TII Balanced

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

Big Gain for Balanced Portfolio

By Gordon Pape

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 what we’ve seen with this portfolio. It was down about 14% at the time of our last review in late March, but that was nowhere near as severe a loss as the stock markets were absorbing.

One reason for that is that at the time of the previous update, in 2019, I made moves to increase the bond weighting to 42.5% from 34.5%. Bonds have lost ground in March, but they’ve did much better than the stock market.

Since then, the portfolio has rebounded strongly, as we’ll see in a moment.

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 five-year rate I can find right now is 2% from Oaken Financial, which would make our current target 4%

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 Oct. 23.

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. We received seven monthly distributions since the last update, for a total of $0.217 per unit.

iShares Canadian Universe Bond ETF (TSX: XBB).  This fund tracks the performance of the broad Canadian bond market. After taking a hit in the March sell-off, it has rebounded strongly. The units gained $2.64 since the last update and we received monthly distributions totalling $0.501 per unit.

Canadian Apartment Properties REIT (TSX: CAR.UN). This REIT invests in apartment units across Canada. Investors are concerned that the large numbers of layoffs and business closures resulting from coronavirus will cause many people to default on their rents, but the units have moved slightly higher since the last review. We received monthly distributions totaling $0.805 per unit.

Pembina Pipeline (TSX: PPL, NYSE: PBA). Any stock associated with the conventional energy sector has been hammered this year. However, Pembina’s price has regained more than $5 since the March review, due in large part to the company’s repeated insistence that it will maintain its monthly $0.21 dividend. The market is skeptical, however. The current yield on the stock is 8.9%.

Brookfield Renewable Partners (TSX: BEP.UN, NYSE: BEP). This renewable energy limited partnership provided us with huge gains over the summer. The units themselves advanced by almost $18 each but on top of that investors benefitted from a split that saw them receive one share of the newly created Brookfield Renewable Corporation (TSX, NYSE: BEPC) for every four units of BEP they owned at the time. This portfolio holds 130 units of BEP.UN so we got 32 shares of BEPC plus cash of $29.14 for the fractional share. BEPC is trading at a much higher price than BEP.UN so we scored a big plus there. Both securities pay a quarterly dividend/distribution of US$0.434. We have adjusted the cost base of both securities to reflect the split.

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. It also created a comparable corporation, with each unitholder receiving one share of Brookfield Infrastructure Corporation (TSX, NYSE: BIPC) for every nine units owned. Since we have 90 units in the portfolio, we received 10 shares of the new corporation. Both the units and the shares pay US$0.485 per quarter, but BIPC trades at a large premium, so the yield is lower.

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 5.2%.

Cash. We invested $2,328.67 in a high interest savings account with Motive Financial that was paying 2.2% at the time. We earned interest of $29.88 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, although the only U.S. dollars relevant to this portfolio are the distributions from the Brookfield entities.

Income Investor Balanced Portfolio (a/o Oct. 23/20)

Security	Weight %	Total Shares	Average Cost	Book Value	Market Price	Market Value	Retained Income	Gain/ Loss %
CSAV	20.4	185	$50.06	$9,261.10	$50.03	$9,255.55	$40.15	+0.04
XBB	18.4	250	$32.04	$8,010.20	$33.35	$8,337.50	$235.25	+ 7.0
CAR.UN	7.8	80	$49.69	$3,975.20	$44.35	$3,548.00	$165.60	– 6.6
PPL	4.4	70	$50.20	$3,514.00	$28.55	$1,998.50	$272.30	-35.4
BEP.UN	20.1	130	$13.98	$1,817.40	$69.87	$9,083.10	$710.38	+438.9
BEPC	6.0	32	$58.28	$1,864.96	$84.75	$2,712.00	$13.89	+46.2
BIP.UN	12.1	90	$16.58	$1,492.30	$61.04	$5,493.60	$511.21	+302.4
BIPC	1.7	10	$50.12	$501.20	$76.58	$765.80	$9.70	+54.7
BMO	7.4	40	$108.26	$4,330.40	$84.09	$3,363.60	$328.00	-14.8
Cash	1.7			$698.12		$757.14
Total	100.0			$35,494.02		$45,314.79	$2,286.48	+34.1
Inception				$25,027.75				+90.2

Comments: The last review came just as the market was in the midst of the March crash and we recorded a loss of almost 14% at that time. But that all turned around over the summer and our gain in the latest period was 25.6%. And this despite having about one-quarter of the portfolio sitting in a cash ETF.

The cumulative gain since inception just over nine years ago is 90.2%. That works out to an annual compound growth rate of 7.32%. That’s well above target.

Changes: The portfolio is performing well but it has become too heavily weighted to the two Brookfield entities and needs more diversification. According, we will sell our recently acquired positions in BEPC and BIPC for a total of $3,501.39. We have significant capital gains in both these new corporations, but the yield on the original partnership units is significantly higher.

We will use the money to buy shares in BCE, adding a telecommunications stock to this portfolio. BCE closed on Oct. 23 at $56.20 so we will buy 60 shares for a total cost of $3,372. We will add the balance of $129.39 to our cash account.

BCE is the largest telecom company in Canada and is a stable addition to the portfolio. The shares pay a quarterly dividend of $0.833 ($3.332 per year) to yield 5.9% at the current price.

In addition, we’ll use retained income to add to existing positions as follows:

PPL – We will buy another 10 shares at a cost of $285.50, bringing our position to 80 shares. This will use all the retained income in this account, and we will take $13.20 from cash to make up the difference.

BEP.UN – We have enough to buy another 10 units, for a total cost of $698.70. This will increase our position to 140 units and reduce the retained earnings to $11.68.

All else remains the same.

We now have a cash balance of $2,165.22, which will continue to be invested with Motive Financial’s Savvy Savings Account. The rate has dropped to 1.55%, but that still looks pretty good right now.

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

Income Investor Balanced Portfolio (revised Oct. 23/20)

Security	Weight %	Total Shares	Average Cost	Book Value	Market Price	Market Value	Retained Income
CSAV	20.0	185	$50.06	$9,261.10	$50.03	$9,255.55	$40.15
XBB	18.0	250	$32.04	$8,010.20	$33.35	$8,337.50	$235.25
CAR.UN	7.6	80	$49.69	$3,975.20	$44.35	$3,548.00	$165.60
PPL	4.9	80	$47.49	$3,799.50	$28.55	$2,284.00	$0
BEP.UN	21.1	140	$17.97	$2,516.10	$69.87	$9,781.80	$11.68
BIP.UN	11.9	90	$16.58	$1,492.30	$61.04	$5,493.60	$511.21
BCE	7.3	60	$56.20	$3,372.00	$56.20	$3,372.00	$0
BMO	7.3	40	$108.26	$4,330.40	$84.09	$3,363.60	$328.00
Cash	1.9			$873.33		$873.33
Total	100.0			$37,630.13		$46,309.38	$1,291.89
Inception				$25,027.75