Family feud

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  By Guest Blogger Doug Rowat

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I need safety in retirement.

Pretty standard investor thinking. In fact, a recent Mackenzie Investments poll of more than 1,600 Canadians indicated that 71% of working Canadians think that retirement investments “should be safe, not grow.” Similarly, a recent Fidelity Investments retirement survey of more than 1,900 Canadians indicated that more retirees have their portfolios positioned in either “bonds” or in “cash/GICs and/or other very secure savings/investments” than have them positioned in a balanced mix of assets.

But this excessively conservative approach is entirely the wrong way to view a retirement portfolio. Too much safety represents no safety at all.

While interest rates are certainly going higher, likely by the middle of next year, from a long-term perspective, sustained bond yield rallies will probably forever be blunted by demographics. The expected higher demand from ageing investors will ultimately cap yield expansion. In all likelihood, we’ll never again see the double-digit yields of the 1980s and it’s improbable that we’ll even see 5% yields for most developed-market bond maturities, at least not for any sustained length of time. Even after the Federal Reserve raised interest rates NINE times last tightening cycle, the US 10-year Treasury yield only got as high as 3.25%.

In other words, returns from most bonds (and definitely the safest ones) will remain anemic long term. Here, for instance, are the returns that a basket of Canadian bonds have provided investors over the short, medium and long term:

Canada Bond Universe returns

Source: FTSE Canada Universe Bond Total Return Index, Bank of Canada, Turner Investments; returns annualized

How far are those returns going to get you?

If we assume a long-term inflation rate of 2.75% in Canada (and over the past century this is the exact average—you can check it out here) most bonds will likely never again provide a meaningful enough real rate of return to fund retirements. A substantial allocation of growth assets (e.g., equities) and more aggressive fixed income components (e.g., preferred shares) will almost certainly have to be included.
The safe stuff has enormous utility: it controls volatility and guards successfully against poor, emotional investment decisions. But as a dominant portfolio overweight? Never. More aggressive assets, even in retirement, are required.

The old, zero-risk retirement portfolio died long ago. It’s time to bury it.

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Finally, here are a few recent examples of why we only invest in exchange traded funds.

CN Rail earlier this month sent this blunt letter to shareholders regarding UK-based hedge fund TCI and its growing stake in the railway:

We believe that as you come to learn more about TCI and its plans for CN, you will see that its motives are highly suspect and its approach to railroading is outdated, myopic and destructive to longer term value. We also think you will come to share our view that it would be a mistake to cede effective control of CN to a foreign hedge fund that is also the largest shareholder of our most direct competitor.

There is too much to say about all this to fit into one letter.

Apparently. But CN Rail already said a lot in that one paragraph. The letter went on to accuse TCI of making “false claims”, being “dangerous” and generally being the Thanos supervillain of the Canadian railroad industry. Naturally, this creates a headache for CN investors. CN Rail may be entirely accurate with its accusations, but TCI, no doubt, has an opposing view. So, what’s a CN investor to do? Clearly, they’re in the middle of a corporate soap opera and they’ll now have to conduct lengthy due diligence to sort out which side is truly operating in their best interests.

Rogers Communications shareholders are caught in a similar bind, but this one’s doubly difficult because it’s not just an executive conflict, it’s also a dysfunctional family drama. Here’s what Loretta Rogers, the widow of founder Ted Rogers, had to say about Edward Rogers’ attempts to establish control of the Rogers Communications board:

I believe this campaign waged by Edward was unconscionable; inconsistent with his duties and limited authority as control trust chair; inconsistent with Ted’s wishes; and inconsistent with Rogers’ well-established corporate governance practices.

Ouch. Double-ouch when you consider that Loretta Rogers is Edward Rogers’ mother. If you saw this nastiness going down at, say, a family barbecue, you’d probably politely move to another table. But Rogers investors, especially the long-term ones, don’t necessarily have this luxury. They’re stuck in the middle.

Individual stock analysis is already exceedingly difficult. Dissecting quarterly earnings reports, examining technical charts, considering broader industry fundamentals and weighing valuations are hard enough. Now imagine having to evaluate boardroom pissing contests or family squabbles on top of all this?

Invest in broad-based, low-cost ETFs instead. Yes, you’ll own a few dysfunctional companies along the way, but the diversification will neutralize any company-specific problems.

Life’s short. How much of your investing time do you really want to spend dissecting why rich and powerful mothers are disappointed in their rich and powerful sons?

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.