Martin Pelletier: The GIC strategy is not very attractive for the majority of income-seeking investors
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In the good old days, people retiring used guaranteed investment securities to implement simple ladder strategies. This provided me with enough income to cover some liquidity and lifestyle needs, and the peace of mind that my principal was protected and guaranteed. I drew it down.
Then the 2008 financial crisis happened, and as central bankers used 2% inflation as an excuse to keep stimulating the economy, interest rates were slashed, keeping interest rates at record lows, which led to Prices have increased significantly.
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That changed when the economy reopened after the coronavirus shutdown in 2020, forcing central bankers to sharply raise interest rates to curb out-of-control inflation. Inflation has responded as supply chain log jams are cleared and the surge in consumer spending slows, but there is still some way to go before returning to the 2% target.
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Governments such as Japan and the United States have become accustomed to running large budget deficits, and combined with the recurrence of supply disruptions caused by the Middle East conflict, commodity prices may recover from recent lows and eliminate fiscal deficits. It has become quite difficult. Return inflation to pre-COVID-19 levels.
The positive point in all of this is that even though short-term interest rates are paid up front than long-term interest rates, interest rates eventually rise high enough to start paying investors a decent amount of income. That’s what happened. Therefore, his ladder-like GIC strategy remains less attractive to most income-seeking investors.
This has forced many people to own dividend stocks, but the performance of this sector of the market has declined dramatically. The iShares Select Divident ETF has a yield of 3.8%, so it needs to generate some capital gains to boost its return goals. But over the past 12 months, stocks are down nearly 3% while the S&P 500 index, heavily weighted with big tech stocks, is up 22%. Even over the past two years, the ETF has only gained 1.8% compared to the S&P 500’s total gain of 11%.
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These gains do not cut it, as dividend-paying companies will be challenged to grow revenues, profits, and dividends if the economic outlook “softens.”
Some investors are turning their attention to investment-grade corporate bonds, such as the iShares iBoxx $ Investment Grade Corporate Bond ETF and the iShares Core Canada Corporate Bond Index ETF, which offer acceptable yields of 4.36% and 5.1%, respectively. , probably still not high enough.
As a result, institutional investors, high net worth individuals, and family offices have turned to the private debt market to meet some of their targeted income needs, but this is not without risk. There is a lack of liquidity as the funds are locked up for the next five to seven years, and there is uncertainty about the value of the underlying assets pledged as collateral.
This does not mean that private debt should not be included in a portfolio, but it can present some challenges, especially for those who do not have the size or resources of a large pension scheme.
Structured notes have proven particularly useful in this regard, as they overlay options on a specific index and are packaged as bond-like securities that are backstopped by a bank’s credit rating. Therefore, portfolios of bills can be custom built and managed to meet the specific income goals of high-net-worth clients, family offices, and even small institutions.
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Terms can be set on a tiered basis to manage maturity risk, with downside protection ranging from 25 percent up to 100 percent, depending on the customer’s overall risk tolerance.
In a sense, this is a form of active management in addition to a passive-like portfolio when using an index, and can even be done for a group of stocks that have already been researched. Notes can be closed before expiration, providing at least liquidity if needed.
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Martin Pelletier, CFA, is a Senior Portfolio Manager at Wellington Altus Private Counsel, where he specializes in discretionary risk management portfolios, investment audit/supervision, and private clients and institutional investments specializing in advanced tax, real estate, and wealth. The company operates as TriVest Wealth Counsel. Under planning.
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