For those of you who have their capital managed by an external adviser, here are some red flags:

When you see your adviser market weight all equity sectors, this means that they have no clear vision as to where markets are headed. If your adviser simply has all eleven equity sectors with exactly the same percentage weight as the market, this clearly shows a lack of vision.

If you see your adviser doing this, ask them what value added they are providing over an index fund?

Recommendation

Do your own homework and obtain a second opinion on your investment holdings.

Like the rest of Canada, Ontario has decided to ban mutual fund deferred sales charges effective June 1, 2022.

However any mutual funds that are sold prior to that date, will still be subject to deferred sales charges until they expire. Normally this takes up to seven years.

Recommendation:
Stop investing in any deferred sales charge mutual funds right now and immediately cease any monthly, quarterly or annual contributions.

May 8, 2021

Learn how to set up and actively manage an equity portfolio that encompasses all eleven sectors.

Thinking you are smarter than everyone else by only investing in sectors that are outperforming the market is a foolish strategy.

Equity sector rotation occurs much faster than you think.

Investing in stocks in out of favour sectors like Consumer Staples can still produce winners. Look at how well Empire A stock is doing.

I still firmly believe in assessing the outlook for each sector and having different percentage weights relative to the overall market.

But always have your eyes and ears open for attractively valued stocks with great prospects in out of favour groups.

Based on my experiences with all types of investors over the years, those that use external money managers are reluctant to make any changes when their investment returns are strong. It is important to keep in mind your long term objectives – to lower the fees you are paying and ultimately improve your investment performance. If you can materially lower your fees this will immediately be beneficial to your net worth.

By taking ownership of your investments, you can effectively control how much portfolio volatility you are comfortable with and you can tailor your investments to match exactly your long term goals.

You all know by now that I am not a favourite of rate reset preferreds. Extremely poor liquidity and rate reset risk when interest rates are low are major impediments from investing in them.

However, there have been some recent developments in regards to Canadian banks that have altered the preferred share market somewhat. Historically banks have been major issuers of rate reset preferreds as the capital raised could be included as Tier 1. The dividend on these preferreds was not considered interest and thus not deductible by the banks on their tax returns.

Recently, OSFI, the Canadian regulator, has granted approval for a new type of instrument called Limited Recourse Capital Notes (LRCN’S). These notes can be counted as additional Tier 1 capital. In addition while OSFI considers these notes permanent capital, the securities are considered bonds with the interest on them fully tax deductible by the banks. This deductibility of the interest makes them a cheaper way for banks to raise more capital.

Historically banks have been major issuers of rate reset preferreds. This new OSFI ruling is expected to create a potential shortage of new Canadian rate reset preferred issues, thereby lifting market valuations.

Secondly, there now exists a real possibility of many bank rate reset issues of being called and replaced by these new LRCN’S. This will also lift valuations. Fiera Capital expects up to $11 billion of redemptions over the next few years representing almost 17% of the overall preferred share market.

The LRCN’S will only be available to institutional investors as a new issue, but may still be available to retail investors in the secondary market. I assume that the distribution will not be eligible for the dividend tax credit as it is considered interest, but those details are quite hazy at this time. OSFI has not yet granted permission to Canadian non-financial companies to issue them. However these companies can currently issue a hybrid security instead of the preferred.

Recommendation

This recent news does not encourage me to go out and buy rate reset preferreds at this time. Interest rates remain low and are not expected to rise any time soon. However if you are a current holder of the bank issues, you may want to hold onto them for the possibility of being called at higher prices.

I have analyzed total returns for 1 year, year to date and 1 month.

Golds continue to be the best performing group outperforming all others for 1 year, year to date and 1 month.

Energy is the worst performing group for both the last year and year to date. However over the last month it has sharply outperformed the benchmark TSX Composite.

The Utility sector continues to outperform the TSX Composite on a 1 year, year to date and 1 month basis.

While the Industrials outperformed the TSX on a 1 year basis, they have under performed on a year to date and 1 month basis.

The Telcos – namely BCE, Telus and Rogers, have outperformed on a 1 year and year to date basis, but under performed on a 1 month basis.

The Grocers – Loblaw, Metro and Empire outperformed the TSX on a 1 year and year to date basis, but have not kept up to the TSX on a 1 month basis.

Lastly both the Reits and Financials outperformed the TSX on a 1 year basis, but have sharply under performed the TSX on both a year to date and 1 month basis.

Conclusion

Energy stocks are in the process of bottoming after the massive selloff.

Utility stocks continue to perform well and with their strong dividends they tend to outperform in a recession.

Golds are expected to continue their strong run as long as interest rates remain low.

Both Financials and Reits are suffering in this recession and this is likely to continue until signs of the recession ending are more evident.

There is some modest profit taking in some of the grocers over the last month after their strong performance. However they remain core holdings especially in a recession.

The telcos are similar to the grocers in that they are defensive in nature and will continue to perform well in a recessionary environment.

Industrials are quite cyclical in nature and are expected to perform better when this current recession ends.

Stop buying passive index funds and etf’s in a falling equity market.

Improve the quality of your stock holdings by selecting companies with strong balance sheets and solid growth prospects. Sell your holdings in companies, funds and etf’s that do not meet this criteria. Be extremely selective in what you hold.

Active asset mix strategies work well in a volatile market where you have some cash available to take advantage of market opportunities on market dips.

Having either too much cash or having too little cash by being fully invested both have different risks.

Many investors refused to see a possible market correction and remain fully invested in equities.The risk they face now is the possibility the equity market will retest its recent low and fall further from current levels. If you are fully invested in equities there is no place to hide.

There are two options you can pursue if are fully invested as follows:

Make some equity switches from poorer quality companies to better quality, less leveraged ones.

Take some profits in some stocks and equity sectors that have recently seen a nice market rebound.

For those of you with too much cash the risk is that you may have already missed the market bottom and this involves an opportunity cost.

There are several options you can follow if you have too much cash as follows:

You can gradually phase back into equities by purchasing high quality stocks that have come down in value recently.

You can systematically  invest a percentage of your assets back into equities – say 10-20% at a time.

Cash is king – have plenty of it

Avoid Rate Reset Preferreds

Avoid High Yield Fixed Income

Both US Treasury  and Govt of Canada bonds perform well in a recession. However with current yields so low there is not much upside.

Avoid Equity Index funds and ETF’s

Favour defensive equity sectors like Reits, Utilities and Telcos

Gold bullion performs well when the following occurs:

Falling Interest rates like we have today

During most previous economic recessions, gold outperforms benchmark equity indices

When real interest rates are negative like today, gold performs well

Passive indexing not a good strategy in a declining market

No place to hide in index funds

Active management sharply outperforms an index fund in a bear market due to the following:

Have more cash and invest in more defensive industries like Reits, Utilities and Telcos.

Individual stock selection weeds out poor performers and over leveraged ones

Algorithm based program selling triggers liquidation of both strong and weak sectors equally. However when markets rebound once again, defensive sectors and stocks tend to come back first.

Conclusion

Avoid passive index funds in a bear market

Active asset mix, stock and equity sector selection is the preferred strategy especially in a falling equity market

As our children leave the family home, it is only natural to want to downsize by switching to a smaller condo. On the surface this may appear financially viable with average condo prices lower than two story homes.

However, there are a lot of other factors that you must take into account before doing anything as follows:

What is the monthly cost of the condo and what does this monthly fee cover?

How much has the monthly cost risen over the last several years?

Have there been any major capital improvements and maintenance costs over the last several years that have led to a one time cost assessment for every individual condo owner?

Does the condo fund have a capital surplus to cover annual maintenance costs plus some capital improvements? Alternatively if the fund has a deficit, this is a red flag.

Have you reviewed the financial statements of the condo association? This is absolutely essential and far more important than your assessment of the individual unit. If you are not comfortable reading the financial statements, hire a independent accountant who is not associated with the condo to read and assess them for you.

Lastly condo insurance rates are rising dramatically in Canada and will ultimately lead to a combination of higher monthly condo fees plus an additional assessment for each separate unit owner. In some instances insurance premiums have risen this year by up to 200-500% over last year. It is very important to review the building’s insurance rates for both the last several years and for this year in order to determine if the individual condo owners will be required to pay more monthly fees and one off cost assessment fees.

Recommendation

Buying a condo may not be the best decision you make financially.

Consider other options such as renting an apartment or purchasing a freehold property that does not involve any of the negative issues that condos have.

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