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investor clinic

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When a stock accounts for a large portion of one's portfolio because of strong performance, is it a good idea to rebalance? For example, BCE has grown from 8 per cent to 15 per cent of my portfolio and I'm wondering if I should sell part of my position.

This is a tricky one. On the one hand, as I wrote in a recent column , I don't like to sell stocks unless the company's outlook has changed. Selling winners could also trigger capital gains tax in a non-registered account.

On the other hand, if a stock accounts for a large chunk of your portfolio – and I would argue that 15 per cent qualifies as large – you'll feel extra pain if something goes wrong with that company. The flipside is also true: If the stock keeps rising, you'll be glad you have such a large position.

So, while there are pros and cons to rebalancing, the ultimate goal should be to control your risk. My general rule of thumb is not to let any one security account for more than 5 per cent of my total portfolio – a guideline some fund managers also use.

The 5-per-cent number isn't carved in stone, however, and you don't necessarily have to sell any shares to lower BCE's weighting. For example, you could direct any new cash to other stocks or, if you have BCE on a dividend reinvestment plan (DRIP), you could suspend the DRIP and use the dividends to buy other stocks to gradually bring down BCE's weighting.

Not everyone thinks trimming winners is necessary. Twenty years ago, when the Chicago Bulls were dominating the National Basketball Association, Warren Buffett used a sports analogy to make his point.

"To suggest that [an] investor should sell off portions of his most successful investments simply because they have come to dominate his portfolio is akin to suggesting that the Bulls trade Michael Jordan because he has become so important to the team," he wrote in this 1996 letter to Berkshire Hathaway shareholders.

It's an interesting analogy, but not a perfect one. Michael Jordan was the best basketball player of his time, so trading him would indeed have been foolish. But is BCE your best – i.e., most promising – stock by virtue of having the largest position in your portfolio? Of course not. A stock's weighting says nothing about its future performance.

In the end, it comes down to your comfort level. Are you so confident about BCE's future that you can accept the risks that come with having such a large position in one stock? If you have any doubts, then rebalancing is probably a prudent move.


I have been holding Boston Pizza Royalties Income Fund (BPF.UN) for many years and I'm wondering why it is "off the radar" of most analysts. The fund yields more than 7 per cent and seems to be a solid performer. Am I missing something significant?

It's not just Boston Pizza that's off the radar of Bay Street. Most of the other restaurant royalty stocks – such as Pizza Pizza Royalty Corp. (PZA), A&W Revenue Royalties Income Fund (AW.UN) and Keg Royalties Income Fund (KEG.UN) – also receive scant analyst coverage, for a couple of reasons.

First, royalty funds – which license the restaurant's trademarks to the operating company in exchange for a percentage of sales – have minimal expenses. As such, they generally don't need to sell equity or debt to the public, which means brokerage houses have little interest in covering them. In fact, most are followed by just one analyst.

Second, the stocks typically have small public floats and low trading volumes. This limits their appeal to institutional investors, who would have trouble buying or selling the shares in size without moving the price significantly.

Lack of coverage isn't necessarily a reason to avoid these stocks. In fact, there's an argument that stocks without a large analyst following are often undervalued. Restaurant royalty stocks tend to have higher-than-average yields and most have been raising their distributions recently (including the two I own, PZA and AW.UN).

BPF.UN hiked its distribution by 6.2 per cent in February, following a similar increase in 2015, but investors hoping for another distribution boost might have to be patient.

In May, the fund announced that same-store sales growth – which it refers to as "a key driver of distribution growth for unitholders" – was just 0.6 per cent in the first quarter, held back by weakness in the company's core Alberta market, which represents roughly one-third of sales. However, the fund said it continues to have "strong sales growth in all regions of Canada that are not directly impacted by the oil and gas industry."

In a research note published in May, Laurentian Bank analyst Elizabeth Johnston reiterated a "hold" rating on the shares. "Given the continued weakness from Alberta, we remain conservative on the outlook for BPF," she wrote.