Options for a totally FI portfolio in a rising interest market

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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soloman
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Options for a totally FI portfolio in a rising interest market

Post by soloman »

I've been overseeing my daughter's investment portfolios over the last 4 years. She has $250K in a totally fixed income RRSP, and $1.75M in a mixed FI and Equities portfolio. The two are managed such that the Ratio of Equities to Fixed Income is 50:50. (Her choice). She's made about 6% per annum over those years. She's happy with that. The taxable account is with one Portfolio Management firm (A), the RRSP is with another (B). She deposits $8,000 per month to the taxable account.

It's the RRSP account I'm concerned about. It's all Fixed Income, as even part of her taxable account has to be made of Fixed Income to get the overall required ratio of 50:50. The Portfolio Management firm's policy has been to maintain about $100K in a HISA, the remainder in short term (5 yr) mostly Canadian Bank bonds. As you may imagine, the result has been poor performance, with an internal return of about 1.5%, after Management fees. She deposits $1.8K per month into this account.

I'm wondering if there is not a better way of managing her RRSP account. I'm also concerned about how well the account will do in the future rising rate environment with the firm's policy. We'd have to first transfer the account to some other place where either the managing firm our ourselves were more flexible. Here are some options I've been thinking about:

1) Just buy GICs. I/we could do this. Have a 5 year ladder, renewing every 6 months. We'd save on management fees, retain the capital, gain on the probable increasing rates of GICs.

2) Give the account to a firm that would use more tools, e.g. Real Return Bonds, Corporate Bonds, High Yield Bonds, International Bonds, REITS, etc.

3) Increase the Equity ratio from its current zero and compensate by lowering the equity rate in the taxable account.

Other options are possible of course.

I'd welcome your opinions ! Thank you.
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Re: Options for a totally FI portfolio in a rising interest market

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1) Just buy GICs. I/we could do this. Have a 5 year ladder, renewing every 6 months. We'd save on management fees, retain the capital, gain on the probable increasing rates of GICs.
Would you go to a deposit broker to do this? Or do you have another way to keep GIC money under CDIC limits in a registered account?

I/we have our Registered accounts at TDW as GIC's came due with crappy re-investment rates I just clenched my teeth and bought bond ETF's, with a 20% Reits chaser*. Almost all reinvested now It wasn't pretty may not be pretty when rates rise but it's all in one place, easy to manage.

I have mega FI with 70% outside registered accounts, with FI taken all together it's doing about 2.200%**, no fee's, add in the dividends from the non-registered portfolio and total is only generating 2.781**% with a target of 3%.

*counts as equity against my 35/65 AA which has now climbed to 40/60 which I'm trying to justify/live with for the moment.
**lol, well I thought the decimal places was funny
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Re: Options for a totally FI portfolio in a rising interest market

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What you do depends on whether you (and your dau) want you to go DIY on the RRSP or not. For sure, the existing account is not returning well given the products it is invested in. If both of you are willing to DIY, I'd transfer the RRSP to a discount brokerage, preferably associated with the bank that dau does her banking at.

I'd go with a 5 year GIC ladder for all of it...or for a portion and the rest, maybe 50%, in a bond ETF such as VSB or VAB. That should at least double the return she is now getting. Eventually, after a number of years, she/you may then become a bit more adventuresome and look at some BBB (still investment grade) corporate bonds and debentures if they start to pay considerably more than 5 year GICs.

Clearly, her $250k RRSP is a small portion of her overall assets and that is the one that allows more room for learning, experimentation, mistakes, exploration. My own bias for myself (I have a RRSP worth somewhat less than 10% of my overall portfolio) is a mix of GICs, debentures and corporate bonds of BBB or higher. It is good for about a 3-3.5% return. I also assist my ex with a similar sized RRSP and while she is currently in a 5 year GIC ladder, I have been suggesting to her to evolve it entirely into a single bond ETF to make her life simpler.
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Re: Options for a totally FI portfolio in a rising interest market

Post by soloman »

I'm anti ETF's at the moment, with rising interest rates on the horizon, the value of the fund will go down. I think a good balance could be GICs (each one under $100K), and 5 year laddered good Corporate Bonds (held to maturity). Maybe throw in small bits of Real Return, High Yield Bonds, and a HISA. I'd use TD Webroker. I like their choice of Bonds.

I think I could do this myself for her. I have quite a bit of investment knowledge.

What do you think ?
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Re: Options for a totally FI portfolio in a rising interest market

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An ETF is only as vulnerable as its duration... but that is a personal choice. I don't use bond ETFs either. It's a matter of ease, comfort and practicality.

There is not a lot one can do with a $250k RRSP albeit it will grow over time. I'd not complicate it with too many product types. Keep it down to a few types, e.g. 5 year GIC ladder for half of it, and the other half in something you feel comfortable about such as investment grade corporate bonds* or even debentures/term notes. I'd stay away from HY (junk) Bonds...they can behave like equities on the downside with no upside. No need for an HISA with regular contributions to the account.

* Buying bonds and debentures in less than $20k face value will cost more. Find out what TDDI's commissions are. It matters. BMO IL, for example, is more costly than Scotia iTrade with the latter being $1/$1000 face value, minimum $24.99 (meaning $25k is the the most cost effetive minimum).
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Re: Options for a totally FI portfolio in a rising interest market

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The thing is that advisors will want to make your portfolio more complex than it needs to be in order to keep you confused. So AR's advice is good especially with a move to a DIY approach.

What I did with MIL after monitoring the activity with her portfolio manager for a couple of years was the guarantee her higher yield and easier reports. Since it was all FI, I just introduced some BBB convertible debentures to replace CSBs. She was already into corporate bonds. One of them (H&R) ended up converting early at 70% premium and that justified the whole switch away from her FA. I told her that the Christmas dinner was not a problem but I would not be buying her a plant. I flippantly said that I would not buy her anything that might die.

Got her overall yield up by 25% and her ongoing costs down by 75% p.a. but this was 12 years ago.

Anyway, to OP I suggest you take some decisions. Do it gradually.
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Re: Options for a totally FI portfolio in a rising interest market

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And obviously only if dau agrees. After all, it is her money.
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Re: Options for a totally FI portfolio in a rising interest market

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kcowan wrote: 05 Aug 2017 18:20
What I did with MIL after monitoring the activity with her portfolio manager for a couple of years was the guarantee her higher yield and easier reports. Since it was all FI, I just introduced some BBB convertible debentures to replace CSBs. She was already into corporate bonds. One of them (H&R) ended up converting early at 70% premium and that justified the whole switch away from her FA.
Could you explain this a bit more fully please: "One of them (H&R) ended up converting early at 70% premium"

Any suggestions on some safe CD's ?

Thanks.
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Re: Options for a totally FI portfolio in a rising interest market

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There is no such thing as a safe CD. Debentures are unsecured debt and issued as a teaser alternative to higher priced secured debt on the hope that the ultimate converzion rate is attractive at a future date. That said, there are decent BBB rated companies out there that are usually worth betting on.
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Re: Options for a totally FI portfolio in a rising interest market

Post by OhGreatGuru »

With respect, this is a conversation you both need to have with the Portfolio Management Firms. Why does (A) think 100% FI asset allocation is appropriate in her RRSP, when she has $1.75M in other, unregistered assets?

From a purely tax efficiency point of view it makes sense to have FI in a tax-sheltered account if you have assets elsewhere. That may be why it has been set up this way- but that is speculation on my part.

I would be more inclined to question why the unregistered account has $100k in a HISA; and to examine if the 50/50 overall asset allocation is still relevant to her circumstances. The short-term bonds will adapt more quickly to rising interest rates than long-term bonds. Does she need/want a lot of liquidity in this portfolio?

You haven't mentioned if she has a TFSA.
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Re: Options for a totally FI portfolio in a rising interest market

Post by kcowan »

soloman wrote: 27 Aug 2017 11:34Could you explain this a bit more fully please: "One of them (H&R) ended up converting early at 70% premium"

Any suggestions on some safe CD's ?

Thanks.
There are two aspects you must select for a CD. One is the health and safety of the company. This is true for Bonds and Stocks. The other is the interest rate and terms. For CDs, the interest rate should relate to the amount of risk you are taking. And the conversion privilege is an added incentive to buy the bond.

In the case of H&R, their stock was an a tear and they offered to convert early to avoid having to share further appreciation of the conversion privilege (and the continuing high interest). It turned into a great equity investment after conversion.

But it is not the feint of heart. Most end up marginally in a profit or loss position on the conversion, i.e. good interest on a corporate bond. And lately, the offerings are becoming weird. Hydro One and Rogers Sugar are the last two of note. Both varying from the standard. Neither would have been appropriate for MIL. I got Rogers because I thought the Maple syrup acquisition would give them some upside, but the Hydro One was a different beast entirely. Might be good but I did not have the patience in the summer to analyze it.
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Re: Options for a totally FI portfolio in a rising interest market

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BRIAN5000 wrote: 05 Aug 2017 15:23 Would you go to a deposit broker to do this? Or do you have another way to keep GIC money under CDIC limits in a registered account?
Suppose the OP's daughter uses a discount brokerage account for her RRSP. She has $250k and she sets up a five year GIC ladder, with five rungs worth $50k each. She can get GICs from a number of issuers that way. With the CDIC limit being $100k, she just has to make sure not to buy more than 2 rungs from the same issuer.
OP wrote:I'm anti ETF's at the moment, with rising interest rates on the horizon, the value of the fund will go down.
There is an ETF that reproduces a five year bond ladder. Suppose that two investors buy the same bond portfolio on the same day (i.e. a five year ladder) and sell everything after 5 years. But investor A holds the bonds directly, whereas investor B invest in the ETF. Let's ignore all fees, and this is a registered account. Shouldn't A and B end up with the same amount at the end? The fact that interest rise or fall in the meantime changes nothing to the fact that investors A and B will each have the same amount after 5 years, i.e. the suitability of ETFs as opposed to directly held F.I. does not depend on the future direction of interest rates.
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Re: Options for a totally FI portfolio in a rising interest market

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BRIAN5000 wrote: ↑Sat Aug 05, 2017 12:23 pm
Would you go to a deposit broker to do this? Or do you have another way to keep GIC money under CDIC limits in a registered account?
Suppose the OP's daughter uses a discount brokerage account for her RRSP. She has $250k and she sets up a five year GIC ladder, with five rungs worth $50k each. She can get GICs from a number of issuers that way. With the CDIC limit being $100k, she just has to make sure not to buy more than 2 rungs from the same issuer.
Yes you can do this but the rates you get from discount brokers don't seem very good to me at least at TDII.
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Re: Options for a totally FI portfolio in a rising interest market

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Yeah but simplicity is worth something for your survivors and executors. Best monetary return is not necessarily best value.
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Re: Options for a totally FI portfolio in a rising interest market

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I thought as a general rule of thumb longer term bond Etfs will show more volatility (downward) then short term Etf's of the same type.

Why has ZCS fallen off a cliff* and ZCM seems to be holding up fairly well in this rising rate environment?

*put them on a chart
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Re: Options for a totally FI portfolio in a rising interest market

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I probably shouldn't respond, but you guys are dreaming in technicolour if you think you can average 3% on 100% fixed income! If you can then you had better hang a shingle out and sell your services!

The daughter is getting 1.5% on a managed portfolio; that is probably as good as you can expect. I might be getting another 1% on my RRSP, but that is based on wholesale values and bonds that were bought years ago, so I'm not sure exactly what you hope to gain. When looking at current bond pricing there isn't a whole lot of room to build a portfolio that's going to do materially better than what she is getting with the current arrangements.

When dealing with a rising fixed income market you keep your maturities short and basically suck it up. You're not going to lose money if you hold to maturity, but you won't get rich either!
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Re: Options for a totally FI portfolio in a rising interest market

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BRIAN5000 wrote: 06 Sep 2017 14:41 I thought as a general rule of thumb longer term bond Etfs will show more volatility (downward) then short term Etf's of the same type.

Why has ZCS fallen off a cliff* and ZCM seems to be holding up fairly well in this rising rate environment?

*put them on a chart
Brian, haven't done more than a 2 minute look, but it may well be because short term GOC bond yields have moved the most in an absolute sense, never mind percentage wise which is even more significant, while 5-10 year bond yields have not moved nearly as much....flattening of the yield curve so to speak. That is to be expected when central banks raise overnight rates, at least in the near term.
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Re: Options for a totally FI portfolio in a rising interest market

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scomac wrote: 07 Sep 2017 02:13 I probably shouldn't respond, but you guys are dreaming in technicolour if you think you can average 3% on 100% fixed income! If you can then you had better hang a shingle out and sell your services!
I have been holding pretty close to 3% on a 6 year ladder fixed income mix of GICs, AL/BBB corporate bonds and unsecured BBB debentures/term notes at about 1/3rd each, all in my RRSP of course. I just bought a 5 year FFX debenture with a YTM of 3.53% net of commission. And no, this mix would not be for everyone.
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Re: Options for a totally FI portfolio in a rising interest market

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I have been holding pretty close to 3% on a 6 year ladder fixed income mix of GICs, AL/BBB corporate bonds and unsecured BBB debentures/term notes at about 1/3rd each, all in my RRSP of course. I just bought a 5 year FFX debenture with a YTM of 3.53% net of commission. And no, this mix would not be for everyone.
Actually, I'd go with that, apart from the debentures. As described below !

Looking back at my daughter's performance, it was 1.5% for 2016, this year to date it's worse. In fact she has lost $25 when you take into account the management fees !

I'm leaning more and more to me looking after it for her. Take 50% and put into a 5 year GIC ladder, the other 50% into a 5 year ladder of Bank Bonds. Couldn't be much more simple and she'll gain what she is paying in management fees.

I went to a RBC branch yesterday. OMG ! What a load of puffed up "experts" who thought I knew nothing. Guy even tried to explain to me how to build a GIC ladder !! They got a line drawn through them on my list ! The other women was nice though and summed me up more quickly. It's all about people really. Going to a BNC this afternoon. But I'm thinking we will move her account to the "mutual fund/brokerage" firm that looks after people in her profession. Not that I think much of their competence either, but they will be more inclined to "look after" her when I'm scattered to the wind.
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Re: Options for a totally FI portfolio in a rising interest market

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So I went to my local Scotia Bank today. Surprised. What a difference ! Nice person to talk to, talked to me as an equal, knowledgable, structured steps in what to do now, and how to plan for when I die.

I thought about the transfer from the PM group now to any new organization, and realized that it would be difficult to transfer her RRSP to her professional organization, as they don't handle direct bonds, so the bonds would have to be sold off at current market worth, and transferred as cash, which would not be good, since they (about 6 of them) are at a discount right now.

So bottom line, Scotia Bank, Direct Investing seems the best choice for us at the moment. Daughter will save quite a lot.
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Re: Options for a totally FI portfolio in a rising interest market

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scomac wrote: 07 Sep 2017 02:13 I probably shouldn't respond, but you guys are dreaming in technicolour if you think you can average 3% on 100% fixed income! If you can then you had better hang a shingle out and sell your services!

The daughter is getting 1.5% on a managed portfolio; that is probably as good as you can expect. I might be getting another 1% on my RRSP, but that is based on wholesale values and bonds that were bought years ago, so I'm not sure exactly what you hope to gain. When looking at current bond pricing there isn't a whole lot of room to build a portfolio that's going to do materially better than what she is getting with the current arrangements.

When dealing with a rising fixed income market you keep your maturities short and basically suck it up. You're not going to lose money if you hold to maturity, but you won't get rich either!
From my search at BMOIL, you can get 3% on provincial strip bonds, but you need to have maturities out 11+ years. Of course, these will go down in market value as interest rates rise but presumably you would hold to maturity. How close to retirement is the daughter?
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