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En Francais
By Malcolm Morrison
The Canadian Press
Thursday, November 25, 2004
Also published in:
Canoe Money Thursday, November 25, 2004
Regina Leader-Post Friday, November 26, 2004
Calgary Herald Saturday, November 27, 2004
TORONTO (CP) - It's another one of those years when investors will have to fight hard to net seven or eight per cent from their portfolios.
Adrian Mastracci, investment counsel at
Vancouver’s ‘fee-only’ KCM Wealth Management, says, “You’ve got to have an investment counsellor, an investment advisor - someone who has access to these things and can keep an eye out for them.”
Traditional fixed income products aren't much help. For example, Guaranteed Investment Certificates are paying a range of about 1.65 per cent to 3.15 per cent for one-and five-year terms, respectively. "Which is about half the rate you would have gotten in mid-2000, which then was around 5.3, 5.5 per cent," noted Adrian Mastracci at KCM Wealth Management in Vancouver.
People should be aware of any means possible to net than extra point or two - and that includes exploring that realm of fixed income security known as the junk bond.
The very name conjures up pictures of bond certificates issued by corporations on their last legs paying astronomically high interest rates.
Those types of securities are available to investors with a cast-iron stomach. But more typically junk bonds are issued by companies suffering a temporary downturn and have to pay that extra two or three percentage points to get financing.
"They're triple-B securities and lower," said Brian Acker, referring to a credit agency rating that doesn't qualify as investment grade.
"It's one of those things where there are sales on these things when people are scared, when institutions are scared about the credit, then you have specials."
For example, Canadian transport giant Bombardier Inc. will likely have to pay more money to attract investments from the bond market after having its debt ratings dropped to junk status by Moody's Investors Service, which cited the company's weak returns and risks in the aerospace division.
The New York agency assigned a Ba2 rating to Bombardier Inc. and qualified it a "speculative grade" rating.
Bombardier finds itself in august company.
Acker said he remembers last December when "we did some nine per cent Fords for, I think, three years when there was a scare on Ford that they were going to go bankrupt.
"Subsequent to that time, people are no longer (concerned) about Ford going bankrupt so those bonds have rallied and we're still collecting nine per cent."
Acker also pointed to a nine per cent bond issued by Hudson's Bay Co. last year with a three-year term.
But he strongly cautioned that junk securities are far from a sure thing and belong in that small part of your portfolio labelled "speculative," where you allot "maybe five or ten per cent of a fixed income portfolio to get a little higher rate of return."
An investor might also want some help in tracing down these securities because they don't come along very often and can sell off very quickly.
"You've got to have an investment counsellor, an investment advisor - someone who has access to these things and can keep an eye out for them," Mastracci said.
"You have to be somewhat patient and you're not always going to be able to get filled on the day you want them."
And you can't count on your mutual fund or company pension plan to go after junk bonds because many are prohibited from investing in them since they aren't investment grade.
"In many cases if you look at the investment goals of, let's say, a traditional bond mutual fund, you're going to get most of them not really getting into the junk bond area," said Mastracci.
"Every one of these funds will generally have a credit mandate and they won't go below a certain mandate."
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