Smith Manoeuvre Portfolio April 2009 – The Turning Point?
For those of you just joining us, this is my portfolio that is leveraged with money borrowed from my home equity line of credit (HELOC). As the money borrowed is used to invest, the interest charged is tax deductible. For more details, check out my modified smith manoeuvre strategy.
There hasn’t been a lot of excitement in this portfolio over the past couple of months as I haven’t been buying much. The markets have bounced off their lows, but I’m unsure as to how long this will last. The predominant reader sentiment is that the markets will head lower soon and perhaps even retest March lows. As a result of the uncertainty, I have been mostly sitting on the sidelines waiting for the opportunity to use some of my investment cash.
What do I have my eye on? I’m mostly watching utilities right now as they seem to be unfavored but with attractive fairly dividend yields. In particular, besides what I already own, my watch list includes Enbridge (ENB), Canadian Utilities (CU), and Emera (EMA). As a matter of fact, my only transaction since the last update was a utility purchase. I’ve recently doubled my position of TransCanada Corp (TRP).
Financials (along with the whole market) have seemed to turn around with a vengeance since the March lows but they actually look like they are due for a small correction. Since my SM portfolio is heavy in financials, my portfolio has recovered a bit as a result.
In terms of selling, I haven’t done any in quite some time. However, I am tempted to sell Petro Canada (PCA) and my remaining position of Teck Comminco (TCK.B). Petro Canada is merging with Suncor who has a lower dividend payout, and TCK.B has cut their dividend but is making up for it with capital appreciation. Decisions decisions.
Here is my SM portfolio as of April 2009:
|Stock||Symbol||Shares||Avg Buy Price||Total||Div/Share||Yield|
|FTSE RAFI US 1500 Small-Mid ETF||PRFZ.US||20||$51.50||$1,029.99||$0.42||0.82%|
|AGF Management Limited||AGF.B.T||50||$22.71||$1,135.49||$1.00||4.40%|
|Bank of Montreal||BMO.T||25||$44.17||$1,104.24||$2.80||6.34%|
Total Portfolio Book Value: $51,220 (total invested from HELOC including after tax interest)
Portfolio Value (Cash + Equities): $44,589.29 (as of April 20, 2009)
Total Portfolio Cost Base of Equities (including commissions): $36,362.09
Portfolio Market Value of Equities (as of April 20, 2009): $29,121.70
Total Dividends / Year: $1,437.30
Portfolio Dividend Yield: 3.95%
Leveraged Investing Disclaimer: There have been a lot of readers who have mentioned that they are interested in a leveraged portfolio. Over the long term it may be lucrative. However, over the short term, equities are volatile and can put the portfolio deep in the red. My portfolio is a prime example of what can happen. If you can’t stomach losing 20-30% in the portfolio in any given year, then your risk tolerance isn’t suited for leveraged investing.
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From your perspective, it no longer qualifies as a dividend producer but rather a capital gains play. It could be some time before it pays a dividend again (my guess is late 2010 at the earliest).
At this point, you can probably get out and still make some money (it traded earlier in the low 16’s) and then turn around and purchase a dividend producing equity that is in the same industry – or at least not in the financials because of your over weight position already.
Samuel Manu-Tech is classified as being in the same industry, very thinly traded, has a yield of around 9.5%. It is losing money but would be a proxy on a NA-Mexico economic rebound – kind of what Teck would be.
It is near a 15 year low. Somewhat speculative one might say. Might be worth keeping on a periodic check list to see if what happens to its losses/profits and whether it can maintain the dividend.
cf, I still hold 1/2 my position of tck.b. However, I’m seriously considering dumping it now. What are your thoughts?
I hope you didn’t get rid of Teck. It is up another 25%+ since my post! It is easily the best performer in my SM portfolio (although at one time it was my worst).
Thanks for the feedback FT re: your thoughts on mortgage paydown vs. stock buying. I’ll probably do both!
Keep up the great work on your posts!
Kumar, you can do whatever you please with the cash portion of your non-reg account. The key thing is to NOT mix borrowed funds w/ non borrowed money in the investment account. Just think, if you were audited, how would CRA know if you withdrew the borrowed amount or otherwise?
It’s up to you when you want to pay down your mortgage. The reason why I do it is b/c I have a readvanceable mortgage and my credit limit goes up with every dollar I pay down on the mortgage.
Hope this helps!
Thanks FT, appreciate your time.
So, can I at least consider withdrawing the cash balance of my non-registered account and pay down mortgage while waiting for recovery on the stock portion?
I want to know whether my investment account can have borrowed money and non-borrowed at the same time as it will take some time to recover my invested capital on my existing stocks.
Do I to pay down mortgage first before deposting in to investment account?
BTW: I am ware of the superficial loss rules (through your and CC posts)
sorry for multiple questions.
Kumar, I’m not sure it’s a good idea to deposit borrowed funds into a non-reg account, then withdraw the other portion.
You can either wait until your stock return to the value you feel comfortable with before selling, or sell for a capital loss.
Personally, if you are dead set on putting your portfolio against your mortgage now, I would sell the portfolio, use the cash to pay down the mortgage, THEN use an investment loan to buy more stock.
One thing to note though, if you sell for a loss, and would like to buy back the same stock in the near future, be careful of superficial loss rules.
Hi FT & other SM Pros,
Great! site with wealth of information. Keep up the good work.
Please give your thoughts on the following scenario.
I have setup a HELOC (not readvanceble as my mortgage is up for renewal end of 2010 and don’t want to pay penalty for readvancing)
My current fixed mortgage interest rate is 4.04%.
I have a non-registered brokerage account setup soem time ago and have stocks and cash balance worth of 20K. As my portpolio value is less than what I have invested I may have to wait for bit of a market recovery to sell anything.
Here is what I am thiking of doing please let me know is this a good idea.
1. want to use my HELOC (Prime +1) and to withdraw 20K and deposit in to my investment account
2. Withdraw within days 20K from my investment account and pay 20k against my mortgage.
Will this be allowed? If not what are the options available for me to use borrowed money for my non-registered account and repay the mortage by the same portfolio worth of my no-registered account.
Thanks in advance.
I don’t use Questrade but I do use IB. I can only transfer money out of IB manually and it can only go to the account that funded it (within 60 business days or something like that) or any account if after the holding period.
I haven’t actually done this yet – I’ve only transferred in.