TII Balanced

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

Rate of Return: 5.7%

Initial Value $25027.75

September 21, 2011

Original Issue

Update Value $48846.70

October 26, 2023

Update Issue

ROUGH TIMES FOR BALANCED PORTFOLO

By Gordon Pape, Editor and Publisher

 These are unusual times. Normally, when the stock market runs into problems, bond prices rise. This acts as a counterweight, which is why financial advisors have for many years advocated a 60%-40% stock/bond split for conservative investors who want a balanced portfolio.

But 60/40 isn’t working right now as rising interest rates have clobbered both bond prices and interest-sensitive stocks. As a result, our model Balanced Portfolio was badly mauled in the six-month period from April to October.

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. Right now, the surge in rates is putting pressure on all our positions except cash and GICs.

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 5.15%, which would make our current target 7.15%.

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

GICs. We invested a total of $10,000 in a one-year GIC from Saven Financial to protect some fixed-income assets from falling bond prices. It pays 5.15% and matures on April 21, 2024.

iShares Core Canadian Universe Bond Index ETF (TSX: XBB). We dipped a toe back into the bond market in April, buying 200 shares of this universe bond fund for $28. It turns out we were too early, as the continued rise in interest rates sunk bonds during the summer. We received monthly distributions that totaled $0.498 per unit.

 iShares U.S. IG Corporate Bond Index ETF (CDN-hedged) (TSX: XIG). We added this corporate bond fund at the same time. Again, we were too early.

 Canadian Apartment Properties REIT (TSX: CAR.UN). This REIT invests in apartment units across Canada. Most REITs have been hurt by rising interest rates, and this one lost $5.90 in the latest period. We received six monthly distributions totaling $0.726 per unit.

 Pembina Pipeline Corp. (TSX: PPL, NYSE: PBA). Although the energy sector is strong, the pressure of rising rates hit Pembina’s stock price, with a loss of $2.33 since our last review. We received two quarterly payments for a total cash flow of $1.335.

Brookfield Renewable Partners (TSX: BEP.UN, NYSE: BEP). The units of this green energy partnership with worldwide assets continue to be weak, with the price down $12.86 since the last review. We received two quarterly distributions for a total of US$0.6375 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. After a slump in 2022, the units staged a short-lived recovery early this year but then nosedived, losing $15.76 since the last review. We received two quarterly distributions totalling US$0.765.

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 before going into a deep dive, which continues. The stock pays a dividend of $0.9675 per quarter.

 Bank of Montreal (TSX, NYSE: BMO). The financial sector has been hurt by recession fears, which investors worry could impact short-term profits. The whole sector is down, and BMO shares lost $17.19 during the latest period. The bank raised its quarterly dividend by 2.8%, to $1.47, effective with the July payment.

Fortis Inc. (TSX, NYSE: FTS). This St. John’s-based utility has experienced the same downdraft as most interest-sensitive securities. The stock lost $5.68 per share in the latest period. We received two dividends of $0.565 each.

 Cash. We invested our cash balance of $2,922.41, including retained earnings in a Saven Financial High Interest Savings Account, which offered 3.75%. We earned $54.80.

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

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

Security Weight

%

Total

Shares

Average

Cost

Book

Value

Market

Price

Market

Value

Retained

Income

Gain/

Loss

%

GIC Apr.21/24 22.0 1 $10,000.00 $10,000.00 $10,000.00 $10,000.00 $257.50 +2.6
XBB 11.5 200 $28.00 $5,600.00 $26.16 $5,232.00 $99.00 -4.8
XIG 7.7 190 $20.38 $3,872.20 $18.42 $3,499.80 $79.23 -7.6
CAR.UN 7.4 80 $49.69 $3,975.20 $42.26 $3,380.80 $509.21 -2.1
PPL 8.3 90 $47.13 $4,242.00 $41.92 $3,772.80 $185.85 -6.7
BEP.UN 7.1 110 $14.74 $1,620.90 $29.43 $3,237.30 $159.40 +109.6
BIP.UN 10.9 155 $15.53 $2,407.70 $31.86 $4,938.30 $283.27 +116.9
BCE 6.7 60 $56.20 $3,372.00 $50.68 $3,040.80 $712.18 +11.3
BMO 10.5 45 $109.85 $4,943.20 $106.27 $4,782.15 $346.60 +3.8
FTS 5.3 45 $55.37 $2,491.65 $53.54 $2,409.30 $243.45 +6.5
Cash 2.6     $1,205.76   $1,205.76    
Total 100.0     $43,675.81   $45,499.01 $2,875.69 +10.8
Inception       $25,027.75       +93.3

Comments: There’s no sugar-coating it – this was the worst six months this portfolio has experienced since it was launched. Except for the GIC and cash, all our securities suffered losses. The total portfolio value as of Oct. 20 (market value plus retained income) was $48,846.70. That represents a loss of 11% over the six-month period.

The cumulative gain since inception 12 years ago is 93.3%. That works out to an average annual compound growth rate of 5.65%. That’s lagging our goal, but it is still better than the best five-year GIC rate.

Here’s the good news. As it stands right now, this portfolio is like a coiled spring. When interest rates begin falling, almost everything in this portfolio is going to snap back and the returns could be impressive. It’s just a matter of time. Be patient.

Changes: The only security that I am dubious about is BEP.UN. It was a great performer for years, but the renewable energy business has become a wasteland, and it may take more than a change in the direction of interest rates to turn things around. We will sell our position for a total of $3,396.70 (including retained earnings). We’ll put it in a six-month GIC with EQ Bank that pays 5%.

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

CAR.UN – We’ll add 10 units at $42.46 for a total investment of $424.60. We now own 90 units and have $86.61 remaining in retained earnings.

BCE – We’ll buy another 10 shares at $50.68 for a total cost of $506.80. We now own 70 shares and have $205.38 in retained earnings.

All else remains the same.

We have cash and retained earnings of $2,992.65. These funds will be deposited with CIBC, which is running a 5.6% promotion right now.

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

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

Security Weight

%

Total

Shares

Average

Cost

Book

Value

Market

Price

Market

Value

Retained

Income

GIC Apr.21/24 21.5 1 $10,000.00 $10,000.00 $10,000.00 $10,000.00 $257.50
GIC Apr.20/24 7.3 1   $3,396.70  $3,396.70   $3,396.70 $3,396.70 0
XBB 11.2 200 $28.00 $5,600.00 $26.16 $5,232.00 $99.00
XIG 7.5 190 $20.38 $3,872.20 $18.42 $3,499.80 $79.23
CAR.UN 8.2 90 $48.87 $4,398.10 $42.26 $3,803.40 $86.61
PPL 8.1 90 $47.13 $4,242.00 $41.92 $3,772.80 $185.85
BIP.UN 10.6 155 $15.53 $2,407.70 $31.86 $4,938.30 $283.27
BCE 7.6 70 $55.41 $3,878.80 $50.68 $3,547.60 $205.38
BMO 10.3 45 $109.85 $4,943.20 $106.27 $4,782.15 $346.60
FTS 5.2 45 $55.37 $2,491.65 $53.54 $2,409.30 $243.45
Cash 2.5     $1,205.76   $1,205.76  
Total 100.0     $43,675.81   $46,587.81 $1,786.89
Inception       $25,027.75      

 

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