A safety-first portfolio

There’s a lot of nervousness about the state of the markets these days. There’s a sense that the best of the bull market may be behind us and that any profits going forward will require skilful stock selection and a willingness to accept more risk. There are several reasons for this unease. Interest rates are starting to rise. The Iraq mess continues to degenerate. We have a minority government in Ottawa. What to do?

How about moving to a low-risk portfolio that offers some modest growth potential? If that appeals to you, I have some suggestions. Here’s a portfolio I recommend. I have confined myself to funds that you can buy into for $1,000 or less.

Altamira T-Bill Fund 20%
HSBC Mortgage Fund  10%
CIBC Canadian Short-Term Bond Index Fund 15%
TD Canadian Bond Fund 10%
GGOF Canaan High-Yield Bond Fund 5%
GGOF Monthly High Income II Fund 5%
Trimark Global Balanced Fund 5%
Mackenzie Ivy Growth & Income Fund 10%
Mackenzie Ivy Canadian Fund 10%
Mackenzie Ivy Foreign Equity Fund 10%

Slow and steady
This is a slow and steady portfolio that is designed for investors who want to keep their risk to an absolute minimum. We have 60 per cent of the assets in money market and fixed-income funds, 5 per cent in an income trust fund, 15 per cent in balanced funds, and 20 per cent in conservative equity funds. With that kind of mix, the chances of loss are minimal. However, the potential for gains is limited. That’s a trade-off that has to be made if you want less volatility.

Here’s a brief explanation as to why each of the funds was selected.

Altamira T-Bill Fund (20 per cent). This is a no-load fund so you can easily move in and out and it has one of the lowest management expense ratios (MER) in the sector, at 0.38 per cent. That has made it possible for the fund to record an above-average performance for all time periods out to five years. Over the past year, Altamira T-Bill Fund returned only 2.5 per cent. However, we should start to see that gradually increase over the next 12 months as rates rise. While that’s happening, this fund is a safe haven from the storms buffeting the bond and income trusts markets.

HSBC Mortgage Fund (10 per cent). Mortgage funds don’t generate great returns but they present very little risk when rates rise. This HSBC entry is even less risky than most in the category and has never lost money over a calendar year since it was started in 1992. If you don’t have easy access to HSBC funds, almost any no-load bank mortgage fund can be substituted.

CIBC Canadian Short Term Bond Index Fund (15 per cent). This is a low-risk short-term bond fund that gained 3.2 per cent in the year to May 31. Although the chances of the fund losing money over a calendar year are slim, it is not risk-free. It actually lost 0.7 per cent in April and about the same in May because of interest rate jitters. Don’t let those hiccups bother you, however. Over time, this is a safe place for your money.

TD Canadian Bond Fund (10 per cent). This fund offers a low MER (1.07 per cent) and can be purchased on a no-load basis for as little as $100 in an RRSP. Performance over all time periods is well above average for the category. Bonds will continue to be under pressure for a while but this is another fund that has shown an ability to ride out the rough spots. Since it was launched in 1988, the fund has lost money in only two calendar years, the last being a drop of less than 1 per cent in 1999.

GGOF Canadian High Yield Bond Fund (5 per cent). High-yield bond funds are more risky because they focus on issues with lower credit ratings. That is why this one has only a 5 per cent weighting. Offsetting that is the potential for higher returns than you might expect from a conventional bond fund.

GGOG Monthly High Income II Fund. (5 per cent). The income trust sector has been beaten down recently and the trend may continue as rates rise. But the good cash flow offsets that to some degree. Again, just a 5 per cent weighting.

Trimark Global Balanced Fund (5 per cent). This one has been an outstanding performer, outdistancing the rest of its category over all time frames by a wide margin. For example, over the three years to May 31 the fund posted an average annual gain of 9.6 per cent. The average fund in the category lost 0.8 per cent.

Mackenzie Ivy Growth and Income Fund (10 per cent). All the Ivy funds are very conservatively managed. That usually suggests below average returns but this one has performed very respectably with an average annual five year gain of 6.6 per cent. That’s more than two percentage points better than the category average.

Mackenzie Ivy Canadian Fund (10 per cent). This is an excellent example of a fund that has shown great consistency over time. That’s a credit to manager Jerry Javasky who took over in 1997 and has been at the helm since. His emphasis is on capital preservation and he is willing to move to a large cash position in volatile markets to protect the asset base. During the bear market, Ivy Canadian lost ground only once, a 4.7 per cent decline in 2002. Prior to that, it had never lost money over a calendar year since it was launched in October, 1992. That’s a remarkable record.

Mackenzie Foreign Equity Fund (10 per cent). This one is also conservatively managed by Jerry Javasky doesn’t go to extremes. The latest report shows it with about 22 per cent cash and a broadly diversified equity portfolio, with an emphasis on U.S. stocks. The fund held up very well during the recent market correction and shows a risk rating that is much better than average for its category.

Be sure to check with a financial advisor to see if any of these funds are right for your personal needs before you make a commitment.