How to tell if you need to make changes to your investment portfolio because of the Russian invasion of Ukraine: You own a highly speculative portfolio designed for last year’s go-go stock market conditions.
If you own a diversified portfolio, a balanced mutual fund or an asset allocation exchange-traded fund that corresponds with your personal investing profile, you can stand down.
The question of whether and how to adjust a portfolio to war in Europe was raised recently by a 72-year-old reader who has a substantial six-figure amount invested in a mutual fund – the $2.7-billion RBC Managed Payout Solution – Enhanced. “I’m worried,” she wrote. “With this Russian invasion, should I change my investments? I live off the monthly income from this fund.”
No, this mutual fund should not be sold because of what’s happening in Ukraine. In fact, it’s an example of a diversified portfolio that should be able to withstand shocks like this quite well. Maybe your portfolio is similar.
First off, RBC Managed Payout Solution – Enhanced has just over half its assets in bonds, which act as a shock absorber when stocks fall. Bonds had a rough 2021, but prices have been on the rise since the invasion began on Feb. 24. Just over 40 per cent of the bonds are government-issued, which means they will hold up particularly well in traumatic moments. Most of the remainder is in corporate bonds, which offer a bit more yield than government bonds, with a little less stability.
A bit more than one-quarter of the fund is in Canadian stocks, which have been volatile lately. But with financial stocks playing a big role in the portfolio, there will be dividends to help generate the income this reader depends on. This fund also has significant exposure to energy stocks, which have done well lately because of the spike higher in oil prices. U.S. stocks have fallen harder than Canadian stocks, but they account for just 17 per cent of the portfolio.
RBC Managed Payout Solution – Enhanced should be fine through any market disruptions ahead caused by the invasion of Ukraine. The heavy bond weighting isn’t ideal for the expected rise in interest rates this year, but the overall mission of this fund in generating income shouldn’t be affected.
Signs you might need to make a change in your portfolio to adjust for any potential shock: You let your portfolio get overweight in stocks lately because you thought bonds were a losing bet, or you’re heavy on thematic sector stocks or funds. In particular, watch out for tech-dominated sectors that became trendy in the past two years.
Old-fashioned diversification is how you build a portfolio that can weather a conflict like the one happening in Ukraine. You may already have that diversification.
-- Rob Carrick, personal finance columnist
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Stocks to ponder
Bank of Montreal (BMO-T) If you had to pick out a winner from Canada’s banking sector over the past year, BMO would be a contender – raising the question of whether the bank is emerging as the top bet in the group. David Berman explains.
Jamieson Wellness Inc. (JWEL-T) Given the sharp correction in many stocks, it may soon be a good time for investors to put some beaten-down stocks on their radar screens. Jennifer Dowty says this is one such stock. Year-to-date, the share price of this consumer staples stock has plunged 17 per cent. In late-February, the stock became oversold with a relative strength index reading below 30. Now, the share price seems to have found a floor with the stock price stabilizing after the company reported better-than-expected fourth-quarter earnings results.
Suddenly, the assumptions that have long fed emerging-markets enthusiasm look quite wrong
As Russian missiles bombard Kyiv and as China’s President Xi Jinping prepares to cement his status as that country’s absolute leader, investors should acknowledge a simple truth: We were wrong about emerging markets. Not that long ago, it seemed obvious that up-and-coming countries would deliver both high returns to investors and increasing levels of democracy to their citizens. Neither assumption turned out to be true. As Ian McGugan tells us, the past 12 months have demonstrated with remarkable force how deep the problems run, both for humanitarians and for profit seekers.
How to adjust your portfolio to react to a rapidly changing, frightening new market
Almost overnight, the world has changed. Russia’s invasion of Ukraine is likely to have far greater and longer lasting consequences for the global economy than the pandemic inflicted. Gordon Pape considers some of the things that have changed and their implications for our investments.
Ukraine invasion proves bitcoin as ‘digital-gold’ — but will that perception last?
Advocates have long hailed bitcoin as an inflation hedge and safe-haven asset not just like gold but better than gold. Russia’s invasion of Ukraine in February validated that view. Since the war began, the price of bitcoin has risen to as much as US$45,000 per unit, up more than 13 per cent. That, of course, flies in the face of what many in mainstream finance think. Ethan Lou takes a look at the continued debate.
Divesting Russian assets proves difficult for investors who want to ‘do the right thing’
The push to remove any trace of Russian assets from Canadian portfolios is at an impasse, with the global financial system increasingly unwilling to handle the toxic securities. Before Russia became a pariah state as a result of its invasion of Ukraine, most emerging-market funds that track diversified global indexes had to carry a Russian component – typically 3 per cent to 4 per cent of assets. In addition, several actively managed Canadian funds went into the year with stakes in popular Russian stocks, such as banks and oil companies, some of which have since been put on Canada’s sanctions list. But as Tim Shufelt tell us, those shares may now be unsellable and effectively worthless.
Investors should consider our abnormal world when bracing for the future
Near-zero interest rates and gushers of government stimulus have taken key parts of the economy on wild rides. Home prices and corporate profits have both shot skyward, shattering expectations in the process. Investors should remember how abnormal all this is when bracing for what comes next. In the past, the smart bet has been to assume that central bankers will ride to investors’ rescue on any sign of market weakness by cutting interest rates. But right now, when central banks are focused on hiking rates to fight inflation, the usual rescue measures don’t apply. As Ian McGugan explains, getting back to normal is going to be a bumpy process.
Why this money manager is trading retail and grocery stocks for railways and fertilizer
As inflation surges, money manager Anil Tahiliani, a senior portfolio manager at Matco Financial Inc. in Calgary, has been busy shifting some of his portfolio positions. This includes ditching utility shares and consumer discretionary stocks with less leeway to raising prices. Brenda Bouw talked with the fund manager.
Others (for subscribers)
Monday’s Insider Report: As gold tops $2,000, a company’s chair invests over $1.3-million in this stock yielding 2.8%
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Ask Globe Investor
Question: My daughter is in grade 11, and I’ve been gradually shifting her RESP holdings to GICs as she approaches university. I’m finding it very difficult to put any more into GICs at the current rates. I’m using BMO Cover Call Utilities ETF and Enbridge as relatively safe choices, paying decent dividends, and have stop limit orders on them so that I can’t lose the initial investment.
I now need to move more money out of active stock trading and am confused by Premium Income Corp A. It is currently paying a whopping dividend, over 9 per cent. Generally, I see a big yield as a red flag, because that usually happen when a stock drops. But this stock seems to have been paying such a dividend for a long time, and the stock is rising. Too good to be true? Could you address the sustainability of its dividend yield? – Mel B.
Answer: Premium Income Corp. is a split share security, managed by Mulvihill Capital Management. It invests in the shares of Canada’s Big Six banks, splitting them into common and preferred. Mulvihill charges a management fee of 0.9 per cent.
The preferred version trades under the symbol (PIC-PR-A-T). It’s the first security to receive any dividends paid by the banks, to a limit of $0.215625 per quarter, or $0.8625 annually. At the time of writing, the shares were trading at $15.26 to yield 5.65 per cent. The market price of the preferreds may occasionally fall when bank stocks falter, but generally they trade in the $15 range, which was the original issue price. There is little upside, but little risk either. The dividend is secure.
Excess payouts accrue to Premium’s A shares, which trade in Toronto as PIC.A. They benefit from the growth in the value of the underlying bank shares and any increase in the dividend payouts from those shares. Since the banks are now raising dividends after being constrained for two years by the Office of the Superintendent of Financial Institutions, we could theoretically see an increase in the dividend. There’s no guarantee of that, however.
According to the Mulvihill website, the A shares currently pay 20 cents per quarter (80 cents annually), to yield 9.6 per cent based on the price of $8.32 at the time of writing. The distribution looks safe, but the A shares can be volatile at times. The original issue price was $10, but they dropped as low as $3.14 in October 2020 according to the TMX website.
It appears the dividend yield is sustainable for both classes of shares. I don’t think there is much downside risk to the price of the A shares currently, but these are uncertain markets, especially given the situation in Ukraine, and we have seen volatility in the past.
Since you’re investing for an RESP where the money will be needed within a few years, the preferreds are the lower risk choice – although you are sacrificing some yield.
What’s up in the days ahead
Jennifer Dowty gets the latest investing insight from the head of asset allocation at TD Asset Management. And Dr. George Athanassakos has a warning for dip buyers everywhere.
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Compiled by Globe Investor Staff