“We’re after yield today. We’re exchanging potential upside for income today. We are transferring some of the upside into income now. For us, in terms of a yield portfolio, it makes sense.
That’s the portfolio manager’s view of yield. But what about the advisor?
For insight on this front we went to Toronto advisor Greg Hall, a broker with RBC Dominion Securities.
“Negative yields are a new phenomenon and would indicate to me that something is clearly wrong,” says Hall. Does this have something to do with deflation being on the horizon? I honestly don’t know as this is uncharted territory.”
So what are some of the products Hall’s recommending at the moment?
“For fixed income, I recommend short term municipal, provincial and federal bonds with short duration that avoid any exposure to Europe. Hold to maturity and minimize or remove interest rate risk.”
“Alternatively, I use low volatility (read USA) ETF’s that offer some yield with the benefit of being very liquid so one can raise capital quickly if necessary. Another fixed income alternative are bond or fixed income fund of fund ETF’s that are so diversified, the risk of catastrophe is all but eliminated.”
Now is not the time to be playing around.
“The truth is we are at a crossroads and it is difficult to predict what will happen. The world central banks are terrified of deflation and the negative yield option is untested. Now with the added reality of China suggesting the possibility of a hard landing we need to be very careful.”
Given the choice between negative yields and cash, Hall will take the cash thank you very much. Govern your clients accordingly.