TII Balanced

Target: return 2% more than the highest-paying GIC

Bear Bites Balanced Portfolio

By Gordon Pape

There are times when almost every investment you look at is going up. This is not one of them. Despite the recent rally, North American stock markets have posted big losses this year.

It’s periods like this when people have to make hard decisions about their portfolios. I’ll get into more detail shortly, but first let’s take a look at how our Balanced Portfolio has fared since the last review in late March.

This portfolio was launched in September 2011. It offers a conservative mix of stocks, fixed-income securities, and cash. Normally, this type of portfolio tends to underperform when stock markets are strong but reduces risk when bear markets emerge. That’s not quite the way it’s happening this time around.

The portfolio had 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 five-year rate I can find right now is 5.2% from Tangerine Bank, which would make our current target 7.2%.

Here’s a summary of the securities we currently hold and how they performed over the period since I last reviewed this portfolio in March. Prices are as of the close of trading on Oct. 21.

GICs. We have two one-year GICs with EQ Bank paying 2.25%. They mature in March and April of 2023. We made this move to protect our fixed-income assets from falling bond prices. The interest rate looks low today but was the best available at the time. That shows how quickly rates have increased.

iShares Convertible Bond Index ETF (TSX: CVD). This ETF invests in a portfolio of convertible bonds. These can be exchanged for common shares in a company at a predetermined price, so they offer the potential of a capital gain (or loss) along with regular bond interest. We added this fund 18 months ago at a price of $18.59. We saw a small gain in the first six months, but since then the fund has followed the bond market down. It lost $1.32 per unit in the latest period. We received monthly distributions totaling $0.418 per unit.

Canadian Apartment Properties REIT (TSX: CAR.UN). This REIT invests in apartment units across Canada. REITs have been hit hard by rising interest rates, and the units fell $13.42 in the latest period. That’s a big drop for what is normally a stable security. We received monthly distributions totaling $0.847 per unit.

Pembina Pipe Corp. (TSX: PPL, NYSE: PBA). Pembina’s stock rebounded as oil prices rose. But the shares hit a wall over the summer, losing $3.19 since the last review. The monthly dividend was increased to $0.2175 effective with the September payment.

Brookfield Renewable Partners (TSX: BEP.UN, NYSE: BEP). The units of this green energy partnership with worldwide assets were hit with a loss of $11.34 in the latest period. Due to timing, we received three quarterly distributions for a total of US$0.96 per unit.

Brookfield Infrastructure Limited Partnership (TSX: BIP.UN, NYSE: BIP). This Brookfield partnership invests in infrastructure projects worldwide: railroads, ports, transmission lines, toll roads, etc. The units split 3 for 2 in June, so we now own 135. We received three quarterly distributions totalling US$1.08 (post-split).

BCE Inc. (TSX, NYSE: BCE). We added Canada’s largest telecom company to the portfolio in the fall of 2020 at $56.20 per share. The shares went as high as $74.09 but have pulled back sharply in the face of rising interest rates. We received two quarterly dividends of $0.92 per share.

Bank of Montreal (TSX, NYSE: BMO). The financial sector has been hurt by recession fears, which investors worry could impact short-term profits. As a result, all bank stocks are down, with BMO losing $26.59 in the latest period. The bank raised its quarterly dividend by 4.5%, to $1.39, effective with the July payment.

Fortis Inc. (TSX, NYSE: FTS). This St. John’s-based utility is normally a reliable performer, but like most of the rest of the stock market, it has been in a decline for several months. It lost $9.07 per share in the latest period. We received two dividends of $0.535 each.

Cash. We invested $3,823.53 in a high interest savings account with EQ Bank that was paying 1.25% at the time. We earned interest of $27.88 for the period.

Here’s how the portfolio stands now. Commissions have not been factored in.

Income Investor Balanced Portfolio (a/o Oct. 21/22)

Comments: It was a rough six months. Apart from the GICs, none of our securities showed a profit. The total portfolio value as of Oct. 21 (market value plus retained income) was $51,445.26. That represents a loss of 9.6% over the period.

The cumulative gain since inception 11 years ago is 105.6%. That works out to an average annual compound growth rate of 6.77%. That was ahead of target for most years since the portfolio was launched, but right now it’s lagging slightly.

Changes: Most investors have faced this situation at least once. You have put together a carefully constructed portfolio of sound securities, but it’s losing ground. You have three options.

Sell. Pull the plug, liquidate everything, and move the proceeds into GICs, which are looking quite attractive right now.

Tinker. Make a couple of changes but otherwise carry on as before.

Hold. The securities are solid. The market will recover. Stand pat and wait it out.

I’m going to choose option two. Our first move will be to sell CVD for a total (market value plus retained earnings) of $4,105.22. We will put that money into a six-month GIC with Tangerine Bank, which pays 3.75%. This way all our GICs will mature at about the same time, hopefully when the market has settled down. At that point we’ll decide how to proceed going forward.

Next, we’ll sell 60 units of BEP.UN for a total of $2,293.80. We’ll use the money to buy 140 units of the iShares S&P/TSX Capped Energy Index ETF (TSX: XEG), which is trading at $16.14. Total cost is $2,259.60. We have $34.20 left, which we’ll add to cash.

XEG gives us exposure to the red-hot energy sector. The fund is up 54.3% year-to-date, and the quarterly distributions have steadily increased from $0.0582 per unit last December to $0.222 in September.

We’ll use some of our retained income as follows:

BIP.UN – We’ll take advantage of the price dip to buy another 20 units at $45.77 for a total cost of $915.40. We’ll take $15.30 from cash to make up the difference. We now own 155 units.

BMO – The banks will eventually snap back. While the price is down, we’ll add another five shares of BMO at a cost of $612.80. That brings our share count to 45 and reduces retained income to $89.20.

All else remains the same.

We now have a cash balance, including retained earnings, of $3,169.81. We’ll move this money to an HSBC High Rate Savings Account, which is currently offering 4.25% to new customers.

Here is the revised portfolio. I will review it again in March/April.

Income Investor Balanced Portfolio (revised Oct. 21/22)

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