Pape’s Balanced Portfolio ahead of target

Some rebalancing needed

Stock markets have done well this year, but growing evidence of a slowdown in world economic growth and talk of a possible recession have investors worried. It’s at times such as this when it is important to review your portfolio and ensure it is properly balanced to reflect your risk tolerance. That’s what we will do today with the model Balanced Portfolio I developed for my Income Investor newsletter.

It was launched eight years ago, in September 2011, with an initial valuation of $25,027.75. The goal was to achieve a return that at least matched the best available five-year GIC rate plus two percentage points.

That means the target varies with the rise and fall of interest rates. Right now, the best five-year rate I could find this month is 3% from ICICI Bank, so we want to see an annual return on this portfolio in excess of 5%.

Here’s a summary of how the securities we currently hold performed over the period since I last reviewed this portfolio at the beginning of April. Prices are as of the close of trading on Sept. 20.

iShares Canadian Short Term Bond Index ETF (TSX: XSB). Short-term bonds (maturities of five years or less) don’t offer a high return but they provide portfolio stability and limit downside risk. The unit price was up $0.02 in the latest period, and we received distributions of $0.275 per unit, so we ended up with a small gain of 1.1%.

iShares Canadian Universe Bond ETF (TSX: XBB). Bond prices moved higher and yields dropped as the U.S. Federal Reserve Board cut interest rates twice. The unit price of this ETF gained $0.86 since the last update. Distributions totalled $0.371 per unit, so we ended the period with an advance of 3.9%.

iShares Convertible Bond ETF (BATS: ICVT). This ETF invests in a portfolio of convertible bonds, mainly issued by U.S. companies. It was added to the portfolio a year ago. The price dropped initially but recovered slightly in the latest period, gaining $0.52 (figures are in U.S. dollars). Monthly distributions totaled $0.388.

Canadian Apartment Properties REIT (TSX: CAR.UN). This high-performance REIT was added to the portfolio at the time of the last review in April. It has done well for us so far, gaining over 11%. Distributions are paid monthly and totaled $0.575 since the REIT was added.

Pembina Pipeline (TSX: PPL). This Western Canada pipeline company is another new addition to the portfolio. The shares are off $0.30 since the original selection, but we received monthly dividends totalling $0.99, which left us with a small profit for the period.

Brookfield Renewable Energy Limited Partnership (TSX: BEP.UN). This renewable energy limited partnership has been on a roll recently, gaining $7.75 per unit in the latest period. We received two distributions of US$0.515 per quarter.

Brookfield Infrastructure Limited Partnership (TSX: BIP.UN). This Brookfield partnership invests in infrastructure projects worldwide: railroad, ports, transmission lines, toll roads, etc. The price is up $7.65 since the last review, and we received two quarterly distributions of US$0.5025 each. This is far and away the number-one performer in this portfolio.

Bank of Montreal (TSX: BMO). We added this bank stock a year ago, with a view to injecting more stability into the portfolio. It hasn’t worked out that was so far. The banking sector has been in a slump, and the shares lost $4.76 since the last review. That was partially offset by two dividends totaling $2.03 per share.

Cash. We invested $1,721.96 in a high interest savings account with Motive Financial that pays 2.8%. We earned interest of $24.10 for the period.

Here’s how the portfolio stands now. Commissions have not been factored in. For simplicity, Canadian and U.S. dollars are treated as being at par for purposes of the calculations, although obviously, the distributions received from the two Brookfield partnerships and ICVT are worth more in Canadian dollar terms.

Comments: The bond section of this portfolio continued to contribute as the interest rate outlook changed and rates fell. On the equity side, the Brookfield partnerships continued their torrid pace, and we had a good contribution from the Canadian Apartments REIT. BMO was the only serious weak spot. Overall, the portfolio gained 7.5% in the period.

The cumulative gain since inception eight years ago is 76%. That works out to an average annual compounded rate of return of 7.32%. That’s well ahead of our target.

Changes: The portfolio is doing well, but I have two concerns at this point. The first is the heavy weighting in BIP.UN, which now stands at 21%. This security has been an outstanding performer, but it is beginning to make the portfolio look lopsided and needs to be pared back.

My second worry is that the bond portion of the portfolio is down to 34.5%. With world economic growth slowing, it is only a matter of time before this reality catches up with the stock market. A late-year slump, similar to the one that occurred last December, is a real possibility.

To address these issues, we will sell 50 units of BIP.UN at $63.30, for a total $3,165. We will use the money to add to our position in XBB, buying 100 units at $32.19 for a total investment of $3,219. We will take the extra $54 from retained earnings. That will give us a total of 250 units of XBB and reduce our retained income to $134.70.

We will also buy another 10 units of XSB for a cost of $275.70. That will bring our position to 160 units and reduce our retained income to $18.26.

The net result of these moves will be to reduce our weighting in BIP.UN to 13.4% and increase our total bond weighting to 42.5%. This will reduce the profit potential of the portfolio but better position it for what could be a difficult period for the markets.

We have cash remaining of $2,021.22, which will continue to be invested with Motive Financial at 2.8%.

Here is the revised portfolio. I will review it again in March in my Income Investor newsletter.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.

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Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.