Attributes of the portfolio

• 3.42 years = Average Term (modified duration)
• 8.05% = Yield to Maturity
• 10 = total positions.

We are diversified across 7 different industry groups with the largest exposure to Oil and Gas, representing less than 17%, and the smallest exposure to pharmaceutical at about 7.5 percent.

The average term of the debt can change for a variety of reasons; the mostly likely being the addition of new positions. In segregated portfolios we hold the individual positions and the term tends to drop through the holding period as individual securities approach maturity. When we began to research this approach the assumption was that the average maturity would be about 5 years. As we assembled the positions we found we could achieve our target return of 8 percent with a shorter maturity – so as a lender, getting the money back earlier is good. We expect to add longer term positions in the next few months so as to extend our term, but only if we are compensated with additional risk adjusted return.

At this time, U.S .and Canadian currency is close to parity. This allows us to consider US corporate debt as well as Canadian issues. The addition of U.S. dollar denominated bonds adds some risk to the portfolio. However, my view is we get paid for this risk because of the much larger inventory of bonds and debentures from which we can choose.

How do we make more money than we expect?

If the US dollar advances against the Canadian dollar we will have a positive impact to total return. If companies retire the debt early we will make more yield for any position where the cost basis is less than 100 per bond which is typically the case in our portfolios.

The best upside lift occurs when a company we own is acquired. Acquiring companies tend to have better credit ratings and the yield at which the acquired company debt is valued tends to lower the yield and increase the price of the bonds and debentures we hold. Our biggest upside occurs when we hold a convertible debenture of a company that is acquired. In this case the price of our convertible can rise because of a lift in common stock price of the debenture issuer.

How do we make less than we expect?

Credit risk: Generally if we do not get paid the interest and principal due then the yield to the portfolio will be reduced.

Currency Risk: If the US dollar declines against the Canadian dollar then the returns will be decreased for the US dollar exposure.

Reinvestment Risk: As individual positions mature and we are paid out by the companies, we have the risk of replacing the investments with comparable yield and quality.

What do we do to reduce risk?

Having short maturity allows us to identify the source of getting our money back. In addition our exposure is diversified across companies and industry groups.

This approach benefits from good upfront work on the fundamentals of the companies.Credit analysis around existing debt issues differs from equity analysis in that we are less concerned with predicting the direction and magnitude of earnings but are rather more interested assessing our comfort level with getting paid back. We want to know where we sit in preference and maturity to the other liabilities of the companies in which we invest. We only invest if we can clearly see assets and recurring revenue to the company that cover the obligation to us, not only with respect to ongoing interest payments but more importantly to the principal payments at maturity.

Finally, we lend money to companies that can afford to pay us back based on the current financial statements but also where the operational merits of the company are generally improving.
We are not conflicted in our purchases since we steer clear of new financings. When we buy debt we prefer to see a history of market trading. We want to have evidence indicating what the investment is worth to others in the market place, both to buy and to sell.

This type of corporate debt can be viewed as the unloved part of the debt markets. The size of the issues and float traded excludes most participants to this market. Investors here have to be prepared to do independent research. We often find that there are few buyers and a discount is applied to those who want to sell prior to maturity. Our advantage is information, access and pricing. We believe our approach allows us to pass along a “liquidity discount” to the benefit of our client portfolios.

Best regards,

Patrick

Well it has been 6 weeks and I have accomplished my initial goal of having a weight number that starts with the number 1!  I have dropped about 3 pounds per week for a total of 18 pounds and have hit the magical 199 last Sunday. My ultimate goal is to weigh 180 pounds from the starting point of 217 pounds. This implies a 2.2 pound rate of weight loss per week for 17 weeks to our end date of May 1^st.

This past week represents a redoubling of effort so as to achieve a below 200 level. For me this manifested in two-a -day work outs; an early run on the treadmill followed by a noon hour weight training session.

Food

My approach has been to cut out processed food. I eat mostly vegetables, a smallish amount of meat and some starches. Initially, I did use an app to follow and tally my total for the day but soon found that I had the ability to eat about 1900 calories per day without counting. Bread, alcohol, pastas, sugar and salt laden foods are minimized. I still enjoy caffeine, and the odd glass of wine. I now really notice any slips and find that my metabolism has changed such that my body doesn’t handle junk food and sugar nearly as well as it did when they were staples of my diet.

Exercise

Our treadmill has been a godsend -  my wife Shelley’s idea. This Ottawa winter has been milder and less snowy but a lot more icy than usual. The dogs don’t like the salt and I don’t like slipping around. Walking has been a challenge but I usually walk back and forth to work and this represents about a 150 calorie burn per day. The treadmill is good for 250-400 calories, dependant on duration, and my work out another 300. The work out is a high metabolism approach designed by my trainer Andreas Kotantoulas of the Wellness Centre in my office building. The work out is 6 reps of 6 exercises, 6 times, without any breaks between exercises. All exercises are big muscle variety and equate to full body movements. Andreas tells me that the approach is used by professional hockey players for 6 weeks prior to camp so as to hit the ice lean and strong. It also provides good balance and core strength. I finish by doing crunches and roll out any knots in my muscles on a foam roller before stretching (most days). It has occurred to me than anything with the descriptor 6-6-6 should be approached carefully, but Andreas has given me a great game plan that is working well.

Net

Through exercise and diet I have eliminated about 10,000 calories per week from my previous sustenance level.  Each 3500 reduction equates to 1 pound so any combination above 7700 calories will get me to my 180 pound goal. I expect to reduce the work out frequency to add back some calories as it seems to me losing too quickly can be a big problem as you are more likely to fall off the regime from deprivation. Everything in moderation, as usual, is the right approach.

I most appreciate the encouragement that I have received from many of you. It is especially gratifying to know that my “wellness” journey has served to encourage others to join in with their own commitments.

Best regards,

Patrick

We are all business owners/professionals and are well into our middle age. We all four travel for work and pleasure and have the strain of road meals and restaurants to worry about. Each of us is physically active and perhaps better-than-average recreational athletes… back in the day.

The contest was announced before the holidays so, at least in my case, I had a very guilt-free season of parties and dinners. This year over-indulging didn’t matter, and perhaps was a slight positive for the competition if I added a little to my starting weight total. So the answer to “would you like another helping?” was …absolutely! And why not add some chocolates to the top of that gravy… I added about 8 pounds in two weeks.

My mental accounting is that I weigh about 200 lbs but if that were true then I would weigh less than that at some point during the year and it has been more than five years since I have seen a number that starts with 1. Calories have never been a consideration; traditionally I have eaten for taste and enjoyment. At home we eat well, generally avoiding processed foods and preparing from scratch where possible. My wife is very good about the quality of our food and we eat mostly organic, but my weakness appears to be quantity; I am perhaps living to eat rather than eating to live.

Where to begin?  I am an analyst so I started with some research. “Diet”, “Calories” are very attractive search titles and my browser provided an endless array of web sites that wanted to solve my problems by selling me something. There are also very good discussions from credible sources about reasonable approaches to eating. I needed to understand the variables to separate what matters from the noise of the commerce of food. I found several, but one in particular that helped me put it all together;

http://web.mit.edu/athletics/sportsmedicine/wcrwtloss.html

To lose weight for a significant period you need to restrict calories in a sensible manner. The quality of the food is important since it provides the essential nutrients for health but if you don’t burn more fuel than you are taking in then there is no progress.  Right-sizing the calories and getting the ratio of protein to carbohydrates and fat is the total package.

I also needed to be aware of what I eat. The free app Calorie Counter by Arawella Corporation seems to have this covered off. I am able to track my net caloric intake as well as the composition of the calories. I also found that I could enter my current position and my May 1^st weight goal and a daily total calorie target was provided. In my case I am trying to get to 180 pounds in 17 weeks. Apparently if I consume 1900 net calories per day I will get there. Furthermore, total caloric intake is offset by exercise. In my case a half hour walk at a reasonable pace equates to about 100 calories, whereas 30 minutes of weight training offsets 250 calories. I like using an app to track because it provides constant feedback on the food and exercise choices I am making. It seems to me that eventually the choices will be automatic and I will not need the software though it is fun to use and does all the math for me.

My wife also discovered that one of the tech reporters she follows on Twitter, Mike Wendland, has decided to lose weight and embrace healthy life choices and he is tracking his progress on social media – on his blog, twitter, Facebook etc. She purchased his book and is following his updates on twitter as he seems to be doing much the same type of regime as me. His website has a lot of good information. http://superhealthyme.com/

The goals are ambitious and calorie counting will only get me so far. Exercise and building up muscle mass will be essential if I am to sustain weight loss for the full period. In addition, if my more muscular body is burning more calories the likelihood of maintaining a healthier size is greatly improved.

To date after 5 days I have lost my chocolate – gravy and extra wine weight and am tipping the scales at 211. So far so good, but this is more like a marathon than a sprint and there is a long way to go.

For the next 16 weeks I expect to write about our (my) progress and welcome any comments. I encourage you to consider joining us and doing this for yourself. If you do jump on board for the ride please let me know.

Patrick

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Richardson GMP Limited, Member Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

There are however, periods of time when economic risk is higher; the global debt problems and Japan’s difficult natural disaster come to mind. In some time periods earnings are generally not growing. If markets are discounting higher risk then it stands to reason there should be some additional volatility and in this past quarter at least, uncertainty has resulted in lower stock prices.

Markets work properly when they can move both higher and lower. If common stock prices were simply pegged higher each quarter then they would not well reflect the variant conditions of the economy and society in general.

From 1970 to the end of 2010, total returns to stocks in Canada (S&P/TSX) and the US (S&P 500) have increased at a compounded rate greater than 10%. Inflation has been about 4% so real returns for the period are about 6% and investors have been well paid for accepting the risk of holding stocks. Not all decades are equal. The past 10 years have been less giving. In Canada the average returns since 2001 have been 6.6%. Inflation averaged 2.4% for a net of 4.2% in real inflation adjusted return. So the premium for holding risky assets has been below average.

How should this recent result impact our future expectations? Even in a below average return decade, patient investors did okay. They were rewarded with real returns and grew their money. While a definition of risk can be a future where “you don’t know the outcome,” long term averages should be attributed some predictive power. It seems to me that it makes more sense to consider a bigger sample (more years) than assume the recent experience will continue into the future.

There is plenty of risk in stock markets that is well rewarded and a source of good compensation for investors. There is also lots of risk assumed by the investment community that has no or perhaps negative compensation. Our investment focus is the elimination of risk that has no payoff.

Public stock market indexes have been a source of dramatic returns in excess of inflation for more than a hundred years. Investors can capture the returns to indexes at very low cost. However, there are problems with indexes. The S&P 500 for example is dominated by large growth companies. The calculation of the index has a bias toward large capitalization stocks. These features represent risk without compensation.

Another prominent example of non-compensated risk is assuming that stock markets provide risk free return by selecting only stocks that go up. Focus lists of investment houses are typical examples of this type of approach. The problem with these list approaches is they are not investable. You can’t be the first into the stock choices and the first out so the “return to the list” is not the investor experience. In my view, non-compensated risk like this should be minimized since they ultimately do not support the goals of investors.

Simple index returns can be improved upon. A better exposure to risk provides better compensation. We spend our time working at identifying risk worth taking and where possible, eliminating risk that doesn’t pay.

Patrick

September 9, 2011

The volatility and pressure in world stock markets is regrettable. Risk has manifested in providing little if any return for the past decade. It seems to me that this current downturn has been triggered by the perception of a lack of effective leadership on the part of governments around the globe.

Of the three main players in the economy – individuals, corporations and governments – the investment markets are concerned primarily with corporations. At this point, North American corporations as a group are much better off – as measured by balance sheet financial strength – than previous median levels. Companies have less debt and more cash than we expect them to have. This is a good thing that should be a source of investor confidence. On the other hand, many of the world governments are bankrupt: Iceland, Greece and Ireland come to mind.

Investment markets are concerned with predicting the future. In the bond markets, payback (yield) for investing in 10 Year Government of Canada Bonds is about two and a half percent. The same is true of 10 year U.S. treasuries.  Investors buying these yields are willing to take a return, after inflation, of less than zero for 10 years. That number looks worse after taxes. It is worth noting that in the case of Canada and the U.S., investors in government debt appear unconcerned about default.

Individuals in North America have more debt than usual and the unemployment rate remains relatively high. The recent recession has been a difficult and persistent one for consumers.

The agreement to extend US Government debt was essential in that all financial interests were served and every investor would have experienced losses if it had not been confirmed. The US Government is too big to fail. Essentially, all countries in the G10 are too big to fail.

Sellers in the stock market will see much slower growth in the future. In terms of national accounts, aggregate demand is a function of buying power. The pessimistic view is that individual consumers and governments are tapped out. Companies who might otherwise be expanding are reluctant to do so if, in the future, there are fewer customers willing to buy their products. The thinking is that with fewer customers there is no growth. This is an important assumption that may prove to be incorrect.

In my view, predictions of future corporate earnings are a poor guide to investment decisions. This poor predictive power holds true for those that use so-called top down (aggregate economy based) analysis or bottom up (individual company) focus. Professional analyst predictions are frequently wrong and show little persistence when they do get it right. I think the balance of investment return for appropriate risk assumed will re-establish. Stocks will outperform bonds in the future, just as they have in the past. Good companies will innovate to find new customers and are already doing so.

We will re-balance our allocations once things settle down and we can confirm how this recent decline has impacted the plans for your portfolio. We re-balance when we have the evidence to do so and avoid the trap of attempting to generate investment returns by predicting short term outcomes.

Thank you for being our client and please pass this along to any friends or colleagues who could use a little reassurance and understanding.

Best Regards,

Patrick

Over generations, the concept of saving has been instilled in most Canadians as a top priority.  Many of us were taught early on the value of a dollar and to save for a rainy day. Sadly, saving has become a mere afterthought to thousands of Canadians.  Looking at this graph, you can see just how bad the savings rate has declined, from a high of 20% in the early 1980s to less than 4% in 2010. With the savings rate declining and the population aging quickly, the situation doesn’t bode well for the adults of this generation and baby boomers.

Source: Statistics Canada. Sector Accounts, Persons and Unincorporated Businesses. CANSIM Table no. 380-000.

With the CPP and OAS providing retirees with a minimum level of income and employment pension plans shrinking, it is becoming more and more important for individuals to take control of their personal financial plans if they want to have a comfortable retirement.

The government provides many incentives to invest through the RRSP program. Contributions are tax deductible, thereby decreasing the tax bill and all taxes are deferred on savings and interest until retirement.  In reality, Canadians are not taking advantage of these incentives and are letting the benefits slip away.  Over the last 50 years Canadians have made more than $600 billion in RRSP contributions yet have unused RRSP contributions totalling an additional $500 billion. During the last decade, the percentage of individuals who have made contributions to the RRSP program has fallen from 41% to 34%.  During a time when people should be saving more, the opposite is actually occurring.

Consumption has been the main cause of the declining savings rate.  Just like our neighbours to the south, Canadians have become mass consumers.  People are putting an emphasis on current consumption rather than future savings.  In addition, volatility in the market and disappointing performances in the past has had a profound affect on the behaviour of Canadians. They would prefer to spend their money today rather than lose it in the market.  But, by making sacrifices in the present and taking a long term view to consumption, savers will, over time, have more money and have the ability to enjoy it longer.

Many Canadians have problems saving money.   They do not have a budget or a well thought out savings plan.  Without a plan, expenses and debt can spiral out of control and makes saving impossible.  The implications of this situation are far reaching and easily avoidable.  Not only do these people miss out on the magic of compounding, but also the tax incentives that occur yearly. Having a feasible plan in order and sticking to it takes discipline and time.  But, the future rewards are well worth it

Success in investing begins with individuals saving for the future.  As a group, savers build up cash flow headroom through discipline and sacrifices. Savers become great investors because they have time on their side and the cash to take advantage of opportunities.  They have the flexibility to ride out volatility in the market and set their sights on the long term without letting short term issues get in their way.  To most people, saving is a part of life and a way to watch their money grow over time.  But, to many Canadians, the lifestyle of consuming and spending now will only lead to a future of cutting back and making great sacrifices in their golden years.

The opinions expressed in these articles are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP or its affiliates.

Source: Statistics Canada. Estimates of Population, Canada, the Provinces and Territories (Persons). CANSIM Table no. 051-0001; and Statistics Canada. Population Projections for Canada, Provinces and Territories (2005-2031). CANSIM table no. 052-0004.

As a nation, we are challenged to provide a financially comfortable and healthy lifestyle after retirement. Public Pension funds, CPP and OAS are designed as a safety net, providing only a basic standard of living. Personal savings and private pension plans are expected to make a significant contribution.

Private Defined Benefit (DB) pension plans participation rates have been dropping. DBs are stressed by smaller contributions from a shrinking population of workers and recently by volatility in the investment markets. According to actuarial estimates by Mercer, by the end of 2008 more than 70% of DB plans had solvency ratios under 80%. This means the total assets of these pension plans offset only 80% of the liabilities.  An unfunded liability is ultimately backed by the earnings of sponsor companies. Fortunately, that recent underfunded status has been largely reversed by positive investment returns in 2009/10.

The volatility in plan assets is a concern for corporate Canada and there remains considerable incentive for companies to reduce exposure to pension risk by converting existing DB plant to Defined Contribution (DC) pension plans. In DC plans the investment risk is borne by the employee-retiree. For private company sponsored plans in 2008 alone the number of participants in DB plans declined by 7.8%. Given the incentives, it is reasonable to expect this trend to continue. It is worth noting that public DB plans are headed in the opposite direction, with an increase of 4% of participants during 2008.

The overall result is that most Canadians are responsible to provide for their own retirement. Investors bear both the risk of managing assets and benefit from the rewards to getting it right. To a significant extent, our current wealth management strategies define our future lifestyles.

Our Policies Support Your Goals

As a leading Private Family Office (PFO) we think we have a role to play in providing a platform for successfully discharging the demands of your family’s wealth management.

We are focused on getting wealth management to work for you. Our clients understand the challenge and like most investors, prefer to work with a professional advisor. They understand that the skill set required to grow wealth is often very different from the skills needed to preserve wealth and the purchasing power of that wealth.

While financial success comes with responsibility, enjoying your wealth is best experienced once those responsibilities are satisfied. Our purpose is to help clearly define your important goals and bring you considered strategies to achieve success. We use trusted relationships though our network of professionals who are experienced at tax, legal, insurance and estate issues. We would also be pleased to work with your current trusted advisors.

We typically work with a larger percentage of the assets of our clients so that our strategies and approach can make a difference in their financial lives. We think costs matter, taxes matter and current cash flow requirements are probably not diminished in retirement. We have the tools to define a family’s unique requirements and the evidence-based investment approach to confidently get it done. Our joint responsibility is your investment success; we have a proven approach tested through many market cycles.

The motto, “our policies support your goals” refers to both our unbiased investment approach as well as to the professional standards of care of the Chartered Financial Analyst (CFA) designation which defines our business practice. We enjoy what we do and would be pleased to discuss your requirements.

Patrick

The opinions expressed in these articles are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP or its affiliates.

To make a tax deductible contribution, the contribution must be made within 60 days after December 31^st.  That means, contributions to be deducted against 2010 income will have to be made by Tuesday, March 1^st, 2011.

For the calendar year 2010, you can contribute up to 18% of your earned income to a maximum of $22,450, minus any pension adjustment.  To determine your personal deduction limit, it is best to refer to your most recent Notice of Assessment, which was returned by CRA with your most recent tax return.

Many of our clients are taking advantage of the simple and convenient method of making online deposits to their accounts at Richardson GMP using their online banking site.

Here is how it works:

1. Log into your online banking service

2. Follow your financial institutions instructions to set up a new Payee in the bill payment area

3. To setup a new Payee, search for GMP

4. The results page should return GMP Securities L.P. – please accept this

5. You will then be prompted for an account number (enter one of your Richardson GMP account numbers)

6. Once accepted, you’re done!

Please feel free to contact our team if you need any assistance in deciding the amount of your RRSP contributions or making an RRSP contribution deposit.

Lisa

We include private investments in our portfolios because the returns are potentially higher. We think they are higher because investors demand more return to invest in a market where information is not readily available and where liquidity is challenging. We know from the evidence that institutional investors as a group are also increasing the percentage of their overall portfolios allocated to private equity. Extra return comes at a price and the price in private equity markets is access to information and networks of trusted contacts.

Many of the people we talk to have had experience investing in a “friends and family” round of a private company. While this investment is a private transaction, it doesn’t compare to our approach in this market. We expect that as a whole, the returns to private equity are higher so we want broad diversification. We win by accessing a broad exposure to this asset class. In our pooled approach we own 2-3% positions in any one private company on average. We think throwing all your money at one position represents too much risk of total loss of capital. In addition, there is excess reward available by using relatively better information to guide investment activity. Friends and family may be less focused on relative value than they ought to be. Private companies should pay a fair price for capital.

Publicly-listed securities represent a small percentage of all companies. There are 3 or 4 private companies for every public one. According to Tom Kennedy, Managing Director of Kensington Capital, there is profit available when markets are unbalanced:

“There are approximately 100 billion dollars chasing one trillion dollars in potential transactions in the private Canadian marketplace.  Excess demand for capital represents a great opportunity for potential investors.”

In Canada at least, there is much greater demand for capital than potential supply available. We like these odds, as market imbalances tend to favour one side; in this case the suppliers of capital as a group, who should expect to be rewarded with higher returns for risk assumed. It is important to understand that investors still have to do their homework and not all participants in private equity investments will be rewarded equally.

Public markets are often referred to as “efficient” in that most information about public companies is broadly understood. Information is readily available and instantaneously transmitted to a large audience. By comparison, information about private companies is generally not available. As a result, better information is a source of returns in the private markets.

The total return to public stock markets is the sum of all return to the participants in that market. Overconfident financial marketers are paid to encourage us to consider strategies to perform better than the probable outcome. By definition, not everyone can do better than average, and once fees are considered most will underperform the average of the group. We can’t all eat someone else’s lunch. If we want portfolios that perform better than average, then we should include assets like private equity that provide higher returns.

Patrick

The opinions expressed in these articles are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP or its affiliates.

From an investor viewpoint, net worth can be checked against previous levels to hopefully see some progress. Improvement often means more money to draw on, as more is better when it come to supporting future lifestyle choices.

Let’s assume a primary financial goal is increased retirement income. Do your actions support your goals?  Future retirement income is positively affected by savings and growth on those savings. So an important policy to support your new financial success is to create some savings, or perhaps spend less.

I have found discussing spending habits to be something of a buzz kill.  Some people tell me that they are better at making more money than budgeting. Making more money can work, but there still has to be some savings, and spending cuts are more predictable that earnings growth.

Once you have some savings, and are in the habit of creating an ongoing supply, it’s time to consider money growth strategy.

Investment management fees and expenses do not support the goal of growing your savings. On the other hand, properly constructed portfolios do a better job of wealth creation than throwing money at the markets and hoping and praying. Some fees pay for experience and judgment. Some fees end up paying for other people’s entertainment.  You should have a policy of supporting investment advice and minimizing entertainment expenses.

As a guideline, the Canadian Pension Plan Investment Board pays about three quarters of one percent per year in fees and expenses to manage their 120 billion dollar fund. For most of us it is reasonable to expect to pay a little more to have our money managed. Your policy should be to pay a right amount and yes, lower fees are better.

Your growth expectations should be supported by the investments you hold. For example, if the long term return to equities is 12 percent, expecting 20 plus percent return is bad policy. You may indeed have periods when you achieve the big number, but there is no sense being disappointed at what is a highly probable outcome. If you expect to achieve more return than is available, you should have a policy of investing in assets that provide higher return than stock markets.

Leverage doesn’t increase only the positive return; you get more of the bad as well. A leveraged portfolio expected return has a broader range of possible outcomes. If you are paying incentive fees, like many hedge fund models, then the most probable outcome is a lower number than if no leverage is applied. Your investment policy should consider the math of your approach and check to see that the incentives support your goals.

We are focused on our goal of building the finest platform for investment advice. I am convinced we are on the right track with policies that directly support the goals of our clients. Let’s chat about your investment policies. This is the year, now is the time.

Patrick

The opinions expressed in these articles are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP or its affiliates.