TII Balanced

return 2% more than the highest-paying GIC

This portfolio was launched in September 2011 with the goal of combining above-average cash flow with reasonable risk. The initial portfolio valuation was $25,027.75, and the target 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. Right now, the best five-year rate I can find is 3.5%, so we are looking for an annual return on this portfolio in excess of 5.5%.

Comments: The bond section of this portfolio continues to erode in the face of rising rates. On the equity side, we saw gains from Inter Pipeline and Dream Global REIT, but the losses in BCE and the two Brookfield partnerships offset that. For the six-month period, the net result was a small gain of 0.2%, thanks primarily to the strong dividends/distributions we received.

The cumulative gain since inception is 57.3%. That works out to an annual compound growth rate of 6.69%. That?s better than our target, but this portfolio is not making much headway and more changes are needed.

Changes: We?re going to sell our position in the iShares International Treasury Bond ETF. It has not performed to our expectations and does not provide any cash flow, so we?ll move on. This frees up US$2,925.06 to reinvest.

We will also sell 100 units of XSB for $2,703. That will leave us with 150 units.

We are going to reinvest that money in the iShares Convertible Bond ETF, which trades on the BATS Exchange under the symbol ICVT. It invests in a portfolio of convertible bonds, mainly issued by U.S. companies such as Microchip Technology, Twitter, Intel, and Advanced Micro Devices. Technology companies issue almost half the bonds in the portfolio.

The performance has been excellent, with a year-to-date gain of 9.4% and a three-year average annual compound rate of return (to Aug. 31) of 8.95%. The fund pays monthly distributions, which are currently about US$0.07 per unit. The expense ratio is 0.2%.

Convertible bonds offer an opportunity to earn interest while also potentially benefitting from increases in stock prices. The main negative is that the risk potential is higher in a fund of this type. Only about 13% of the portfolio is in investment-grade bonds (rated BBB or higher). About 62% of the holdings are unrated. The bottom line is we are assuming more risk in the expectation of potentially higher returns.

The units closed on Sept. 21 at US$59.39. We will buy 95 units for a cost of US$5,642.05. That will use the money from our other bond fund sales and we?ll take $13.99 from cash to make up the difference.

We are also going to sell our position in BCE, which continues to trend down. Including retained dividends, this will give us $4,511.04 to invest. We will use that money to buy 40 shares in Bank of Montreal (TSX, NYSE: BMO). The stock closed on Sept. 21 at $108.26, so the total cost of this purchase is $4,330.40. The balance of $180.64 will be added to the cash account.

We originally recommended BMO in Income Investor in September 2015, and it has been performing well for us. The current yield is 3.6%.

Finally, we will use retained distributions to buy another 10 units of Brookfield Infrastructure Limited Partnership while the price is down. This will cost $498.60. We now have 140 units and our retained distributions have been reduced to $53.46.

The total cash balance of $1,405.85 will be left on deposit with EQ Bank at 2.3%.

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