With 2019 winding down, let’s take a final look at the questions that have piled up in the email box this year.
Building a portfolio
Q - Currently I have a corporation with multiple seven figures in investible capital. My family gets sufficient income from the family trust and so we do not need cash flow from this money.
I would like to invest in a tax-efficient manner with a 20-year horizon. The funds can be held in Canadian or U.S. dollars. Do you have any specific advice as to how to build a sensible portfolio and which markets you would be most exposed to? My objective is over a 20-year period to have grown the assets as much as is possible, observing a responsible level of risk. Currently, I have a traditional 70/30 split between Fortune 500 stocks and fixed income. – Peter J.
A - For starters, I would suggest you reconsider the 30-per-cent fixed income holding. That’s a useful cushion against a market meltdown, but you’re looking at a 20-year time horizon. Using that parameter, a high fixed-income allocation will hold down your total return over time. Consider cutting back to 20 per cent or even 15 per cent. (I would never suggest this to an older person but we’re looking long-term here).
Based on what you tell me, you have no exposure to emerging markets. Southeast Asia, including India and China, should lead the world in growth over the next 20 years because of their young and upwardly mobile populations. I would consider putting 10-15 per cent of the portfolio into low-cost ETFs that focus on that region.
You also seen to have no exposure to Europe and Japan. I believe these will be slower growth areas, but they should not be ignored entirely if you are to have geographic balance.
Your emphasis on the U.S. and the Fortune 500 companies is on target from my perspective. But if you are going to enhance tax efficiency, you need some exposure to Canadian dividend stocks and REITs.
Overall, I would look at a mix like this: 40-per-cent U.S., 20-per-cent Canadian, 15-per-cent emerging markets, 10-per-cent EAFE, 15-per-cent fixed income.
As for the holdings, use ETFs for emerging markets, EAFE, and fixed income. Stick with high-quality blue-chip stocks for the U.S. and Canada. – G.P.
Q – Do you know of any Canadian funds or ETFs that invest in infrastructure and telecoms in India? The population is very young, and millions will move from rural to urban areas in the next 20 years. Thanks - Rene
A - I don’t know of any India funds either in Canada or the U.S. that are that narrowly focused. There are several funds and ETFs with a broader mandate, whose portfolios will include a lot of telecoms and infrastructure companies. The oldest in Canada, dating back to 1998, is the Excel India Fund, now owned by Sun Life. As of Oct. 31, it was showing a 10-year average annual rate of return of 8.12 per cent. However, the MER is very high at 3.3 per cent.
For a cheaper alternative, look at the iShares India Index ETF (XID-T). It hasn’t been around as long (it was launched in January 2010), but its MER is 1.09 per cent. That’s high for an ETF, but still much cheaper than Excel. The fund tracks the performance of India’s Nifty Fifty Index and was showing an average annual return since inception of 7.23 per cent as of Nov. 30. - G.P.
Q - I’m retired with a pretty solid dividend portfolio built over 30 years. My millennial children are looking to start building their own portfolios, but they (and I) fear this is a poor time to start investing with the looming prospect of recession and possible severe market dives. Buying a house may also be on the horizon in a year or two. Current dips in the markets do not present confidence for investing hard earned cash and GICs return so little. What would be a prudent thing to do? – Sheila P.
A – If a house purchase is on the horizon, the prudent course would be for the children to protect their assets from a market correction. Most economists predict there will not be a recession in 2020, but U.S. indexes are at record highs and we’re sure to have a pull-back at some point. If your children were taking a long view, that shouldn’t be a major concern, in fact it would represent a buying opportunity. But a house in the short-term forecast changes the equation.
I suggest they keep the money in a CDIC insured high-interest savings account. Laurentian Bank is currently offing 3.3 per cent on digital accounts. You’ll also find good rates at Motive Financial, EQ Bank, and Oaken Financial. – G.P.
Q – Is there a Canadian equivalent to U.S. TIPS? - Jacques B.
A – TIPS is short for Treasury Inflation-Protected Security. These are U.S. Treasury bonds that are indexed to inflation. The principal value of TIPS rises in lock-step with inflation. In Canada, these are called real return bonds.
Blackrock offers the iShares Canadian Real Return Bond Index ETF, which trades under the symbol XRB. It has done well recently, with a one-year return of 10.83 per cent to Nov. 30. However, average annual results since inception in December 2005 are an insipid 3.83 per cent. The management expense ratio is 0.39 per cent. – G.P.
Mawer Balanced Fund
Q - I have invested a total of $270,000 in my name, wife’s name, and daughter’s name in Mawer Balanced Fund. I would like to invest another $100,000 in the same fund. Is this too much to invest in the same fund or should we split it? I like the fund because it is balanced and carefully managed. Your comments would be highly appreciated. I am 80, wife 72, and daughter 42. – Ron A.
A – First, let me say that this is an excellent fund, with a great track record. According Morningstar, the average annual return over the decade to Dec. 20 is 9.49 per cent. Equally important for conservative investors is the fact the fund had only one losing year during that time, a fractional drop of 0.3 per cent in 2018. The MER is a reasonable 0.91 per cent.
That said, I would never advise investing more than 25 per cent of your assets in a single fund. Things can go wrong, even with the best-managed portfolios. If the new investment would exceed that target, you may want to look at other options. – G.P.
If you have a money question you’d like me to answer, please send it to email@example.com and write “Globe Question” in the subject line. I can’t guarantee a personal response, but I’ll answer as many as possible in this space.
With that, Happy New Year to all. I’ll be back in 2020.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.