Some use them as an equity replacement, but we prefer to allocate a large portion of our fixed-income exposure, especially as they are taxed in the same manner. Owning them within registered vehicles such as registered retirement savings plans and tax-free savings accounts can therefore make a lot of sense.
In our balanced strategy, we’ve taken our fixed income down to 10 per cent and added up to 35 per cent in notes while maintaining direct market exposure for the remaining 55 to 60 per cent. We really like this alternative approach to the traditional 60/40 portfolio, which could remain challenged for some time in this uncertain interest rate and inflationary environment.
For example, we recently bought one on the Canadian banks that will pay a 13.3-per-cent annualized coupon each month as long as they don’t fall 20 per cent from current levels. If they do, we miss the monthly coupon for as long as the banks remain below 20 per cent, but the coupon will return once they rise above that threshold.Article content
We would also add a smaller amount of upside torque via higher-yielding auto-callable structured notes within this fixed-income allocation, not unlike those who allocate a percentage to high-yield non-investment-grade bonds.