PIM: Diversified Income Portfolio

Paul Borisoff - Aug 03, 2018
PIM: Diversified Income Portfolio – August 2nd, 2018 The Diversified Income Portfolio* was up 0.1% in July – leaving the portfolio up 1.5% in 2018 – and 6.9% higher over the last twelve months. In comparison, our benchmark was up 0.2% in July –  l

PIM: Diversified Income Portfolio – August 2nd, 2018

 

The Diversified Income Portfolio* was up 0.1% in July – leaving the portfolio up 1.5% in 2018 – and 6.9% higher over the last twelve months. In comparison, our benchmark was up 0.2% in July –  leaving it down 0.2% in 2018 – and 3.5% higher over the last twelve months.

 

* These returns are reported as a composite, time-weighted, rate-of-return (gross of fees, net of transaction charges) for all accounts in this mandate.  Long-Term Returns/Benchmark Numbers will be reported in our Quarterly Updates.

 

The S&P/TSX Composite High Dividend Index (40% of our benchmark) registered a 1.6% gain in July.  Over the last twelve months this high-yielding stock index is up 5.7% as many constituents continue to firm-up off oversold levels.  

 

In contrast the Canadian bond market (FTSE/TMX Canada Universe Bond Index) was down 0.7% in July– and is now back in negative territory in 2018 (down 0.1%).  Over the last twelve months bonds are up 2.0% though – which compares favorably to the last three-year average of 1.2% per year.   Unfortunately, we do not see much room for improvement going forward – and the possibility of a negative return on this asset class over the next year is possible if rates move higher.   We sense a growing level of frustration from investors seeking income from mainstream bond portfolios and balanced funds (which often have large traditional bond allocations). 

 

While our Diversified Income Portfolio has significantly outperformed our benchmark in most recent periods – we realize that preserving capital and eking out only small gains can also leave investors frustrated.  We believe though that we have very good visibility to an expected significant pick-up in expected returns over the balance of 2018 based on our overall asset class exposure to areas such as convertible debentures, and on an individual security basis.  Below is one example.

 

Recent Portfolio Changes – and Highlights:

 

After collecting 6 dividend payments we sold our 1.0% position in Timbercreek Financial at the same price we bought at in February this year: $9.30 per unit.  We used the proceeds to increase our position in Chorus Aviation (CHR) to 2.0% of the portfolio from 1.0% at $7.30 (6.6% yield) – and lowering our adjusted cost base to $7.84.

 

Chorus Aviation’s principal business is providing small aircraft (up to 78 seats) flying services to Air Canada under a fixed remuneration contract called the Capacity Service Agreement.  CHR also owns Voyageur Airways and set up Chorus Aviation Capital (CAC) in 2017 to acquire, finance, lease, and trade regional aircraft.   It is the CAC division which has analysts covering the company excited on its outlook due to the potential to significantly increase earning power.   The recent weakness in share price came after the company reported a lack luster quarterly earnings report in May.    The company is currently rated a “Buy” or “Outperform” by all analyst covering it – with a current one-year consensus price target of $10.53 per share.

 

Summary:

 

At month-end the portfolio’s cash position was sitting at ~6.5% and our convertible debenture exposure was approximately 36.5%. Total Cash and Fixed Income exposure including our four 3rd party specialty fixed income manager positions was ~69.4% at month-end.  

 

We continue to strongly believe that the portfolio’s composition and flexibility offers a substantially improved risk/reward trade-off compared to an “income portfolio” relying only on government bonds and pure stock market exposure to drive returns and income. 

 

Although large investors often face size and liquidity constraints there are many attractive income opportunities which retail investors and small institutional investors can incorporate into their portfolio if they know where to look – and then complete the detailed due diligence required. That is what we plan on continuing do as we strive to deliver consistent above average returns.

 

In the meantime, please do not hesitate to contact me if you have any question or concerns. 

 

Sincerely,

 

Paul J. Borisoff

Senior Vice President

Portfolio Manager, Senior Investment Advisor