Stock Smarts: A Conservative Portfolio

Gordon Pape | March 19th, 2014

Despite a weak period in 2013, returns on this conservative portfolio are ahead of target.

It’s been several months since I looked at the Conservative Portfolio I created for my Internet Wealth Builder newsletter. When I last updated it in the fall, it was bearing the scars of the fallout from interest rate fears that began in May 2013 and had lost 4.8% in the previous six months.

Although the overall return since the portfolio was launched in September 2011 was still acceptable, I decided to make several changes to reduce the risk going forward. I did so keeping in mind that the purpose of this portfolio is to protect capital while providing a better return than you’d receive from a high-interest savings account. The current target is a range of 3.5% to 4.5% annually.

Here are the securities we hold with some comments on how they have performed in the latest six-month period.

iShares 1-5 Year Laddered Corporate Bond Fund (TSX: CBO). This is a low-risk, short-term corporate bond ETF that acts as one of the stabilizers in this portfolio. It will never deliver a great return but it should outperform short-term GICs in most years with minimal risk. The trading price is below what we originally paid but is up slightly from my last review in the fall. With the distributions added in, we have a total return of 8.4% since the launch.

iShares DEX Short Term Corporate Universe + Maple Bond Index Fund (TSX: XSH). This ETF was added at the time of my last review. Part of the portfolio consists of short-term, high-quality corporate bonds (all rated BBB or higher) issued by Canadian companies such as the big banks. The Maple Bond component is comprised of Canadian-dollar bonds from foreign issuers such as Bank of America, JPMorgan Chase, and Goldman Sachs. We’ve had a total return of 2.2% since we acquired it, which is consistent with the low-risk nature of this fund.

iShares Advantaged U.S. High Yield Bond Index Fund (CDN-Hedged) (TSX: CHB). This ETF focuses on high-yield U.S. bonds (aka “junk bonds”), which are normally associated with higher risk. However, in the current climate this type of bond has fared better than conventional issues and the return in the five months since we acquired these units is a healthy 6.1%.

PIMCO Monthly Income Fund (PMO005). This is a global fixed-income mutual fund that is managed by one of the world’s most respected bond houses. It offers monthly cash flow and places a heavy emphasis on capital preservation. I added this fund in October and our return to date is 4.5%.

BCE Inc. (TSX, NYSE: BCE). Almost 64% of this portfolio is in various types of fixed-income funds. This allocation is consistent with the primary goal of capital preservation. The rest of the money has been spread among three conservative growth securities. All have performed well, pushing up returns to significantly ahead of target. BCE, for example, is up by $4.56 a share since our last review. Add in the December dividend and we have a total return of almost 12% since October.

Enbridge (TSX, NYSE: ENB). Enbridge is another blue-chip stock that has done well for us, again proving that you don’t have to speculate on penny mines to earn a nice return. The shares have gained $6.82 since last fall and we have received dividends of $0.665 per share for a total return over the latest period of 17.7%

Brookfield Infrastructure Limited Partnership (TSX: BIP.UN, NYSE: BIP). This Bermuda-based limited partnership is our top performer so far with a total return of 74.4% since the launch of the portfolio. Management recently announced a 12% increase in the distribution, which helped to push the share price over $40.

So here is how we stand. The initial book value was $10,000. At the time of my last review the value of the portfolio was $11,371.14, including dividends/distributions. These results are as of the close of trading on March 4. Brokerage commissions are not factored in and the Canadian and U.S. dollars are treated as being at par. Fractional shares are for tracking purposes only.

Gordon Pape’s Conservative Portfolio

(as of March 4/14)

Security	Weight %	Total Shares	Average Cost/Share	Book Value	Current Price	Market Value	Dividends/ Distributions	Total Dividends Received	Gain/Loss (Initial Purchase) %
CBO	23.8	136.8	$20.25	$2,770.20	$19.81	$2,710.01	$48.41	$293.49	+ 8.4
XSH	19.2	110.0	$19.72	$2,169.20	$19.90	$2,189.00	$27.91	$27.91	+ 2.2
CHB	9.4	50.0	$20.73	$1,036.50	$21.49	$1,074.50	$25.66	$25.66	+ 6.1
PMO005	11.4	90.0	$14.01

$1,260.90

$14.42

$1,297.80

$19.82

+ 4.5

BCE

11.0

26.10

$38.32

$1,000.15

$48.19

$1,257.76

$15.20

$131.87

+38.9

ENB

13.8

32.08

$31.17

$999.93

$49.00

$1,571.92

$21.33

$95.76

+66.8

BIP.UN

11.3

30.59

$26.60

$813.69

$42.01

$1,285.09

$27.84

$134.22

+74.4

Interest

0.1

$ 10.33

Totals

100.0

$10,050.57

$11,396.41

$213.14

$728.73

+20.6

Inception

$10,000.00

+21.3

Comments: The total value of the portfolio including dividends/distributions is $12,125.14. That means it is ahead 21.3% since inception for an average annual compound rate of return of 8%. That continues to be well ahead of our target.

The last five months saw a recovery from the loss of the previous period and then some. Our bond funds were steady and recorded small profits while the three stocks in the portfolio – BCE, Enbridge, and Brookfield Infrastructure – all posted nice advances. Since our last review, the portfolio has gained 6.6%.

Right now, the portfolio is performing as expected and the returns speak for themselves. Therefore I see no point in tinkering with it. We’ll retain the current mix and reinvest the accumulated cash in a high-interest savings account at 1.35%.

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