Nick Maggiulli, chief operating officer at New York-based Ritholtz Wealth Management, outlines what is arguably the most important question in portfolio management: Why own bonds when they yield almost nothing?
In defending fixed income, the author starts by mentioning the inverse correlation of stocks and bonds during periods of equity market weakness. Bonds historically climb when stocks drop and this was true in 2020. When the S&P 500 was down 23 per cent year-to-date on April 1, the iShares Core U.S. Aggregate Bond ETF was higher by two per cent.
A bond allocation can also enhance returns by enforcing investor discipline. By definition, rebalancing a portfolio involves taking profits on the best performing assets.
Mr. Maggiulli also mentions that government bonds are the only game in town when it comes to risk-free investments, so investors should take what they can get.
The reason I’d recommend a government bond component in portfolios is because the decision to not hold bonds is a form of market call. By avoiding bonds, an investor is predicting that no situation will arise where risk-free debt will be beneficial to performance.
In Monday’s newsletter, I detailed the bearish outlook of Macquarie strategist Viktor Shvets who believes that central bank monetary stimulus will lead to a market ‘black hole’. This scenario is not probable in my estimation, but it is credible, and it’s one where investors would be happy to be holding government debt.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Trulieve Cannabis Corp. (TRUL-CN) The company is a leading medical marijuana company in Florida with 63 Trulieve-branded retail stores. Management plans to expand its market dominance beyond the Sunshine State focusing on four additional U.S. states. Year-to-date, the share price is up 84 per cent. The stock has a unanimous buy recommendation from 12 analysts and the average one-year target price implies a 72-per-cent potential gain over the next 12 months. Jennifer Dowty has a full profile of the stock. (for subscribers)
Brookfield Renewable Corp. (BEPC-T) This has become an instant hit with investors, to the point where it is defying expectations. The company was spun out of Brookfield Renewable Partners LP in late July. It was originally expected that both the partnership units and the new corporate shares would trade around the same price. That’s not how things have turned out. Gordon Pape explains why such a large gap in performance has opened up between them. (for subscribers)
NorthWest Healthcare Properties REIT (NWH.UN-T) Not all REITs have been hammered this year. Those that specialize in malls, hotels, office space and long-term care facilities have taken the worst of the pandemic sell-off. But others that focus on sectors that have thrived during this recession have done well. This REIT is trading at about the same price at which it began the year and offers a yield of 6.9 per cent. Gordon Pape tells us more about why he likes this REIT. (for subscribers)
Why bubbly big tech stocks are likely to lose their fizz
Apple Inc. is currently the largest stock in the U.S. but Amazon.com Inc. vies with Microsoft Corp. for the second and third spots, depending on the day. All of them have fared unusually well in recent years. Problem is, giant companies have a hard time growing significantly. Compounding matters, growth that is slow, or slowing, can be a real issue when stocks trade at high multiples. Norman Rothery explains why investors need to be cautious of these big tech giants. (for subscribers)
The cost of playing it safe as an investor is plain as day
The cost of a comfortable investing experience needs to be explored, especially with bond yields at such low levels. As Rob Carrick reports, a clear illustration of the comparative returns of conservative and aggressive investing can be found in a recent National Bank Financial update of its five model exchange-traded fund portfolios. (for subscribers)
Green is the colour of money for funds betting on a Biden win
Fund managers betting that green-type stocks with environmental, social and governance credentials will benefit from an expected win by Democrat Joe Biden in the U.S. presidential election are also looking at a swathe of other companies expected to rise along with them. David Randall of Reuters looks at some examples. (for subscribers)
After America First, some investors bet on a Biden boost abroad
After four years of America First, some money managers outside the United States looking for big post-election investment winners are quietly confident it is the turn of the rest of the world to shine. With several opinion polls pointing to a Joe Biden presidency, these investors are leaning toward assets such as emerging markets or European bank stocks, as potential beneficiaries of a Democrat win while turning cautious on markets such as Russia, which might be hurt by the change. Karin Strohecker, Sujata Rao and Elizabeth Howcroft of Reuters have more. (for everyone)
Others (for subscribers)
Wednesday’s Insider Report: Director invests nearly $500,000 in this large-cap stock yielding 6.8%
Number Cruncher: Seven companies with management teams able to navigate choppy waters
Others (for everyone)
Ask Globe Investor
Question: My wife and I recently sold our U.S. vacation home. We took the cash and transferred some into Canadian dollars. We will use these dollars to pay our Canadian tax obligations as well as a couple of large purchases. We are left with over US$200,000. At the moment these funds are sitting in a U.S. dollar account at RBC. This account pays next to no interest. Presently we have no need for this money. In the future we would like to use some for travel.
It might be a good time to transfer some of these dollars to Canadian because of the exchange rate. What do you think? However, we would like to keep most of this money in U.S. funds. Do you have a suggestion as to where we could park/invest this money? Many thanks! – Martin K., Okotoks, Alberta
Answer: I think your idea of keeping most of the money in U.S. dollars is wise. It’s hard to see the Canadian dollar significantly appreciating in value in the near- to medium-term unless there is a sudden spike in oil prices – which is highly doubtful.
As to where to park the money, according to RateHub.ca, the best rate available on a one-year U.S. dollar GIC is 1.10 per cent at ICICI Bank Canada, a subsidiary of a large Indian bank. Their five-year rate is 1.55 per cent.
What’s up in the days ahead
Brenda Bouw checks in with fund managers at PenderFund Capital Management for their latest stock picks and thoughts on the technology sector. Plus, David Berman explores what’s behind the surging stock prices of the Canadian railways this year.
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Compiled by Globe Investor Staff