2020 vision is halfway to becoming 2020 hindsight. This year with Covid19 is one we’d prefer to never repeat. Yet at July 1st our portfolios had proven successful in avoiding the worst losses of wider markets. And in the few weeks since this half opened, values have continued rising and growing stronger. Today let’s see what areas have done well, and which are still waiting for greater recovery.
Bonds and credit markets are above water after a tumultuous March-April. Some areas of bond/credit markets had fallen 15% and more but are now broadly showing 2% to 5% gain year-to-date. We have no vital concerns in this area. In fact when credit markets were lower our portfolio teams had brief access to bonds at 20-30% discount so I’m confident we will see further good news in this area over the months ahead.
Global Dividends and our Growth mandates have also outpaced benchmarks. Results this year range from -2% to plus 6% where the market indexes are still negative 5-6%.
Greater difficulties have been with our Canadian Dividend focus, also Real Estate. I’m not including Infrastructure in these thoughts as it has been comparatively stronger and is designed to be self-correcting: as people spend less time in airports and on highway 407 these days, cargo transportation is bursting with new demand, so too with data-transmission due to home offices, zoom and Netflix – plus the fact that regulated infrastructure provides guaranteed indexed income regardless of epidemic, social distancing or other factors.
Canadian Dividends: Paused and Still Paying.
Digging deeper into domestic dividend funds let’s look for example at RBC Canadian Dividend Fund. Having dropped 20% to the end of March, current results are still down 14% since the year opened. Some accept this while others worry. Simple facts however. This fund is representative of its peers. It has seen the same and worse in times past. It will recover and reach new highs in due course. Top holdings include 5 banks, 2 railroads, 2 energy pipelines, and a team of global asset management. These ten holdings form nearly half of the portfolio, and 66 other holdings make up the rest. With only 10% foreign content the fund mimics risks of our narrow Canadian economy but this is fine because we purposely hold other globally-focused funds to reach outside Canada. In the past ten years this fund reduced dividend yield twice, but total dividends more than doubled in ten years. If the dividend yield last Christmas would have been near 3.5% then three months later it was paying over 4%, and today would still be near 4%. That is vastly more lucrative than Canada’s ten-year bonds at ½% and 30 year bonds at 0.99%.
Absolutely, dividend payors will provide a healthy recovery. As corporate earnings grow stronger in the months ahead they will be amply able to sustain dividends, and banks also will have greater confidence in the balance sheets of their clients/borrowers. Provisions against credit-losses will be eased, meaning banks will be able to bring much of their credit-loss provisions back into earnings. When the 2007-2009 meltdown took RBC Dividend Fund down 37% it rebounded to brand-new highs by 2011 and more than doubled its earlier lows by 2014. This will happen again because it is repeated time and again throughout the decades.
Portfolio dividend yield remains strong. Canadian dividend funds are 12-14% below where they opened the year, but we’re confident they will be higher soon. And meanwhile, we’re benefiting from a particularly strong income yield in these times.
Real Estate … Canadian and Global.
We have valuable information now to share that wasn’t available for my June SWM letter. We have two main exposures to real estate: one is a property fund 99% invested in specific Canadian commercial and residential properties; the other holds real estate interests almost entirely outside Canada. We can speak personally on your own positioning: my comments here relate to the real estate mandate as a whole in our client portfolios.
One question you’ve asked touches the types of property we own and how to avoid severe and permanent losses. Another question is about viability of office properties in an age of working-from-home. Underlying these is whether income will be hurt for any extended period and the value of continuing with the real estate mandate.
Four main types of investment real estate include office, industrial, retail, and residential. A fifth would be infrastructure as it generally involves a land-based footprint in some manner. Retail is our smallest exposure except it’s worth noting: (i) retail today includes multi-use where vigorous retail enterprises are integrated within multi-family residential buildings, also (ii) grocery properties remain a vital footprint of retail properties – people haven’t stopped buying food. Industrial properties include warehouses, manufacturing plants, and logistical/transportation centres, clearly vital and profitable even in times of pandemic distancing. Multi-unit residential is an area of distinct growth through our major urban centres such as Toronto and Vancouver, as well as vibrant cities worldwide where low-vacancy rates drive escalating rents and thriving yields. Office space deserves its own focus here as follows.
Commercial Offices remain Vital and Viable.
Commercial office values have suffered somewhat as Go-stations became Ghost-stations. People stayed home to avoid viral risks of public transport and office congestion. Will offices disappear? Will leases perish and if so, how soon? Is rental income threatened? Let’s see …
- Offices have been around for a long time. The Spanish Flu a hundred years ago wreaked greater havoc than any time since, yet office properties remained a key element of society, valuable in lower-risk investing for income, growth, and family estate. Any change to this would arise from modern technology and new patterns of working so let’s look further here.
- Working from home seemed an intriguing change in March and many welcomed the first few weeks of it. Recent surveys suggest 40% feel they are less productive from home, yet many also say they’re working 3 hours longer each day due to complications of being out-of-office. Two-thirds or more now say they want to get back to the office at least three to five days a week. Others need at least periodic visits to the office. Stresses and distractions in the home-office include various family issues including and not limited to caring for children, pets clamouring for attention, personal loneliness, noisy next-door renovations, less than ideal furniture, and more. Emptying the dishwasher or doing laundry isn’t half as refreshing as a coffee break catching up on life with your colleague. Offices allow a sense of “work family”, social identity and support among colleagues … which are so vital that they actually comprise two of the five main issues of concern when people are preparing for a different type of exit, ie. retirement.
- Businesses also report, offices are more than just a place for clearly defined “work” activities but also where knowledge is exchanged and expanded through intentional collaboration and informal chats by the water cooler or microwave. At home, people speak of being “zoomed out”, exhausted from internet-based conferencing. Collaboration and group-knowledge has not yet disappeared because people retain some of the association of months before, but as time passes this mutual connection declines. Team-potential weakens. Drivers of excellence become individualized, loyalty diminishes. One business survey stated succinctly, “company productivity and success benefits from office workers interacting with each other in formal and informal ways, in person, at the office.”
- We also see that more space will be needed in an office to permit safe distancing among those who are present. As a result the footprint of an office may remain more or less unchanged. Plus, office leases extend out five and ten years or more, so even pausing for pandemic, leases will be paid, rents will continue, and the yield will continue to increase with time.
- That last point might raise a question so let’s close with the following from GWL Realty Advisors: “Office professionals want to be productive and successful—and their employers also want them to succeed. This requires the opportunity to (build trust among colleagues, create confidence in leaders, collaborate on projects, transfer knowledge between people, and build the culture or brand, all of which) requires office space. Prior to the covid-19 outbreak, most firms were competing for talent. Talent is typically 80-90% of company costs while office space is 5-10% of costs (with technology being most of the remainder). If the office space can make the talent more productive and improve attraction and retention, the financial math works.”
All told, our diversified mandates for commercial and residential real estate remain vital to assuring lower-risk growth and lifelong income.
Second Half — a New Bull Market.
It is a vast understatement to say the world is emerging from a recession which has been the fastest (and with this speed it’s been one of the deepest) on record. Government stimulus and regulated safety standards are pulling us onward and upward. Investment markets are rising because we can see, even with a second wave of Covid19 in parts of the world, we’ll soon be beyond the worst of it. Vaccines hopefully are on the way, and if not we will still manage. I forget where I was reading that over 350 major illnesses have hit the world in the past fifty years and each of us could name only a few of them; most have no prevention, yet many have become either so rare or commonplace that they’ve fallen off the radar. We will get past Covid19 one way or the other … both personally, and as our investments will assure financial stability, sustainable growth, and lifelong income for ourselves and our future.
Reach me with any questions, and connect us with anyone who needs help to secure financial goals, lifelong comfort, and a rewarding retirement. Share this letter with anyone who can benefit.
Yours in Financial Security for LIFE!
Brian Weatherdon, MA, CFP, CLU, CPCA. 905-637-3500
627 Guelph Line, Burlington, Ont. L7R 3M7. 1-877-937-3500
Author: A Lifetime Of Wealth — And How Not To Lose It (2013). Protecting Life, Loved Ones, and Future Dreams (2013). Your Business, Your Retirement: Halton Retirement Study (2015).
** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. Returns are from publicly available sources and research from a variety of firms including but not limited to GLC, RBC, CIBC, Mackenzie, Dynamic, Franklin Templeton. Opinions reflected in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to consult alongside your legal and accounting firms to advance your financial security and unique goals. We are grateful always to receive your comments and questions.