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There are times when the investing world gets turned upside down.

This is one of them.

Many of the investments we previously viewed as safe, such as bonds, preferred shares, and dividend paying stocks, have become liabilities as interest rates rise.

As a result, our Low-Risk Portfolio, which we set up last October, has become more vulnerable than we would like.

The goal of this portfolio is to protect assets against stock market losses while providing a return that is at least a point and a half better than the top GIC rate. Right now that is 3.46 per cent so our current target is 4.96 per cent.

The initial investment was $50,000. Commissions are not factored in and the Canadian and U.S. dollars are treated as being at par for easier calculation.

The portfolio is comprised of the following securities. Here is an update on their performance with prices as of mid-day on May 24.

iShares Core Canadian Universe Bond Index ETF (XBB). This ETF tracks the performance of the broad Canadian bond market, including both government and corporate bonds. Bonds have been under pressure as interest rates rise and the fund dropped 51 cents per unit since the fall. However, we received slightly more than that in distributions (including the May 25 payment) so we managed a fractional overall gain.

PIMCO Monthly Income Fund (PMO005). This fund invests in non-Canadian fixed income securities from around the world. Like almost all bond funds, it has been hit by rising rates, with a decline of 41 cents in the net asset value (NAV) since October. The distributions didn’t quite match the NAV drop so we took a small loss.

First Asset Enhanced Short Duration Bond ETF (FSB). This ETF invests in a portfolio that is divided between short duration high-yield securities and investment grade corporate bonds. Like the other bond funds, rising interest rates have cut into the price, with a 13-cent decline in the period. However, we received monthly distributions totaling 17 cents so we ended up marginally ahead. Note that the distributions were cut back to 2 cents per unit at the start of the year from $0.03 initially. As a result, the yield dropped to 2.4 per cent.

Canadian Utilities Preferred Shares Series BB (CU.PR.E). This straight preferred from a top-rated utility offers a fixed dividend rate of 30.62 cents per quarter ($1.2248 per year). Like bonds, straight preferreds are negatively affected by rising rates. In this case, the dividends almost exactly offset the 90-cent drop in the share price. The current yield is 5.3 per cent.

Royal Bank (RY-T, RY-N). Banks are supposed to profit in a time of rising rates but we have not seen that reflected in Royal’s share price to date. The stock is down $1.60 since October. However, that was more than covered by dividends totalling $2.76 per share. The bank raised its quarterly payment to 94 cents (from 91 cents) in April.

Fortis Inc. (FTS-T, FTS-N). Bonds and straight preferreds aren’t the only securities hit by rising rates. Interest-sensitive stocks like utilities and telecoms also get sideswiped. Fortis is down about $5 a share since October. There is nothing wrong with the company; it’s just on the wrong side of the current cycle. We are receiving dividends of $0.425 per quarter but that’s not enough to offset the drop in the share price.

BCE Inc. (BCE-T, BCE-N). This is another interest-sensitive stock that suffered a setback. The shares are down $4.56 despite the fact the company raised its quarterly dividend by 5.2 per cent in March, to 75.5 cents per share ($3.02 per year).

Cash. We received interest of $25.94 from the $1,933.60 held in our on-line account at EQ Bank.

Here is a summary of the portfolio as of the mid-day on May 24.

Low-Risk Portfolio (as of May 24)

SecurityWeight %Number HeldAvg. PriceBook ValueMarket PriceMarket ValueRetained IncomeGain/Loss %
XBB15.8250$30.86 $7,715.00 $30.35 $7,587.50 $149.00 0.03
PMO00514.6500$14.44 $7,220.00 $14.03 $7,015.00 $81.05 -0.17
FSB12.3600$10.01 $6,006.00 $9.88 $5,928.00 $102.00 0.04
CU.PR.E14.3300$23.80 $7,140.00 $22.90 $6,870.00 $275.58 0
RY14.570$100.82 $7,057.40 $99.22 $6,945.40 $193.20 1.2
FTS13150$46.78 $7,017.00 $41.73 $6,259.50 $191.25 -8.1
BCE11.4100$59.11 $5,911.00 $54.55 $5,455.00 $147.24 -5.2
Cash4.1$1,933.60 $1,959.54
Total100$50,000.00 $48,019.94 $1,139.32 -1.7

Comments: Clearly, it has been a disappointing start for this portfolio. All of our securities dropped in market price during the review period. In a few cases, dividends/distributions offset those losses but the net result was an overall decline of 1.7 per cent in the total value.

The reason is simple. Interest rates are moving up faster than anticipated, especially in the U.S. and in the Canadian commercial marketplace. The Bank of Canada may be standing pat but financial institutions are not, especially when it comes to mortgage rates. This scenario is probably going to continue for a while.

Changes: We need to make some changes that will improve performance and reduce interest sensitivity without adding undue risk. Here is what I suggest.

PIMCO Monthly Income Fund. We can now purchase an ETF version of this fund with a much lower management fee than the mutual fund A units. It trades on the TSX under the symbol PMIF and is currently priced at $19.60. Distributions are paid monthly but they are not consistent so don’t count on predictable cash flow. We will switch our A series mutual fund units for 360 shares of this ETF, for a cost of $7,056. That will leave $40.05, which will be added to cash.

Canadian Utilities Preferreds. The straight preferred I originally recommended (CU.PR.E) is well suited to a stable or declining interest rate environment, however its market price is vulnerable to rising rates. Therefore, let’s replace it with a rate reset from the same company that trades under the symbol CU.PR.I. It should move higher in price as rates rise. It is currently trading at $26.03 and yields 4.3 per cent. We will buy 275 shares for $7,158.25, taking $12.67 from cash to make up the difference.

BCE and Fortis. Here again, we have two first-class companies that are long-term income generators. But both act too much like bonds to be included in this portfolio at present. Therefore, we will sell both positions for a net of $12,052.99. We will deploy that money as follows.

Dream Global REIT (DRG.UN-T). As a group, REITs are interest-sensitive but this one, which focuses on business properties in Europe, is bucking the trend. It is up more than 20 per cent so far this year and pays a yield of 5.2 per cent. We will buy 300 shares at $14.80 for a cost of $4,440.

Sun Life Financial (SLF-T, SLF-N). Insurance companies should fare well in a rising interest rate environment and Sun Life is one of our best. The stock has made a modest advance this year and yields 3.4 per cent. It is trading at $55.20. We will buy 100 shares for a cost of $5,520.

Apple (NDQ: AAPL). Technology stocks have come a long way from the Wild West days of the 1990s. The big companies are now well-established giants with strong cash flow, good balance sheets, and, in many cases, dividends. Apple falls into this group. Its shares have been steadily moving higher and the dividend, while not rich, is reasonable at 1.6 per cent. The trailing p/e ratio is a respectable 18.0, which means in the event of a market downturn it won’t be as vulnerable as its higher-priced competitors. The shares are trading at $188.07. We will buy 20 shares for a cost of $3,761.40. We will take $1,668.41 from cash to make up the difference.

We are left with cash and retained earnings of $762.71, which we will keep in our EQ Bank account at 2.3 per cent.

Here is the revamped portfolio. I will revisit it in October.

SecurityWeight %Number HeldAvg.PriceBook ValueMarket PriceMarket ValueRetained Income
XBB15.6250$30.86 $7,715.00 $30.35 $7,587.50 $149.00
PMIF14.5360$19.60 $7,056.00 $19.60 $7,056.00 0
FSB12.2600$10.01 $6,006.00 $9.88 $5,928.00 $102.00
CU.PR.I14.7275$26.03 $7,158.25 $26.03 $7,158.25 0
RY14.370$100.82 $7,057.40 $99.22 $6,945.40 $193.20
DRG.UN9.1300$14.80 $4,440.00 $14.80 $4,440.00 0
SLF11.3100$55.20 $5,520.00 $55.20 $5,520.00 0
AAPL7.720$188.07 $3,761.40 $188.07 $3,761.40 0
Cash0.6$318.51 $318.51
Total100$48,972.56 $48,715.06 $444.20
Inception$50,000.00

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 17/05/24 4:00pm EDT.

SymbolName% changeLast
FTS-T
Fortis Inc
-0.13%55.49
FTS-N
Fortis Inc
-0.1%40.77
BCE-N
BCE Inc
0%34.34
BCE-T
BCE Inc
+0.02%46.76
AAPL-Q
Apple Inc
+0.02%189.87
SLF-T
Sun Life Financial Inc
+0.36%70.37
SLF-N
Sun Life Financial Inc
+0.39%51.7
RY-T
Royal Bank of Canada
+0.71%145.34
RY-N
Royal Bank of Canada
+0.75%106.79

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