Randy LeClair is Managing Director and Fixed Income Strategist at Manulife Asset Management. His focus is on fixed income.
Top Picks:
Bank of Montreal Floating Rate Preferred Share Series 17 (BMO.PR.R)
This is a floating rate preferred share that is redeemable by the bank any time at the original $25 par value. The dividend is paid quarterly and is based on a yield spread of +165 basis points over the Government of Canada 91-day T-bill rate (currently 2.65 per cent) or an estimated annual dividend of $0.667 per share. On the current price of $25.50 (Friday close) this equates to 2.62% current yield. This yield will move higher as the T-bill Rate moves higher and offers great protection for those worried about rising short-term interest rates. (Held in the Fund with an average price of $25.20).
Great West Lifeco Inc. 5.25% Series S (GWO.PR.S)
This perpetual (straight) preferred share was issued recently (May 2014). It is one of the top insurance companies in Canada and one of the few companies in the preferred share market with a P-1 credit rating from both DBRS and S&P. It has an initial "call" (redemption) date on June 30, 2019, at $26 and then drops by $0.25 per year to a call price of $25 in 2023 - currently trading at $25.33 (Friday close). With an annual dividend of $1.313 (paid quarterly), the current yield of this preferred share is 5.18 per cent and if you were redeemed at $25 in 2023 the "Yield-to-Worst" is 5.02 per cent. Converting this dividend yield to a "Bond Equivalent Yield" would be in the range of 7 per cent. In other words you would need a bond or GIC with a 7-per-cent yield in order to get the same "after-tax" return of this preferred share dividend. It is held in the fund and the average purchase price in the fund is $25.19.
Enbridge Inc. 4.40% Series 11 (ENB.PF.C)
This is one of North America's top rated energy pipeline companies and carries a preferred share rating of P-2 from both DBRS and S&P. This particular security is a rate-reset preferred share with "call" (redemption) date on March 1, 2020 at $25 or it will reset in 2019 at +264 basis points fixed or floating - currently trading at $25.03 (Friday close). With an annual dividend of $1.10 (paid quarterly), the current yield of this preferred share is 4.40 per cent and if you were redeemed at $25 in 2020 the "Yield-to-Reset" is 4.40 per cent. It is held in the fund and the average purchase price in the fund is $25.
Past Picks: September 30, 2013
Toronto-Dominion Bank Floating Rate Preferred Share Series T (TD.PR.T)
Then: $25.21; Now: $25.52 +1.20%; Total return: +4.35%
Veresen Inc. 4.40%, Series A (VSN.PR.A)
Then: $23.75; Now: $25.25 +6.30%; Total return: +10.93%
Brookfield Renewable Energy 5.00% Series 5 (BRF.PR.E)
Then: $19.80; Now: $21.45 +8.30%; Total return: +14.64%
Total return average: +9.97%
Market outlook:
The Canadian bond market, as measured by the index (FTSE TMX Universe), is turning in a terrific performance on both year-to-date (up 6.6 per cent) and year-over-year (up 7.6 per cent) basis to August 29, 2014. This follows a somewhat dismal 2013. While this year is a pleasant surprise to many market participants, the question now is whether this can continue moving upward and by how much. While no one has the ability to predict the future, it is best to look at the economic landscape to get a better reading on interest rate movements.
It would appear North American economies are in the "fourth quarter" of the interest rate cycle with much of the economic data surprising to the upside (notwithstanding the employment numbers last week). However on a more global perspective, there are some definite economic laggards like Europe and Japan which should mute overall macro growth and are a cause for concern. Domestically, wage growth is low, inflation is tame, and consumer debt levels remain high. Quantitative easing is nearing an end in the U.S., although Europe has just started a similar program. Looking at this mixed bag of factors, it is not the usual scenario where central bankers embark on a round of interest rate increases in order to throw a wet towel on an overheating economy. This situation should be supportive of a low and stable interest rate environment for the next 6 months. As we are reminded by the central bankers, much of how this will unfold will be "data dependent". As we have mentioned previously, short maturity government bonds appear to be anchored in place for the time being while longer term government bonds may be subject to headline risk. Value can be found in investment grade corporate bonds and preferred shares. We remain slightly defensive in our portfolios from a duration standpoint. Investors must be cautious and selective going forward when it comes to their fixed income portfolios.