February 2017 Comments

There’s never a dull moment in my office and January was no exception. You’ll notice a few changes that we’ve taken charge of over the past couple of weeks and I’d like to set new expectations on a number of the positions that we hold across the board.

 

A New U.S. Side to Your Registered Account

1) During the last two weeks in January, we have taken advantage of CIBC’s new capability to accommodate foreign currency settlement in Registered Retirement Savings Plans (RRSP) and Registered Retirement Income Fund (RRIF) accounts by opening a U.S. side to your registered plan. Going forward, U.S. denominated securities can now settle in U.S. dollars rather than automatically converting to Canadian dollars once the position is sold.

With this enhancement, your Canadian securities are now listed on one side of the account and your U.S. securities have been moved to the U.S. side of your account. There are no tax implications and no fees to any accounts; however, this provides all clients a small but important savings on foreign exchange spreads by reducing the number of Canadian/U.S. conversions. Now, when we sell one U.S. listed stock and buy another, your money remains in U.S. dollars during the entire transaction, even if there are a few days or even weeks between the transaction dates. In addition, it allows me to have more control over foreign exchange transactions.

 

Prudently Raising Cash

2) Secondly, you may see that in all portfolio models, including the Smart Income, Balanced Approach, Progressive Growth and Advanced Growth, that I have been raising the level of cash held and holding those funds in the Purpose High Interest Savings Exchange Traded Fund (ETF) and its U.S. cash equivalent listed on your online account and your paper statements under the symbol PSA and PSU.U. The way that I’ve been doing that is by taking profits in some of the positions that have had a lofty rise in recent months and by selling certain positions that have become relatively over-valued based on our quantitative model.

Looking at the market since the surprise election of Mr. Trump in November and the market’s anticipation of his unconventional approach and inflationary business policies, the share prices on both the U.S. and Canadian sides of the border have risen out of pace with their earnings expectations (Thomson Reuters). That’s the reason that I’ve been leaning to a caution-based stance in the market and have allocated one position to the Horizon Enhanced Income Gold Producers ETF. I anticipate that this strategy along with an over-weight cash position, will add stability by adding low-correlation investments, and access to cash for all clients should the markets become volatile over the near-term.

 

The Positive Impact of Reset-Preferred Shares

3) Lastly, I’d like to make mention of the significant outperformance of the Smart Income, Balanced Approach, and the Progressive Growth to the extent that each of these portfolios has an allocation to the Fixed-Floater Preferred Share sector, the Smart Income holding the largest portion and the Progressive Growth holding the smallest allocation. These preferred share securities are historically not expected to rise 20-40% as they did this past year.

In 2015, the Bank of Canada made a series of surprise interest rate cuts, driving fear in investors to sell these preferred shares driving the prices down. Since this sector is a small market, a few sellers can impact prices and when prices dropped, more sellers jumped on board. You’ve heard the lemming story more than once and when the share prices became undervalued, we didn’t join the herd, but instead we bought more of these investment grade, income bearing securities and waited. Today, the dividend yields on these securities have returned to more normal levels in the 4-6% range, as the prices rose. Should the 5-year Canada Bond interest rates rise in anticipation of inflation, the share price rise on these Reset-Preferred shares may not be over yet, since they reset their dividends based on a defined percentage. Notwithstanding, I’d like to temper expectations going forward and emphasize that these securities should not be viewed as the growth mechanism that they have been over the last year but as an income delivery vehicle, which is why we continue to hold them.

 

Sincerely,
CIBC Wood Gundy

Coreen T. Sol, CFA
Vice-President & Portfolio Manager

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