Randy LeClair is Managing Director and Fixed Income Strategist at Manulife Asset Management. His focus is fixed income.
Top Picks:
TD Bank Floating Rate Preferred Share Series T
This floating-rate preferred share has an initial "call" date on July 31, 2018 at $25. It will pay the Government of Canada 3-month T-bill rate plus 1.60% (160 basis points). Currently this preferred share pays an expected $0.65 annual dividend (current yield of 2.57 per cent), however it will go up or down as the 3-month T-bill moves. Although it has a fairly low yield, it offers great protection in a rising interest rate environment. This is a new issue which was a result of a conversion of a "fixed rate-reset" which came up to its redemption/reset date at the end of July 2013. If the bank didn't redeem, the investor then has the option to go either "fixed rate" or "floating rate" at 160 basis points over the Government of Canada 5-year bond (in the case of the fixed rate) or the 3-month T-bill (in the case of the floating rate option). Recently traded at $25.30 (Sept. 26 close) – average purchase price in the fund is $25.18, recently purchased at $25.36 on August 6 (current yield of 2.57 per cent or a Bond Equivalent Yield (BEY) of 3.47 per cent).
Veresen Inc. 4.40%, Series A
This is a fixed rate-reset preferred share. It has an initial "call" (redemption) date on September 30, 2017 at $25, or it will be "reset" and the investor has the option to take either a "Fixed Rate" or "Floating Rate" at 292 basis points (2.92 per cent plus) the Government of Canada 5-year bond (for fixed rate) or the Government of Canada 3-month T-bill (for floating rate). It recently traded at $23.65 (Sept. 26 close) and pays a $1.10 annual dividend (paid quarterly) - average purchase price in the fund is $25.57 and recently purchased at $24.17 on August 6 (current yield of 4.65 per cent and a yield-to-reset (in 2017) is 4.81% per cent, BEY – 6.73 per cent)
Brookfield Renewable Energy 5.00% Series 5 (BRF.PR.E)
This is a perpetual (straight) preferred share with initial "call" date on April 30, 2018 at $26 (the call price declines by $0.25 per year until it reaches $25 in 2022) and pays a $1.25 annual dividend (paid quarterly) - recently traded at $19.70 (Sept. 26 close) – average purchase price in the fund is $25.03, recently purchased at $20.51 on August 6 (current yield of 6.35 per cent and a yield-to-call (2022) is 8.67 per cent, BEY – 11.70 per cent)
Past Picks: August 27, 2012
Enbridge Inc. 4.00% Series H
price decline $1.96 (was 25.36 now 23.40) plus paid dividends of $1.00 total = ($0.96)/$25.36 = TOTAL RETURN (3.79%) (not annualized)
Then: $25.36
Now: $23.40
Total return: -3.79 per cent
Great-West Lifeco 5.40%, Series P
price decline $1.63 (was 26.38 now 24.75) plus paid dividends of $1.6875 total = $0.0575/$26.38 = TOTAL RETURN 0.2% (not annualized)
Then: $26.38
Now: $24.75
Total return: -0.20 per cent
Canadian Utilities 4.90%, Series AA
price decline $2.43 (was 25.93 now 23.50) plus paid dividends of $1.225 total = ($1.205)/$25.93 = TOTAL RETURN (4.65%) (not annualized)
Then: $25.93
Now: $23.50
Total return: -4.65 per cent
Total return average: -2.88 per cent
Market outlook:
The current economic environment consists of: low growth, tame inflation, relatively high unemployment, little wage growth and a consumer that has high debt levels. This situation is supportive for a low and stable interest rate scenario for the next 6 to 12 months. It is difficult to imagine interest rates moving substantially higher in the near term. Corporate bond yields and preferred shares continue to offer great value versus government bonds in this scenario and should provide stable, positive returns for the remainder of 2013 and into next year. The risk to this scenario is the "tapering" of the Quantitative Easing (QE) program in the U.S. which markets believe is the start of a tightening in credit conditions. At the moment, the U.S. Federal Reserve has indicated the economic data does not warrant a reduction in QE. The timing and amount of the reduction presents some uncertainty for the fixed income markets and will create some volatility which can represent an opportunity for longer term investors. Actual increases to short term interest rates appear to be further in the future (18 to 24 months) and do not pose an immediate risk.