WHAT’S AHEAD FOR INTEREST RATES?

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  The Bank of Canada held the line on interest rates at its September fix, shocking currency traders who had been assuming another quarter-point increase and driving down the loonie in the process.

Frankly, I was surprised that they were surprised. With the U.S. Federal Reserve Board sending signals that it may be preparing to cut rates again in that country, a rate increase here would have been a rash and potentially dangerous move. The last time the Bank of Canada became too aggressive on tightening rates, it tilted the country into recession. David Dodge and his associates should take a lesson from the experience of former governor John Crow in this regard.

I found it ludicrous that as soon as Friday’s strong employment figures came out there was speculation the results would push the Bank to raise rates in October. Oh, come on! Does anyone really think that Dodge and company weren’t aware of the August patterns when they made their hold-the-line announcement a few days before? Of course they were.

What is of greater concern to our central bank is the state of the U.S. economy because if it continues to slow down we aren’t going to be able to buck the trend forever. In fact, the Bank specifically mentioned international considerations as being critical to the decision.

“Near-term prospects for growth in the United States and major overseas economies appear to have weakened somewhat,” the Bank said in announcing the decision. “There is also increased uncertainty associated with global financial market volatility and the unsettled geopolitical situation.”

It strikes me as unlikely that any of this will change in the next month. I expect interest rates in Canada will remain stable through the fall, and perhaps beyond if the U.S. doesn’t show signs of improvement. We don’t live in splendid isolation, after all.

Of course, the prospect of continued low interest rates won’t come as good news to those who are looking for alternatives to the turbulent stock market. GICs, T-bills, government bonds, and other traditional safe haven securities are going to continue to offer unattractive yields for some time to come.

Last Friday, The Globe and Mail reported that the average rate on five-year GICs stood at 4.17%. I checked with my broker at RBC Dominion Securities and was quoted exactly the same yield on a five-year CMHC bond. Mortgage-backed securities maturing in August 2007 were yielding 4.15%. You had to go out to July 2012 to find an MBS yielding more than 5%.

In this situation, the best course for an investor seeking a combination of safety and cash flow is to construct a portfolio that combines low-risk debt securities with higher-yielding alternatives like REITs. The ratios will depend on how much risk you want to assume, but a 50-50 split between safe securities yielding 4.2% and higher-risk income trusts with an average yield around 8% would produce an overall cash flow return in the 6% range, with some tax advantages.

That looks like a pretty attractive option right now.

MORTGAGE STRATEGY

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  While we’re on the subject of interest rates, it looks like mortgage rates are going to hold reasonably steady for the next several months. Not surprisingly, some lenders cut their rates as soon as the Bank of Canada made its announcement. More cuts are possible if economic conditions in the U.S. don’t improve soon.

The best strategy right now is to use the low rates to pay down as much of your principal as possible. Take advantage of the “below prime” offers that several financial institutions are promoting. Use the money you save on interest to reduce the loan balance. Depending on the size of the loan, you may be able to increase your equity in your home by several thousand dollars over the next year or so. That will put you in a much better position when interest rates do eventually rise again.

SECURITIES FOR INCOME INVESTORS

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  In a recent issue of our Internet Wealth Builder newsletter, we published an article in which we recommended several securities for income-oriented investors that would fit comfortably into the “higher-yielding” group I described in the first article. Here are two of them.

TransCanada Power LP (TSX:TPL.UN) This was originally recommended in the IWB in June/97 at $25. The shares were trading this week in the $33 range. This limited partnership operates a number of power generating plants, mainly in northern Ontario. They’re state-of-the-art, environmentally-friendly facilities that produce electricity from natural gas and waste heat. These shares haven’t been subject to the volatility of many of the royalty trusts, and the distributions have steadily increased over the years. Currently, the payments are running at $0.63 per quarter, or $2.52 annualized. That represents a yield of 7.6% based on a $33 price. This is a good choice for conservative investors, especially in today’s climate. The only problem is that the units are considered to be foreign content in registered plans for technical reasons.

Northern Property REIT (NPR.UN). We originally recommended this in the IWB in May as a new issue at $10. It was trading this week in the $11.50 range. The trust owns a number of properties, most of them residential, across the Canadian north. Governments are the main tenants, the occupancy rate is high, and many leases are long term. The cash flow projections are excellent, with distributions totalling $1.15 expected over the next year, for a yield of 10%. It’s not exciting, but few people are looking for excitement these days. For stability and cash flow, it’s first rate.

We are currently offering a three-month trial subscription to the Internet Wealth Builder (which is sent weekly by e-mail) for only $29.95 plus tax. If you take advantage of it, you will have access to the IWB Member Section of our Web site, which contains all back issues as well, so you can read the full article on income securities, which contained 11 recommendations in all. To order, go to: http://www.gordonpape.com/bookstore/productdetail.cfm?product_id=313

SUPERSTAR MUTUAL FUNDS

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  Co-author Eric Kirzner and I have just completed work on Gordon Pape’s 2003 Buyer’s Guide to Mutual Funds, which will be published in November. We’ve identified several new funds that we feel are worthy of elevation to $$$$ status our fund superstar category. Here are two that are of special interest.

Trimark Select Canadian Growth Fund. Frankly, Trimark has too many Canadian equity funds. There are four in all, and it’s very difficult to distinguish one from another since they all employ a similar style. All have withstood the rigors of the bear market quite well, due in large part to their value-based approach to stock picking. But this one gets our nod as the top choice right now. It’s run by Heather Hunter, who moved over to Trimark from the Ontario Teachers’ Pension Plan in 1999. She favours large-cap stocks that offer long-term growth potential. The portfolio is well diversified, but was more defensive than its stablemates during the June-July market crunch, with a cash position of almost 16%. Hunter prefers a buy-and-hold approach, typically retaining a stock for three to five years. Returns have been improving and the latest results are especially impressive; the fund lost a shade under 1% in the tough year to the end of July. The three-year average annual compound rate of return of 5.8% is well above average for the category. Many of the top holdings also show up in other Trimark portfolios, but there is obviously enough differentiation to have an impact on returns. The risk rating is the best among the four Trimark Canadian stock funds and is about half that of the S&P/TSX Total Returns Index. This is an excellent RRSP choice.

O’Shaughnessy Canadian Equity Fund. The Royal Bank’s O’Shaughnessy funds deserve a lot more attention. Certainly, if you are a Royal investment client, these should be in your portfolio. There are two U.S. funds and one Canadian fund on offer. All rate $$$$ in our upcoming 2003 Guide. This is the Canadian entry and it has everything you want in a large-cap fund: a skilled and experienced manager, a relatively low MER for the category, no sales commissions, a transparent investment strategy, a good safety record, and some very fine performance results. All the O’Shaughnessy funds use what might be called an active/passive approach: many of the same principles used by index funds are employed, but the system developed by U.S.-based manager James O’Shaughnessy modifies this method by actively selecting key stocks using specialized criteria he has developed. In the year to July 31, the fund gained 2.2% compared to an average loss of 12.6% for the Canadian Large Cap category. The three-year return to the same date was 12.2% per annum. One of the attractions of this fund is that stocks are chosen using a combination of value and growth measurements, which means it should continue to do well when the markets finally turn upwards.

We’re currently offering a 30% off pre-publication special on the 2003 Mutual Funds Guide. You’ll find details at http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=310

You can also get 30% off on advance orders for Gordon Pape’s 2003 Buyer’s Guide to RRSPs. To order, go to: http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=311

WHERE TO LOOK FOR PROFITS

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  The stock markets may be in turmoil, but there’s money to be made elsewhere. To find out where the profits are, read my article at http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=1208

ARE WRAP ACCOUNTS A GOOD IDEA?

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  Some brokers are promoting the idea of so-called “wrap accounts” to their clients. But are they a good idea? Find out how to assess them by visiting our Question and Answer page at http://www.buildingwealth.ca/qa.cfm

Other questions answered this week deal with tuition and education tax credits, RRSP foreign content rules, finding a financial advisor, and RRSP distributions. You can also search our extensive database for answers to questions on any topics of interest to you, or send along a question of your own.

MONEY TIPS FOR STUDENTS

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  If you’re heading off to college, or if someone in your family is, you’ll want to read Kendrew Pape’s savvy advice on how to get the government to help pay for the costs through tax credits and deductions. You can find his CBC transcript on the subject at http://www.buildingwealth.ca/CBC/Index.cfm?CBCTranscript=266

DO YOU WANT TO WRITE A BEST-SELLER?

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  Or learn how to be a radio personality, or improve your public speaking skills, or get quoted in the media? If so, you may be interested in the first-ever Expert Words Conference, to be held in Toronto on Oct. 18-19. It’s especially designed for those who want to improve their skills as writers, speakers, and media spokespeople, and attendance is limited to only 25 people.

I’ll be leading the session titled Creating Best-Sellers: From Concept to Store Shelf. Other seminar leaders will include Canada’s best-known tax author, Evelyn Jacks.

For more information, go to http://www.evelynjacksproductions.com/ipm/development.asp or phone (204)953-4769. If you decide to attend, please mention Investing Today on the enrolment for where you heard about the conference.

RRIF ADVICE

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  Many people will be converting their RRSP to a RRIF before Dec. 31. It’s not a simple process, and getting it wrong can cost you or a loved one a lot of money.

Don’t make a move without reading the fully updated Complete Guide to RRIFs and LIFs, which I co-authored with retirement planning expert David Tafler. Save 20% on the suggested retail price by ordering your copy at http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=308

That’s it for this month’s Investing Today. We’ll be with you again in October. And remember, you’re welcome to send this issue to anyone you think may be interested in reading it. To sign up for a free subscription, go to http://www.buildingwealth.ca/InvestingToday/Newsletter.cfm