IFM Approach to Diversification 

The IFM Investment Approach diversifies by investing in individual securities in the Fixed Income (bonds, Guaranteed Investment Certificates (GICs), and Preferred Shares) and Growth (common shares, Exchange Traded Funds (ETFs)) investment categories. Our diversification guidelines consider each investment’s quality, liquidity, geography, industry, stability and the consistency of corporate profitability.

Our investment approach utilizes an Equal Weight structure. We try to invest equal amounts in each individual security within each asset group.

Note: Most exchange traded funds, mutual funds and stock market indices utilize an Market Capitalization Weight structure, even though studies demonstrate that Equal Weight structures outperform Market Capitalization Weighted structures. 

Fixed Income investments 

Typically, 65% of the portfolio is invested equal amounts in GICs, government and corporate bonds, and preferred shares.

For our Fixed Income investments, we prefer to hold between five and ten individual GICs and bonds. These investments must maintain a minimum credit rating of “BBB” and can have a maturity date between one and twenty years.

In addition to GICs and bonds, the portfolio can invest in anywhere from one to five issues of preferred shares. The selected preferred shares must maintain a credit rating of “P-3” or higher. The investment in preferred shares is limited to less than 20% of the portfolio’s market value.

The portfolio’s Fixed Income investments provide a high degree of safety for our accumulated savings. The Fixed Income investments also provide the portfolio with a steady dividend and interest income stream and they offer a balance to the volatility that Growth investments inherently introduce.

In addition, our Fixed Income investments provide us with a safe-haven for profits rebalanced from our Growth investments and a source of capital for re-balancing during difficult investment cycles.

Note: Typically, the portfolio does not trade the Fixed Income investments prior to maturity. We prefer to hold the bonds and GICs until they mature and then reinvest the maturity proceeds within the same asset category. This eliminates the stress that accompanies attempting to anticipate future interest rate movements.

Growth investments

Typically, the portfolio will invest 35% (in equal amounts) in dividend paying common shares and ETFs issued by 12 to 20 Canadian corporations. For example, if 17 companies are selected, the portfolio will invest approximately 2.06% (35% divided by 17) of its value in each.

The portfolio’s Growth investments are categorized into two types:

  • Core Growth investments, and 
  • Tactical Growth investments

The Core Growth investments represent between 25% and 30% of the portfolio and this portion is invested in dividend paying common shares issued by Canadian companies in the Utilities, Pipelines, Financials, Consumer Staples and Communications sectors.

The remaining 5% to 10% of a portfolio is used for Tactical allocation to ETFs to provide the portfolio with additional diversification and a defense against adverse market changes.

In addition to the portfolio’s diversification into different economic and business sectors, each individual Canadian corporation also diversifies its business into a number of different areas. This adds further diversity for our portfolio. For example, if you own shares in a Canadian bank, in addition to their domestic banking business you are also gaining investment exposure to insurance, mutual fund management, wealth management, corporate underwriting, commodities trading, credit cards loans, mortgages, business lending, stock market trading, bond trading, securitizations, etc. In addition, Canadian banks also maintain large foreign banking, lending and investment operations.

We acknowledge that investing only in Canadian corporations tends to fly in the face of the common recommendation to invest outside of Canada, but we do not see the value in handing our savings to foreign corporations in foreign regions for the following reasons:

The Tactical portion of our Growth allocation focuses on investments in individual ETFs. By investing in a well-established Canadian index ETF, we can further enhance the portfolio’s diversification. We also view this ETF investment as a Swing or Tactical investment, which can be easily and efficiently moved in and out of the stock market.

Example:  If the investment cycle is positive, then by adding an investment in the iShares S&P/TSX 60 Index ETF provides the portfolio with additional diversification and higher potential investment gains, while still receiving a dividend income. On the other hand, if the investment cycle turns negative, the S&P/TSX 60 Index ETF can be sold and the proceeds held as cash. If the investment cycle remains negative and we become concerned about a deterioration in the market value of our core dividend-paying Growth investments, we can reinvest the proceeds in units of Horizon BetaPro S&P/TSX 60 Inverse ETF. Because this structured investment is designed to increase in value when the S&P/TSX 60 Index declines in value, it can offer our Growth investments a bit of a defense in adverse investment markets. This enables the portfolio to defend against capital erosion without selling any of our Core Growth investments and, thus, disrupting our dividend income stream and creating taxable capital gains.

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