The price of a ticket on the flight to safety

Looking at real versus nominal value

“To be thus is nothing” mused Macbeth contemplating his bloody ascent to the Scottish throne, “But to be safely thus…” And in these few words, the bard pretty much describes the state of mind that now possesses a great many purportedly wealthy folks as they survey the current investing landscape.

For it is one thing to be wealthy in the moment, quite another to be assuredly so, far into the future. And with all the turbulence in the economy, in geopolitics, and even in the physical environment, setting oneself up comfortably for the next decade or more is not a straightforward undertaking. If you were to attempt to make a “flight to safety,” what ticket would you book?

Judging from the popularity of Guaranteed Investment Certificates (GICs), we can infer that the consensus answer to that question is to protect a base level of nominal cash value in one’s portfolio. Fair enough, one supposes, to do this to pre-fund some current year expenses. But as we travel the country and are confronted by so many advisory books stuffed with low return GICs, we cannot help wondering whether the herd is overlooking something.

One does not have to be an economist to notice that, over time, the numbers in finance get larger. We used to think incredulous our grandparents’ stories of ten cent hamburgers eaten before five cent movies. But now our own stories of seven-hundred-dollar Vancouver apartment rent meet with similar gasps and guffaws. Could it be that investors are focused too much on the potential for nominal value loss and not enough on real value erosion? In a world with risks that relate to war or natural disaster or the dismantling of institutions, is a focus on maintaining nominal purchasing power the only way to play it safe?

Our own approach to investing with safety considers the real value of the collateral or the business value that supports a bond, loan or other credit instrument. In our mind, it can be safer to earn 10% for a year, backstopped by collateral worth five times a company’s debt than to earn 5% on a guaranteed basis. In fact, from the point of view of preserving purchasing power, it may be safer to own a 50-cent bond, where hard collateral is worth two dollars per unit, than it is to roll a 5% guarantee.

We acknowledge that non-payment risk is not an irrelevant consideration. And of course, in our working hours, we spend a great deal of time assessing credit risks on fund holdings. But erosion of purchasing power is also a risk. And a variety of other instruments in the current market environment appear to offer relatively cheap real value protection with substantial downside protection. Cash and GICs are not the only, nor the best, destinations on an investor’s flight to safety.

Geoff Castle is Lead Portfolio Manager of PenderFund Capital Management’s Fixed Income Portfolios, including the Pender Corporate Bond Fund. Excerpted from the Pender Fixed Income Manager’s Commentary, June 2024. Used with permission.

Disclaimer

Securities mentioned in this article are for illustrative purposes only and do not constitute an investment recommendation. Always consult your financial advisor before investing in any security.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in net asset value and assume reinvestment of all distributions and are net of all management and administrative fees, but do not take into account sales, redemption or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication is intended for information purposes only and does not constitute an offer to buy or sell our products or services nor is it intended as investment and/or financial advice on any subject matter and is provided for your information only. Every effort has been made to ensure the accuracy of its contents. Certain of the statements made may contain forward-looking statements, which involve known and unknown risk, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

Image: iStock.com/bbossom