Retirees hurt by low interest rates

PORTFOLIO DOCTOR But higher returns mean higher risks, say David Cruise and Alison Griffiths

Q

I am a very conservative investor — bonds and GICs — but it is very hard for retirees to get by with such low interest rates. Can you suggest some other forms of investments to give us a higher return? Linda Z. A

Income investors, particularly those who are most risk averse, are in difficult straits — simply put, higher returns mean higher risk. One of the best strategies in low- interestrate environments is diversification by maturity date. If Linda Z.’ s bond and GIC portfolio is properly structured, she will have laddered holdings that mature at varying times, rather than a structure where everything comes due within a narrow time frame. As interest rates rise, as they are doing now, then she can reinvest at higher rates as her holdings mature. Depending on how much money Linda has, she could investigate adding investment-grade corporate bonds, which will increase return over government bonds. Currently, however, the difference ( or spread) between government and corporate bond yields is extremely low, meaning the higher risk of a corporate bond is not being compensated by a sufficiently high yield.

Another option for Linda is to invest a portion of her assets in a portfolio of highest quality preferred shares, which will yield roughly as much as 1 to 3 per cent ( depending on tax bracket) over government bonds.

There are numerous bond and income mutual funds that hold a mix of cash, government and corporate bonds, together with income trusts, common and preferred shares. Care must be to taken that equity and income trusts ( which are equities) are not too heavily represented in order to fit her requirements of low risk. Bond funds are restricted to holding 10 per cent of non- cash assets in equities, “ income” funds are not.

For example, Elliott & Page Monthly High Income Fund gets a five- star ranking by Morningstar, Inc. It beats the benchmark index ( Morningstar Balanced Canadian) and is in the top quartile, or 25 per cent, of similar funds. And performance is appealing with threeand five- year annual compounded returns in the 17 per cent range. However this fund holds 70 per cent Canadian equity.

Acuity High Income is another five- star fund, but it too belongs more in the Canadian equity category than fixed income, with more than 70 per cent, according to the most recent Morningstar report, in equities. On the other hand, Investors Canadian High Yield Income C rates a five- star ranking, but its lower five- year returns, just under 9 per cent, reflect the fact that it is far more a fixed income fund, albeit one that includes a mix of income trusts and high yield corporate bonds.

While the names of so- called income or high-yield funds might make them all appear to belong in the same area, it is important to examine content within the fund, to ensure you are buying what you intend.

Another option for Linda is to add in a high- quality dividend fund to her portfolio. Again, it is important to examine each fund’s asset allocation and investment objectives rather than simply looking at historical return. Q

I have a fairly large portfolio

of some 30 stocks. I trade on the Internet with TD Waterhouse discount broker. I have never used a stop-loss order. How do I go about applying it at this time? Patrick H. A

Stop- loss orders are useful

tools for those managing their own portfolio, particularly for securities that fall into the more volatile category. The idea is to select a price below which you no longer wish to own the stock. When the stock falls to that price, it triggers an automatic sell. TD Waterhouse, like all discount and full- service brokerages, accept stop- loss orders on any number of stocks. You can do it online or by phone. There is no additional fee with TD, but if the order is executed then you will, of course, pay at least the minimum $29 online trade fee or $43 for phone orders. Many investors use stop- loss orders when they are going to be away or know there will be a period of time when they can’t check on their holdings regularly. At TD Waterhouse, for instance, the order stays open for 30 calendar days. If you want to keep stop- loss orders in place for a longer period, then you simply update the orders once a month. The other side of a stop- loss order is called a limit order, which is a point above the current price that will trigger a sell, resulting in a profit. Some experts suggest a 15 per cent gain or loss is a reasonable peg for both stop- loss and limit orders. But the sell point depends entirely on your time frame and risk tolerance. Q

I am wondering if I am better off paying an adviser a 2 per cent fee to manage my portfolio. This adviser says she will sell me F-series funds, which have lower MERs ( management expense ratios). Daniel S. A

F-class mutual funds are

stripped of the “ advice” portion of the management fee ( called a trailer fee), thus lowering the MER. Advisers who are charging portfolio management fees should not, obviously, also be collecting a trailer fee ( or the sales commission, called a load fee) from the fund company. The existence and size of trailer fees and sales commissions may restrict which funds an adviser chooses to recommend to you.

If you have confidence in this adviser and she is completely transparent about all fees, both hidden and otherwise, then freeing her of fund bias by paying an overall portfolio management fee could be a good idea. You should also be buying these funds on a no- load basis, which gives you greater investment flexibility. But you won’t necessarily reduce your portfolio costs.

Before you make the decision, ask the adviser to detail her fees and any fund management fees you may still end up paying. Additionally, ask what kind of service (beyond just buying and selling) the adviser will be providing. Whether to switch to a portfolio management fee or not depends entirely on the quality of information and service this adviser will be providing. The Portfolio Doctor appears Sunday. Send your portfolio, comments or questions to The Portfolio Doctor, Business, The Toronto Star, One Yonge St., Toronto, M5E 1E6; email theportfoliodoc @yahoo.ca; Web at www.portfoliodoctor.