Review and update: Pape’s Balanced Portfolio
Turnaround in balanced investing
Balanced investing has always been the go-to strategy for risk-averse investors. A portfolio split of 60% storks, 40% bonds was considered the most effective way to preserve assets while generating respectable growth.
Until last year, that is. Then all the traditional theories went up in flames. Not only did the stock market tank but bonds, which had been a steadying influence for four decades, experienced one of their worst years ever. The result was a drop of almost 10% in a classic 60-40 portfolio, the third worst performance since 1960, according to the Steadyhand Volatility Meter.
Fortunately, 2023 has been more positive, at least so far. The bond market has rallied, albeit tentatively, and all the major North American stock indexes are in positive territory.
My Income Investor Balanced Portfolio was launched in September 2011. It contains a conservative mix of stocks, fixed income securities, and cash. Normally, this type of portfolio tends to underperform when stock markets are strong but reduces risk when bear markets emerge. The formula didn’t work in 2022, but it now seems to be back on track.
The portfolio had 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. The best five-year rate I can find right now is 5.15% from Saven Financial, which would make our current target 7.15%.
Here’s a summary of the securities we currently hold and how they performed over the period since I last reviewed this portfolio in October. Prices are as of the close of trading on April 21.
GICs. We invested a total of $16,943.20 in short-term GICs in order to protect our fixed income assets from falling bond prices. All these GICs have matured.
Canadian Apartment Properties REIT (TSX: CAR.UN). This REIT invests in apartment units across Canada. REITs were hit hard by rising interest rates in 2022 but are recovering. These units gained $7.41 in the latest period. That doesn’t make up for the 2022 losses, but it’s a good start. We received monthly distributions totaling $0.726 per unit.
Pembina Pipe Corp. (TSX: PPL: PBA). Pembina’s stock price is virtually unchanged from our last review. But the excellent cash frow pushed us into profitability on this security. The company switched from monthly to quarterly payments at the start of this year.
Brookfield Renewable Partners (TSX: BEP.UN). The units of this green energy partnership with worldwide assets have started to recover, with the price up $4.06 since the last review. We received two quarterly distributions for a total of US$0.6375 per unit.
Brookfield Infrastructure Limited Partnership (TSX: BIP.UN). This Brookfield partnership invests in infrastructure projects worldwide: railroads; ports; transmission lines; toll roads; etc. After a slump last year, the units are starting to recover, and are up $1.85 since the last review. We received two quarterly distributions totalling US$1.0675.
BCE Inc. (TSX: BCE). We added Canada’s largest telecom company to the portfolio in the fall of 2020 at $56.20 per share. The shares went as high as $74.09 before going into a deep dive. They are starting to recover, however, and are up $5.51 since the last review. The company raised its dividend 5.2% at the start of this year to $0.9675 per quarter.
Bank of Montreal (TSX: BMO). The financial sector has been hurt by recession fears, which investors worry could impact short-term profits. Runs on U.S. regional banks aren’t helping. Most bank stocks are down, but BMO held its ground during the latest period. The bank raised its quarterly dividend by 2.9%, to $1.43, effective with the January payment.
Fortis Inc. (TSX: FTS). This St. John’s-based utility is normally a reliable performer, but like most interest-sensitive securities, it went into a decline for several months as central banks aggressively raised rates. However, that phase is over. The stock gained $8.56 per share in the latest period. We received two dividends of $0.565 each.
iShares S&P/TSX Capped Energy Index ETF (TSX: XEG). We purchased this energy ETF last fall to gain exposure to the booming energy sector. Unfortunately, energy stocks ran out of steam soon after, and we’re down 3.8% on this one.
Cash. We invested our cash balance, including retained earnings, of $3,169.81 in an HSBC High Rate Savings Account, which was currently offering 4.25% to new customers. We earned interest of $67.36 for the period.
Here’s how the portfolio stands now. Commissions have not been factored in.
After a rough start in 2022, our portfolio recovered nicely with all our holdings except one (XEG) on the plus side. The total portfolio value as of April 21 (market value plus retained income) was $54,349.51. That represents a gain of 5.65% over the six-month period.
The cumulative gain since inception 11 1/2 years ago is 117.2%. That works out to an average annual compound growth rate of 6.98%. That was ahead of target for most years since the portfolio was launched, but right now it’s lagging slightly.
We have $17,309.02 from our matured GICs to reinvest. Also, we will sell XEG for a small loss, giving us a total of $19,483.36 to redeploy. That’s about 35% of our total assets.
It’s time to go back into bonds, but there’s still some interest-rate risk out there, so we won’t take the full plunge. Instead, we’ll start by investing $10,000 in a one-year GIC with Saven Financial that pays 5.15% on maturity (April 21, 2024).
Next, we’ll buy 200 units of the iShares Core Canadian Universe Bond Index ETF (TSX: XBB). The units closed on April 21 at $28 so our total investment is $5,600.
Finally, we will add 190 units of the iShares U.S. IG Corporate Bond Index ETF (CDN-hedged) (TSX: XIG), which is trading at $20.38. This represents an investment of $3,872.20. That leaves $11.16, which we will add to cash.
We’ll use some of our retained income as follows:
PPL – We’ll buy another 10 shares at $44.25 for a total cost of $442.50. We now own 90 shares and have $65.70 in retained earnings.
BEP.UN – We have enough funds to buy 10 units at $42.29, for a cost of $422.90. That gives us 110 units and leaves $85.15 in retained earnings.
All else remains the same.
We now have a cash balance, including retained earnings, of $2,922.41. We’ll move this money to a Saven Financial High Interest Savings Account, which is currently offering 3.75%.
Here is the revised portfolio. I will review it again in the fall.
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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. To take advantage of a 50% saving on a trial subscription and receive the special report “The Tumultuous Twenties,” go to https://bit.ly/bwGP20s.
Notes and Disclaimer
Content © 2023 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. 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.