Tuesday Talks with Brian Etherington: Fixed Income Investment Considerations

Prudent and successful investors weigh risk tolerance; safety of capital; potential for growth; efficient tax treatment which doesn’t negate the benefit of certain types of investment and harmonious integration with their own financial and estate planning objectives when structuring their investment portfolios.
In this historic time of low interest rates some investors may at their peril assume risk outside of their comfort zone in an attempt to level the playing field; others may force their money to work harder than it should because of inefficient tax treatment on the growth.
The examination of the benefits of certain types of fixed income investments in this environment is important
The definition* of a fixed income security is:
An investment that provides a return in the form of a fixed periodic payment and the eventual return of the principal at maturity. They give their holders a fixed claim on the assets of the issuer and are considered low risk and low yield investments which guarantee safety of capital. (*Source: Wikipedia & Investopedia).
To be clear, we are not talking growth funds here; but rather the most conservative portion of one’s investment portfolio.
Franck Dixmier, Chief Investment Officer, Europe for Allianz Global Investors writes in “Bizarro World of Interest rates” that:
The world of interest has been inverted as the reality of real interest rates (after inflation) straying into negative territory has been supplanted in Europe by negative nominal rates. The new paranormal is good for borrowers but bad news for investors and savers.


An added indignity in the current marketplace is that in Canada, CRA deems interest from such investments as savings accounts, GIC’s and bonds as fully taxable at one’s top marginal rate of tax. Transparent and fair – but much easier to tolerate in higher interest rate environments.
Dividends benefit from the dividend tax credit and are treated more tax effectively. 50% of any capital gains are taxable at a rate of 50%; or effectively 25% of any capital gain is lost to income tax.
Thus in spite of historically low interest rates and tax inefficiencies, clearly safety of capital is of concern. Many high net worth Canadians are now including as a portion of their fixed income portfolios, Insured Deposit Funds, offered by major Canadian Insurance companies for over 150 years via their participating whole life dividend funds.
In the words of George Moore: “A man travels the whole world over in search of what he needs and returns home to find it”.

 

 

Brian Etherington is the Chairman at Etherington Generations; a risk management firm that specializes in family life insurance and estate planning. He was appointed a Member of the Order of Canada in 2004 and a recipient of The Queen’s Golden Jubilee Medal in 2002 for community service, as well as The Queen’s Diamond Jubilee Medal in 2012. He is a Founding Chair of the Special Olympics Canada Foundation  and a chair on the advisory council for the 2019 International Youth Games presented by Special Olympics Ontario.