Today’s investment landscape requires a more nimble approach to funding future goals. The old mix of government bonds and blue chip stocks just isn’t pulling the weight it used to.
Here are three ideas that can help bridge the income gap, and do so effectively in a rising-rate environment.
1. Alternative Lenders
Growing companies sometimes need help paying the bills, not so much because they don’t have the money they need, but because they don’t have it when they need it. For instance, their accounts payables may be on a 30-day schedule, while receivables are every 90 days.
For example, suppose a manufacturer of licenced sports jerseys and other logoed products needs a loan to cover payables owed within 30 days, but it has to wait 90 days to get the $1 million it’s owed by a retailer.
The lender provides the needed funds, on interest, and then takes ownership of the receivables. It also uses physical assets like manufacturing facilities as collateral.
Craig Machel, a portfolio manager at Richardson GMP, says investment vehicles that provide exposure to these loans are mostly low-risk and appropriate for conservative investors.
2. Zero-Duration Bond Strategy
Bond investors worried about rising rates should consider active strategies that seek to reduce duration to zero, says Machel.
The strategy eliminates interest-rate exposure in both directions, so whether rates rise or fall the investor’s protected. To accomplish this, managers use a variety of complex tools, including short-selling government bonds. Shorting a security means profiting when it declines in value.
These TSX-listed funds also have a wrapper that makes them tax-advantaged until the end of 2017, when measures introduced in Budget 2013 take effect. The wrapper turns interest income into return of capital, and ultimately into capital gains, which are taxed at a lower rate than interest. When Budget 2013’s changes kick in, returns will be taxed as interest income.
3. Enhanced Equity
Many recoil when they hear someone mentioning investment strategies that include shorting, leverage and derivatives.
Was that your reaction to the above discussion of the zero-duration bond strategy? If so, it’s understandable given news headlines in recent years. But Machel explains these reports tell only half the story.
It’s true that shorting, leverage, and derivatives are used by some in a high-risk chase for outsized returns; but they’re equally useful for achieving the opposite objective: reducing risk for conservative investors.
Equity investors should consider funds using these tools if their primary goal is earning consistent, respectable returns with low volatility, says Machel.
Because these funds are always hedged, you’ll miss out on a bit of the upswing when markets are on fire. But when things turn sour, you’ll be shielded from the worst of it.