TII Balanced

return 2% more than the highest-paying GIC

Sell-0ff Hits Balanced Portfolio

By Gordon Pape

This is a difficult time for everyone, both from a personal and financial point of view. On the one hand, we’re all struggling to keep ourselves and our families healthy. On the other, we’re trying to make the best of a deteriorating financial situation.

The Balanced Portfolio I created eight and a half years ago provides for a reasonable mix of stocks and bonds. We knew right from the start that meant an underperformance when stock markets were strong but would reduce risk when another Bear Market emerged. That’s where we are today, and although the portfolio has taken a hit, it’s nowhere near as bad as the major stock indexes.

One reason for that is that at the time of the last update, I made moves to increase the bond weighting to 42.5% from 34.5%. Bonds have lost ground recently, but they’ve done much better than the stock market.

This portfolio was launched in September 2011, with an initial valuation of $25,027.75. The goal was to achieve a return that at least matched the best available five-year GIC rate plus two percentage points.

That means the target varies with the rise and fall of interest rates. The best rate I can find right now is 2.95% from Oaken Financial, which would make our current target 4.95%

Here’s a summary of how the securities we currently hold performed over the period since I last reviewed this portfolio in September. Prices are as of the close of trading on March 20.

iShares Canadian Short Term Bond Index ETF (TSX: XSB). Short-term bonds (maturities of five years or less) don’t offer a high return, but they normally provide portfolio stability and limit downside risk. The unit price was down $0.77 in the latest period, but we received distributions of $0.325 per unit, so we ended up with a small loss of 1.6%. Even a slight decline is unusual in a short-term bond fund such as this, but the bond market has been under some pressure as investors rush into cash.

iShares Canadian Universe Bond ETF (TSX: XBB).  We saw a similar pattern with this fund. Despite the drastic cut in interest rates in both the U.S. and Canada, the unit price of this ETF dropped $1.48 since the last update. Distributions totalled $0.44 per unit, so we ended the period with a decline of 3.2%.

iShares Convertible Bond ETF (BATS: ICVT). This ETF invests in a portfolio of convertible bonds, mainly issued by U.S. companies. Convertibles offer a play on both the stock and bond markets. You receive interest on the bond plus potential for a capital gain if the share price rises. Now, with heavy stock market losses, convertible bonds have lost their appeal and this ETF is off $9.83 (figures are in U.S. dollars) since our last update. Monthly distributions totaled $0.707. This fund is obviously unsuited to the current environment and will be replaced.

 Canadian Apartment Properties REIT (TSX: CAR.UN). This REIT invests in apartment units across Canada. It’s an interest-sensitive security, which should be performing well at time when rates are falling. But investors are concerned that the large numbers of layoffs resulting from coronavirus will cause many people to default on their rents. The units are off more than $10 from the last review, an extraordinary drop – but these are extraordinary times. We received distributions totaling $0.69 per unit.

 Pembina Pipeline (TSX: PPL, NYSE: PBA). As if the coronavirus wasn’t enough, the energy sector was slammed by the Russia-Saudi Arabia price war that sent oil prices plummeting around the world. Pembina is not an oil producer, but it is an integral part of the energy sector and its shares reacted accordingly, losing more than half their value. However, in this case investor reaction may have been overdone. The company announced it is slashing capital spending this year and deferring new projects. But it is maintaining its monthly dividend of $0.21 a share, saying it “is more than covered by fee-based cash flows, meaning the company is not reliant on the direct commodity price exposed portion of the business to support the dividend.”

Brookfield Renewable Energy Limited Partnership (TSX: BEP.UN, NYSE: BEP). This renewable energy limited partnership is actually ahead since our last review, up by a little more than $2. However, it had been much higher, topping $76 at one point before the market cratered. The distribution was increased by 5.3%, to $0.5425 per quarter.

 Brookfield Infrastructure Limited Partnership (TSX: BIP.UN, NYSE: BIP). This Brookfield partnership invests in infrastructure projects world-wide: railroads; ports; transmission lines; toll roads; etc. With the world economy slowing down, demand for some of these services will temporarily slacken, resulting in a price drop of $16.20 since the last review. The quarterly distribution is up 7%, to US$53.75.

Bank of Montreal (TSX, NYSE: BMO). The financial sector has been hit hard by the selloff, probably too much so. Canadian banks are among the best capitalized in the world, and all survived the financial crisis of 2008 without need of government assistance. At this new low price, the shares yield 6.8%.

 Cash. We invested $2,021.22 in a high interest savings account with Motive Financial that was paying 2.8% at the time. We earned interest of $28.30 for the period.

Here’s how the portfolio stands now. Commissions have not been factored in. For simplicity, Canadian and U.S. dollars are treated as being at par for purposes of the calculations.

Income Investor Balanced Portfolio (a/o March 20/20)

Security	Weight %	Total Shares	Average Cost	Book Value	Market Price	Market Value	Retained Income	Gain/ Loss %
XSB	11.9	160	$28.40	$4,543.20	$26.80	$4,288.00	$70.26	–  4.1
XBB	21.4	250	$32.04	$8,010.20	$30.71	$7,677.50	$110.00	– 2.8
ICVT	13.1	95	$59.39	$5,642.05	$49.50	$4,702.50	$303.82	-11.3
CAR.UN	9.8	80	$49.69	$3,975.20	$44.07	$3,525.60	$101.20	– 8.8
PPL	4.5	70	$50.20	$3,514.00	$23.12	$1,618.40	$154.70	-49.5
BEP.UN	18.8	130	$28.55	$3,711.50	$52.00	$6,760.00	$597.54	+98.2
BIP.UN	11.8	90	$22.15	$1,993.50	$47.10	$4,239.00	$423.91	+133.9
BMO	6.9	40	$108.26	$4,330.40	$62.26	$2,490.40	$243.20	-36.9
Cash	1.8			$566.34		$594.64
Total	100.0			$36,286.39		$35,896.04	$2,004.63	+ 4.4
Inception				$25,027.75				+51.4

Comments: The portfolio is down 13.96% since the last review. No one likes to take a loss of that magnitude, but it’s a lot better than the performance of the S&P/TSX Composite Index during that period. Bonds did not hold up as well as expected, but their losses were much less than those on the equities side.

The cumulative gain since inception eight and a half years ago is 51.4%. That works out to an annual compound growth rate of 5%. That’s just about on target.

Changes: As mentioned earlier, a convertible bond fund is not a desirable holding at this point in time. Therefore, we will sell our position in ICVT for a total $4,702.50. Combined with retained earnings, that gives us cash of $5,006.32.

We are also selling our position in XSB. A short-term bond fund should be doing better than this one is, so we’ll cash out. With retained earnings, we have $4,358.26.

We will invest all this money in CI First Asset High Interest Savings ETF (TSX: CSAV). The fund invests in high-interest savings accounts at five Canadian banks – CIBC, RBC, BMO, Scotiabank, and National Bank – at above-average negotiated rates. The unit price hardly ever budges from the $50.00-$50.10 range, but you receive monthly distributions, the most recent being for $0.0807 per unit. The management fee is 0.14%. The price at the time of writing is $50.06. We will buy 185 shares for $9,261.10. The balance of $103.48 will go to the cash account.

A word of warning. You may be frustrated trying to buy this ETF. Readers have reported that some major bank discount brokerages will not allow it to be purchased on their system. If you run into that roadblock, make your dissatisfaction known and look for another purchase alternative. If you can’t find one, hold the cash.

Some readers may wonder why we’re not selling Pembina. The answer is that I think it would be a panic move. This is a well-managed company whose stock price has been hit by the oil price war, even though it is not an oil producer. The board of directors has made a series of tough but prudent decisions and has decided to maintain the dividend. I expect this stock to be trading higher a year from now, so we’re retaining it.

We now have a cash balance of $2,328.67, which will continue to be invested with Motive Financial’s Savvy Savings Account. The rate has dropped to 2.2%, but that still looks pretty good right now.

Here is the revised portfolio. I will review it again in September when, hopefully, the world will be a better place.

Income Investor Balanced Portfolio (revised March 20/20)

Security	Weight %	Total Shares	Average Cost	Book Value	Market Price	Market Value	Retained Income
CSAV	25.5	185	$50.06	$9,261.10	$50.06	$9,261.10	$0
XBB	21.2	250	$32.04	$8,010.20	$30.71	$7,677.50	$110.00
CAR.UN	9.7	80	$49.69	$3,975.20	$44.07	$3,525.60	$101.20
PPL	4.5	70	$50.20	$3,514.00	$23.12	$1,618.40	$154.70
BEP.UN	18.6	130	$28.55	$3,711.50	$52.00	$6,760.00	$597.54
BIP.UN	11.7	90	$22.15	$1,993.50	$47.10	$4,239.00	$423.91
BMO	6.9	40	$108.26	$4,330.40	$62.26	$2,490.40	$243.20
Cash	1.9			$698.12		$698.12
Total	100.0			$35,494.02		$36,270.12	$1,630.55
Inception				$25,027.75

 

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