PIM: Diversified Income Portfolio

Paul Borisoff - Dec 05, 2017

The Diversified Income Portfolio* was up 0.4% in November – and is now up 9.4% in 2017.   In comparison our benchmark was up 0.7% in November and is now up 4.6% in 2017.  Over the most recent 12-month rolling period the portfolio is up 9.9% compared to our benchmark which is up 5.7%.

 

* 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 Canadian bond market (FTSE/TMX Canada Universe Bond Index) had a good month in November, returning 0.8%, and is now up 2.9% in 2017, and 2.4% over the last 12-months.   The S&P/TSX Composite High Dividend Index (40% of our benchmark) was up 0.7% in November – and is now up 7.0% in 2017 and 10.6% over the last year. 

Recent Portfolio Changes:

During November we made a few small changes to the portfolio – primarily to take advantage of a few opportunities which developed during the month:

We reduced our PIMCO Monthly Income Opportunity Fund position to 3.0% of the portfolio from 3.9% locking-in a small gain since adding it in February this year (~3%).  We also sold our 0.8% position in Atrium MIC 5.25% 30JUN20 $13.50 convertible debenture at 100.96 – which we bought for the portfolio in June of 2013 at par value (100) – a solid, low volatility contributor to returns over the last few years.  Note, we continue to hold a 0.8% position in the Atrium MIC 6.25% $13.30 31MAR19 convertible which we bought in March 2014 also at 100 – which closed the month at 102.49.

Also on the sell side we eliminated the portfolio’s 0.8% AG Growth Int’l 5.25% 31DEC18 $55.00 convertible at 100.75 on November 10th.  We bought this position on August 18th this year at 109.00 - as safer way to gain equity exposure to the company (the shares closed at $57.75 that day).  The day we sold the debenture the shares closed at $49.92 – down 13.6% from where they were when we bought the debenture at 109.00 (the shares traded as low as $47.08 that day).  While we were not concerned about receiving back par value (100) at maturity, the much lower share price made our convertible debenture position a lot more uninteresting to hold over the next year.

We also decided to pull the plug on Enbridge at $45.10 on November 14th - realizing an 8.0% loss since adding it to the portfolio a few months ago.   In this case we wanted to limit a further loss on this position and to take advantage of what we believed were bigger opportunities in energy space (note, Enbridge remains on our Watch List and we do plan on adding it back to the portfolio at some point).

On the “Buy Side” we increased our exposure in Whitecap Resources back to ~ 3.0% of the portfolio from 1.6% at $9.10 per share (3.1% yield) on November 14th.   If you recall, we recently reduced our exposure to Whitecap to 1.5% of the portfolio from 2.8% at $9.75 per share in September.  What interested us in increasing our exposure again was the company’s announcement on November 13th that they were acquiring Cenovus’ Weyburn asset for $940 million with an associated $425mm financing which had heavy insider participation.   One analyst who we follow closely increased his expected production/share growth expectation in 2018 to 15% from 4% on news of this deal.   Note, the $8.80 subscription receipt financing was significantly oversubscribed, so we ended up adding to our position at $9.10 via an open market transaction.  As of December 1st, the current consensus 12-month price target is $12.30 per share (Bloomberg).

Also, as previously mentioned we added a new 0.9% position in a Surge Energy 5.75% 31DEC22 Convertible Debenture ($2.75) to the portfolio at par value (100) in early November via a $40 million transaction to finance a property acquisition announced on October 26th - described as accretive on all key metrics.  This debenture opened weaker than expected, giving us an opportunity to significantly increase our position to 2.4% of the portfolio at 98.74 (our new average cost is 99.16) – with the convertible closing the month at 99.84.   As of December 1st, the current consensus 12-month price target for Surge Energy is $2.88 per share (Bloomberg).

Summary:

At month-end the portfolio’s cash position was sitting at ~5.7% and our convertible debenture exposure was approximately 37.5%.  Total Cash and Fixed Income exposure including our four 3rd party specialty fixed income manager positions was ~69.7% 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. 

Please do not hesitate to contact me if you have any questions or concerns.

 

Sincerely,

 

Paul J. Borisoff

Senior Vice President

Portfolio Manager, Senior Investment Advisor