Six years ago, in September 2011, I set up this model Balanced Portfolio for readers of my Income Investor newsletter. The goal was to combine above-average cash flow with reasonable risk.
The initial portfolio valuation was $25,027.75, and the target was to achieve a return that at least matched the best available five-year GIC rate plus two percentage points.
The best five-year rate available right now is 2.85 per cent, so we are looking for an annual return on this portfolio in excess of 4.85 per cent.
Here's a summary of how the securities we currently hold performed over the six months since I last reviewed this portfolio in April. Prices are as of the close of trading on Sept. 22.
iShares Canadian Short Term Bond Index ETF (XSB-T). This is a defensive ETF, investing in short-term bonds with maturities of five years or less. Its purpose is to add stability and modest cash flow to the portfolio. The price is down 67 cents per unit in the past six months. We received distributions of 32.43 cents per unit, so we ended up with a small loss for the period.
iShares Canadian Universe Bond ETF (XBB-T). The increase in interest rates by the Bank of Canada has hit bond prices, and this universe bond ETF lost $1.03 per unit in the latest period as a result. We received distributions of 43.97 cents per unit, but that was not enough to offset the decline in the market price.
Fidelity Global Bond Fund (B units) (FID1225). Canadian bonds have not fared well in this rising interest rate climate and neither have global issues. This fund lost 41 cents in value in the latest period and the tiny distributions we received did not come near covering that.
Cineplex Inc. (CGX-T). Cineplex stock took a bad beating in this latest period. Poor earnings plus the rise in interest rates weighed heavily on the shares, which lost $11.50 in the six months. The only good news was a half-cent increase in the monthly dividend, to 14 cents a share.
Inter Pipeline (IPL-T). This is another interest-sensitive stock that has lost ground. The shares are off $3.90 since the last review, although they have regained some ground recently. The monthly distributions continue at a rate of 13.5 cents per unit.
Brookfield Renewable Energy Limited Partnership (BEP.UN-T). This renewable energy limited partnership has hardly budged in price in the past 12 months. In the latest period, the shares lost only a penny in value. We received two distributions, totalling 93.5 cents (U.S.) per unit.
Brookfield Infrastructure Limited Partnership (BIP.UN-T). This is another Brookfield partnership but in this case the assets are infrastructure – everything from coal terminals and railways to power transmission lines. The price is up a modest 43 cents since April, but at least it's a gain. We received two distributions of 43.5 cents (U.S.) per unit.
BCE Inc. (BCE-T). BCE shares were down $2.23 in the latest six months. However, we recovered $143 of that in dividends, so the overall loss was small.
Cash. We invested $1,536.93 in a high interest savings account with EQ Bank that was paying 2 per cent at the time. We earned interest of $15.37 for the period.
Here's how the portfolio stands now. Commissions have not been factored in. For simplicity, Canadian and U.S. dollars are treated as being at par for purposes of the calculations, although obviously, the dividends received from the two Brookfield partnerships are worth more in Canadian dollar terms.
Comments: It was not a good six months for this balanced portfolio. All but one of our components lost value, with Cineplex suffering the greatest setback. Overall, we were down 3.9 per cent for the period. That dropped our total return since inception to 59.1 per cent.
That's disappointing, but the compound annual growth rate since the portfolio was launched in 2011 is still a respectable 8 per cent, which remains well in excess of our target.
We received distributions totalling $678.04 during the period for a six-month yield of 1.6 per cent.
Changes: We have been searching for an international bond fund for this portfolio without much success to date. The Fidelity Global Bond Fund has been a disappointment, and its distributions are very low. So we'll go in another direction here.
We'll sell our Fidelity position for a total of $3,141.67, including distributions. We will use that money to buy 60 shares of the iShares International Treasury Bond ETF, which trades on Nasdaq under the symbol IGOV. The closing price on Sept. 22 was $49.74 (U.S.); however, remember that for purposes of this portfolio, we treat Canadian and U.S. dollars as being at par. We will spend $2,984.40 on this purchase, leaving us with $157.27, which will be added to our cash reserve.
This ETF, which we will also add to our Recommended List, invests in government bonds from around the world, except the U.S. More than 75 per cent of the holdings are rated A or higher, so the credit quality is very good. The distributions are not great, only about a penny a month per unit right now. But the overall performance has been very good, with a year-to-date gain of 10.7 per cent. The MER is 0.35 per cent.
The big selloff in Cineplex is a concern but the company is still sound despite the current bad stretch, so we will retain our position for now. Inter Pipeline was also weak in the latest period but it has been showing signs of recovery lately.
We will buy another 10 units of XSB for $274.90, bringing out total to 250. That will leave us with $27.06 in retained earnings.
Our cash total is now $2,025.19. We will leave it in the EQ account, which now pays 2.3 per cent.
Here is the revised portfolio. I will revisit it next April.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.
Follow Gordon Pape on Twitter at twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney