IDA conference update: There’s no place like home, says Coxe

Other things that Canadian advisors have coming however, are big challenges in creating stock portfolios for retiring clients in an environment where the new normal for interest rates is about 3%.

Dividend stocks are going to be particularly crucial, not just because they’ve been key to market growth since 1926, but because going forward one overarching theme will be investment in assets that clients can own in retirement that will give real income returns.

“Up until now, what you’ve known was that inflation would rise during an economic cycle and interest rates would rise, and they would fall and you could adjust your investment portfolio accordingly,” he told Advisor.ca during a break after his presentation. “But if this is anything like the Japanese experience, interest rates will not come back to the kind of levels [people are accustomed to]”

For example, if a client needs $50,000 worth of annual income in retirement, in the past that could be generated with a million dollar bond portfolio. If however interest rates fall to 3% the client will need 40% more money to generate that kind of income. “People like to say Japan is such a unique case,” he says. “I like to say maybe demographically they’re just 20 years ahead of us.”

To counter the risk, he suggests investing in very long term bonds and “the great dividend paying stocks,” but warns clients to avoid following stock prices too closely since the goal is not to outperform, but to continually increase the real income a portfolio generates.

For example, companies like Exxon Mobil have committed to consistently raising dividends in order to retain shareholders, he says, regardless of the company’s returns. Canadian banks, which make up about 20% of the S&P/TSX Composite Index, also meet his criteria perfectly in this area.

In discussing the nature of secular markets and Canada’s prospects going forward, he points out that asset classes which are inverse to more volatile stocks will outperform on a secular basis. Coxe says commodities, dividend-paying stocks, and long bonds all stand to benefit from any fallout of technology related securities. With that in mind, he says the best market to be in during this decade is the TSX.

Although the Canadian market has a relatively small weighting in global indexes, “it’s got all the right stuff, and it’s underweight in all of the wrong stuff,” he says. “Over 60% of the index is exactly what you want to own for the next 10 years.”

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com