BC Business
Jim Gilliland, Leith Wheeler Investment Counsel Ltd. | BCBusiness
President, CEO and Head of Fixed Income, Leith Wheeler Investment Counsel Ltd. Income-generating investments Shorter-term bonds and stocks with dividend-growth potential One-year return, Leith Wheeler Canadian Equity Fund B: 21.27%
Although Jim Gilliland is excited about the opportunities that lie ahead in 2014, he thinks it’s a stock-picker’s market that calls for deep fundamental analysis and a willingness to span multiple asset classes. “A lot of mandates are overly constrained,” says Gilliland, whose firm manages $14.7 billion in assets for private and institutional clients.
Leith Wheeler likes to build portfolios that include investment-grade debt, preferred stock and equities with value characteristics but also dividend-growth potential, Gilliland says. “That combination and having the flexibility to reallocate capital and look at the portfolio as a whole provides a much better outcome for our clients than overly specified mandates that focus on just one narrow part of the market.”
His message to clients: there’s no magic cure for income portfolios’ depressed returns due to low interest rates. “The only way of effectively building income is to step back and look at total returns rather than just headline yields, and to develop a portfolio that has some exposure to the stock market to effectively provide growth on top of the lower income requirement,” Gilliland says.
Low interest rates have pushed investors to “fixed-income surrogates” such as high-dividend-paying stocks and preferred shares, he notes. But given current valuations, Gilliland believes price declines could eat away at yields. “Our approach as we look into 2014 is to barbell it by having a portfolio that combines shorter-term, as in three- to five-year—in some cases even five- to seven-year—investment-grade credit with a stock portfolio that has some dividend growth.”
Leith Wheeler puts these ideas to work in its Income Advantage Fund. As of September 30, the $50.6-million fund had returned an annualized 6.1 per cent net of fees since it launched in December 2010.
Two Recent Investment Picks
REIT debt After finding good opportunities in municipal bonds over the past year or so, including the debt of cities such as Montreal, Toronto and Vancouver, Gilliland’s team wants to exit some of those investments because they no longer offer much of a yield premium over their underlying provincial bonds. It’s now seeking higher-quality corporate debt with a decent risk-return trade-off, he says. Given a four- to five-year time frame, one area that he and his colleagues are reasonably comfortable with is bonds issued by REITs.
The REITs in question have diversified portfolios of commercial properties and the yield on their debt is significantly higher than that of bank deposit notes and other corporate debentures with similar terms, Gilliland adds. Yields are between 3.5 and four per cent, which might not sound great from a headline perspective, he admits. “But when you look at pairing that with dividend equities, and as these bonds come closer to maturity, we find that their spread compresses and they can therefore be sold at a premium,” Gilliland says. “That combination provides a pretty attractive risk-return.”
Callable preferred shares “Because of our cautiousness as it relates to interest-rate risk, one thing that we’ve been doing is substantially curtailing our exposure to perpetual preferred shares,” Gilliland says, referring to preferred stocks that don’t usually have a specified maturity date. The team has turned to callable preferreds, which the issuer can redeem after a set period–say, two or three years.
In 2013, rising interest rates affected these securities much less than the broader preferred-share market, Gilliland says. “The types of preferred shares that we owned and form the bulk of our preferred-share portfolio held in exceptionally well because of their shorter duration and because of their expected call dates.” Although retail investors can buy preferred shares through a broker or an exchange-traded fund, Gilliland argues that more active management is a better option, given the groundwork involved in understanding these securities.