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Portfolio Strategy

The roller-coaster investing year that was Add to ...

Some day, interest rates will rise.

When they do, you’ll have been – ahem – well prepared if you read this column. I’ve been warning investors to brace for higher interest rates for two years now, and rates are lower than ever. As you’ll read in the annual accountability edition of the Portfolio Strategy column, I was on the money as well in 2011 in highlighting a new generation of dividend stocks and urging investors to buy U.S. stocks.

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Here’s a look at these and other hits and misses from the past year:

-On Jan. 1, I started the year in conversation with veteran investment strategist Anthony Boeckh to devise an action plan for investors who at the time were sitting on mountains of cash. Mr. Boeckh nailed it when he sized up what was happening in the United States and Europe and said: “It’s a very risky world out there. A lot of things can go wrong on very short notice.”

The rest of our conversation had its ups and downs for investors. We agreed investors should start edging into the stock market, which has worked out poorly in terms of Canadian stocks and not badly for U.S. stocks, or at least U.S. blue chips. For the year through Dec. 21, the S&P/TSX composite index was down 12.6 per cent while the Dow Jones industrial average was up 4.6 per cent in U.S. dollars. We both thought bonds had risen as much as they were going to, but of course they did well after the stock markets began to fall in the summer.

Read the Portfolio Strategy column on Mr. Boeckh’s 2011 outlook here.

-On Jan. 15, I wrote about what the independent analyst Harry Levant of IncomeResearch.ca describes as high-yield corporations. They’re the dividend stocks that emerged after the survivors of the income trust world converted into a corporate structure in advance of a new tax on trusts that kicked in Jan. 1.

Mr. Levant provided a list of what he considered to be 14 top names in the high-yield corporate world and returns for the year to date have been impressive. All of the 14 had a positive total return over the past 12 months (share price plus dividends), and the average total return was 18 per cent. The average dividend yield at today’s prices is about 5.5 per cent.

Read the column on high-yield corporations here.

Click <a href="http://www.theglobeandmail.com/globe-investor/investment-ideas/portfolio-strategy/performance-of-a-high-yield-portfolio/article2282458/">here</a> to see how this portfolio of high-yield corporations performed this past year.

-On Feb. 12, I delved into the theme of rising interest rates and inflation by looking at exchange-traded funds that might stand up well in this type of environment. Some interest rates ended up falling in 2011, but most of the ETFs presented did just fine anyway. The big exception was the Claymore Inverse 10-Year Government Bond ETF , which is designed to make money as bond prices fall and yields rise (prices and yields move in opposite directions). CIB was down 11.7 per cent year to date.

Read the column on bond ETFs for a rising rate environment here.

-On March 5, I pushed ahead with my thesis that inflation would start to become a concern in 2011 by looking at investments that do well in a world of rising prices. One suggestion – commodities – was an obvious dud, but the other – real return bonds – did quite well. In fact, the two real return bond ETFs traded on the TSX, the iShares DEX Real Return Bond Index Fund (XRB) and BMO Real Return Bond Index Fund , were both up about 16 per cent for the year to date.

Read the column about inflation-fighting investments here.

-On March 19, I reviewed the principles of basic diversification following a shock to the stock markets caused by the nuclear accident in Japan. Contained in this column was an astute comment by Murray Leith, vice-president and director of investment research at Odlum Brown in Vancouver, about the high concentration of resource stocks in the S&P/TSX composite index. “It’s a very risky index,” he said. “It has a very cyclical bias to it, which exposes investors to a lot of volatility.” So it was in 2011.

Read the column on diversification here.

-On May 7, I cited several reasons for buying U.S. stocks, a call that worked out well not only because the U.S. market was comparatively strong, but also thanks to currency factors. After rising above parity with the U.S. buck a year ago, the Canadian dollar slid in value as global economic uncertainty mounted. This adds a tailwind to U.S. stocks and funds held by Canadians, just as a rising dollar undermines the returns from U.S. investments.

Read the column on why it was a good time to buy U.S. stocks here.

-On May 14, I further explored the idea of cutting down on commodity exposure in the Canadian market by looking at equity mutual funds and ETFs with fewer holdings in energy and metals than the S&P/TSX composite index. Each of the funds and ETFs presented was down less than the composite index for the year to date, and a couple actually made money.

Read the column on funds with less commodity exposure here.

Click <a href="http://www.theglobeandmail.com/globe-investor/investment-ideas/portfolio-strategy/etfs-and-funds-with-low-commodity-exposure/article2282461/">here</a> to see how this portfolio performed.

-On July 16, I was still looking ahead to higher rates, but I also cautioned investors that bonds are essential, no matter what the market outlook is. It wasn’t much more than a week later that the stock markets began to slide and bonds once again proved how indispensable they are. As of Dec. 21, the DEX Universe Bond Index, the benchmark for the entire Canadian bond market, was up 7.9 per cent for the year to date. Worried about the downside risk when rates do rise? In my column, I quoted Ghattas Dallal, a senior analyst with CIBC World Markets, who found in a study that the Canadian bond market’s worst decline on record was an 11.4-per-cent drop from June 1980 to July 1981. That’s nasty, but not in the league of what the stock market has dealt out in the past.

Read the column on the safety of bonds here.

-On Oct. 22, I wrote about a defensive portfolio of ETFs created by analysts at National Bank Financial that stood up well in 2008-09 and was likewise resilient in this year’s market storm. Lots of readers asked whether they could buy the portfolio directly. You can’t – you have to build it yourself from the NBF blueprint. Year to date, the defensive portfolio rose 5.5 per cent on a total return basis. Don’t expect good results if the markets rally.

Read about the defensive portfolio here.

Click here to see how this portfolio performed this past year.

For more personal finance coverage, follow me on Twitter (rcarrick) and Facebook (Rob Carrick).

 
  • CIB-T
  • XRB-T
  • ZRR-T
Live Discussion of CIB on StockTwits
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Live Discussion of XRB on StockTwits
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