 | 60 | $65.07 | $3,904.20 | $56.19 | $3,371.40 | $641.82 | +2.8 |
| Cash | 0.9 | $466.28 | $521.92 | |||||
| Totals | 100.0 | $61,061.59 | $56,161.92 | $2,994.81 | -3.1 | |||
| Inception | $25,031.92 | +136.3 |
Comments: At the start of the year it looked as though we might be approaching the end of the current round of rate hikes. The Bank of Canada even paused at one point, raising expectations that the cycle was over. Then inflation started to rise again, and central bankers were quick to signal they weren’t done tightening yet.
The impact on conservative portfolios, which tend to have large commitments to bond and interest-sensitive stocks, has been to pull down valuations. Our RRSP portfolio is down about 4% from our last review in February. It could have been worse, but I never like to lose money in an RRSP.
Over the 11.5 years since the portfolio was launched, we have a total return of 136.3%. That’s an average annual growth rate of 7.77%. That’s down over the past year but still well above target.
Changes: After a strong start to the year, bonds have been losing ground as uncertainty builds over the near-term course of interest rates. I don’t see that changing for the rest of the year, so I suggest moving most of our bond and preferred share positions to a high-interest savings ETF.
Accordingly, we will sell our holdings in XBB, CUD, and CPB for a total of $11,141.38, including retained earnings. We will invest that money in the CI High Interest Savings ETF (TSX: CSAV) which was trading at $50 at the time of writing. This fund invests in high-interest deposit accounts at Canada’s major banks. It earns a better rate of return than a retail customer because of its hefty purchasing power – the fund has $8.1 billion in net assets.
The MER is 0.16%. That is on the high side for what is nothing more than a glorified savings account, but that hasn’t bothered investors.
Monthly distributions vary but have been increasing as interest rates rise. The July payment was $0.203. At that rate, the current yield is 4.9% but future distributions depend on interest rate movements.
CSAV is not your only option. Other companies that offer similar products are Horizons (which has three funds, one in US dollars), Purpose, Ninepoint, and the banks. Some brokers connected to a bank, may not offer access to outside funds, forcing you to buy one of its proprietary products.
We’ll buy 220 units of CSAV for an investment of $11,000. We’ll add the balance of $141.38 to our cash account.
We will use retained earnings to add to these positions:
ZEB – We’ll buy 10 units at $32.58, for a cost of $325.80. We now have 180 units with retained earnings of $65.20. This investment hasn’t done well so far but bank stocks will recover.
BCE – While the price is down, we’ll buy another 10 shares at $56.19 for an expense of $561.90. We now own 70 shares and retained earnings are reduced to $79.92.
The new cash balance (including retained income) is $2,191.73. We will keep it at Duca Credit Union which is now offering 5.25%.
Here is the revised portfolio. I’ll review it again in February.
IWB RRSP Portfolio (Revised Aug. 24/23)
| Security | Weight
% |
Shares | Average
Price |
Book
Value |
Current
Price |
Market
Value |
Retained
Income |
| XSTP | 9.0 | 130 | $40.00 | $5,200.00 | $39.95 | $5,193.50 | $368.03 |
| CSAV | 19.1 | 220 | $50.00 | $11,000.00 | $50.00 | $11,000.00 | $0 |
| ZEB | 10.2 | 180 | $41.91 | $7,544.00 | $32.58 | $5,864.40 | $65.20 |
| XMS | 8.1 | 150 | $28.19 | $4,228.50 | $31.16 | $4,674.00 | $237.75 |
| ZLB | 11.1 | 160 | $31.97 | $5,114.80 | $40.06 | $6,409.60 | $191.28 |
| ZLD | 4.7 | 110 | $24.08 | $2,649.30 | $24.58 | $2,703.80 | $37.40 |
| BN | 15.3 | 200 | $49.53 | $9,886.00 | $43.99 | $8,798.00 | $28.00 |
| ENB | 8.1 | 100 | $52.90 | $5,290.00 | $46.42 | $4,642.00 | $177.50 |
| FTS | 6.5 | 70 | $57.67 | $4,050.90 | $53.52 | $3,746.40 | $343.35 |
| BCE | 6.8 | 70 | $63.80 | $4,466.10 | $56.19 | $3,933.30 | $79.92 |
| Cash | 1.1 | $663.30 | $663.30 | ||||
| Totals | 100.0 | $60,029.90 | $57,628.30 | $1,528.43 | |||
| Inception | $25,031.92 |