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    Protecting your portfolio against currency changes

    In our conversations with clients, one question keeps coming up these days:

    “The Canadian dollar has dropped a lot. How is this impacting my investments?”

    You may have wondered this yourself so we thought to address it here. To clarify, when the Canadian dollar falls, as it has by 7% against the U.S. dollar in 2015, the value of U.S. holdings in a portfolio rises. The reverse is also true. For example, from 2002 to 2007, when the Canadian dollar climbed from about $0.63 to over $1.02, the S&P 500 returned over 6% annually in U.S. dollars, but lost about 2% a year in Canadian-dollar terms. Many investors have seen otherwise solid returns wiped out by currency fluctuations.

    Predicting currency patterns is one of the most challenging tasks in the field of investing. Today, more than ever. And while we are the first to remind clients that we are not currency traders, you can’t ignore exchange rates when investing internationally. There are two ways to look at the issue:  first as owners of U.S. assets and second as potential buyers.

    Those who have been following our strategy know that since 2010 we’ve been putting a lot of money to work in the U.S., predominantly in the stock market and private real estate (e.g. apartment buildings). For much of this time, the Canadian dollar was close to par and the beat-up U.S. market was giving us an opportunity to buy quality assets at reduced prices. This strategy played out nicely given both the loonie’s decline and the uptick in the U.S. economy over the past four years.

    The challenge before us now is to protect these gains should the Canadian dollar recover. Because while it may fall further in the short-term, it is unlikely to stay at current levels over the medium to long term.

    The second issue is with respect to potential new investments in the U.S. In front of our investment committee currently are several U.S.-based real estate investments that look attractive. Yet, if we are buying U.S. assets with 80 cent dollars and the dollar rebounds to, say, 90 cents, we need to be comfortable that our target return is still attractive. This is a regular point of analysis and discussion at our investment committee meetings.

    There are a number of factors that impact exchange rates and we believe it is best for us to avoid predictions. From our perspective, the answer is to put a hedge on a portion of our U.S. dollar-denominated holdings. (To hedge is to enter into a financial contract to protect against unexpected, expected or anticipated changes in exchange rates.) We recently hedged one third of our U.S. exposure and will continue to manage this risk going forward to protect client returns and capital.

    Currency hedging is not a panacea – there is a cost, it is imprecise and it only protects the value within a certain range and for a certain period of time under the contract. And there’s the possibility the Canadian dollar could go lower still. (The pundits’ forecasts range from 70 to 90 cents over the next year.) However, in this volatile, low-interest rate investment climate, where every percentage of return is hard won, we think it makes sense to lock in some of our gains. It’s all part of our approach to protecting capital first — especially when we can buy that protection at a cost that is reasonable – and above all, to be prudently diversified.

    A Young Adult’s Guide to Smart Spending

    We recently held the spring session of our popular NextWave program, an educational and networking based initiative that helps the next generation of our client families become more informed, confident and financially independent.

    On an evening in May, a group of young adults in their 20s and 30s gathered in our boardroom to discuss ‘how to spend money wisely’. Although this topic might seem somewhat prosaic, it attracted close to 40 ‘millennials’ and inspired a spirited discussion. The following concepts were discussed as a guide for young adults to make smart spending decisions and more effectively build and manage wealth.

    Live a comfortable life, not a wasteful one. Many ‘Gen Y’ individuals have never experienced real financial hardship. The downside of this is that it can sometimes lead to overconfidence and overspending, rather than saving for ‘rainy days’ or to achieve financial independence.
    [read more >>]

    Why the deep freeze is good for your portfolio

    Apart from the Olympics, the most popular shared experience these days is talk about the weather. To be specific, the bitter cold that has hit most of Canada – and given rise to the new and now popular term, ‘polar vortex.’ However, there is a silver lining to these snow-filled clouds – and not just for those who enjoy winter sports.

    Demand for natural gas has risen appreciably with the decline in temperatures. And that’s good for investors like ourselves who took a contrary view back in 2011 when the commodity was deeply out of favour. At the time, in North America, natural gas was trading at approximately $1.80 per one million British Thermal Units (BTUs) and producers’ stock prices were depressed.

    But for investors who took a longer-term view, a different picture was emerging. One that held the potential for significant profit.

    [read more >>]

    NextWave – A Young Adult’s Guide to Investing

    Young Couple Dealing with FinancesWe hosted our 3rd NextWave event last week in our King West offices where over 30 young adults gathered to learn about and discuss financial issues specifically relevant to the younger age demographic. This NextWave event is part of a larger program to help young adults develop healthy money management habits and ultimately gain the experience needed to steward wealth responsibly.

    [read more >>]

    10 tax saving tips to do before year end!

    With the arrival of December, our attention often turns to holiday preparations — but it’s not too late to save money on your taxes if you act soon.

    Here are ten tax planning ideas to consider before year end:

    [read more >>]

    What the smart money knows….and how you can benefit

    What are the super-rich doing with their money?

    I know it’s a question that many investors wonder from time to time. In our recently released whitepaper, “What the Smart Money Knows…5 ways to learn from institutional and billionaire investors” we examine the question.

    We look at five factors that set institutional and billionaire investors apart from ordinary investors – it’s not just the money – and we offer up our own solution packaging many of these advantages into turnkey investments for high net worth individuals who want a comparable calibre of expertise applied to their own wealth.

    You can download our whitepaper here.

    Floating Rate Notes – a timely idea for fixed income investors

    Our first order of business is always to protect capital. (If you’re a client or a reader of this blog you likely know that’s been a constant theme in everything we do.)

    In anticipation of a potential rise in interest rates, one of the risks investors should be concerned about is a decline in bond values – what many investors typically think of as “the safe stuff.” If that sounds like a dichotomy it really isn’t. Generally speaking, when interest rates go up, the value of a bond declines. The longer the maturity of the bond the more it falls. (Read our earlier posts Convexity and bonds and Is it time for bond holders to rethink their strategy?)

    To protect our clients’ fixed income investments against rising interest rates — which are inevitable at some point — we’ve been shortening the duration of our bond holdings (now 3 years on average). In addition to that strategy there’s another idea we’ve implemented in recent weeks: Floating Rate Notes (FRNs). [read more >>]