Lessons learned in 2009

25 December, 2009

The numbers aren’t all in yet, of course, but it looks like 2009 will end up being a pretty good year for Canadian investors in Canadian equities and income trusts. It certainly didn’t start out that way.

From the beginning of January to the first week of March, the S&P\TSX Composite Index continued the decline that began in 2008. But then, starting on March 9, the market rallied terrifically through to the end of August. After that, it was pretty much a show about nothing, with the market basically going sideways from September to the end of the year.

But through it all – through those three distinct periods – the TSX will probably close the year with a gain of 26.1%, if the year-end numbers aren’t much different from the year-to-date numbers we have so far. Income trusts should do even better, with a gain of about 31.9%.

Most investors, me included, would call that a very good year. And it’s justification of why people say that you should always have some of your portfolio invested in equities. It’s the same lesson investors learned in 2005 and 2006, and less so but still somewhat in 2007.

The lesson learned in 2008 was to always have some money invested in bonds and cash, for the simple reason that anything invested in bonds and cash wasn’t invested in equities, and that was a good thing. Bonds performed rather more modestly in 2009, however, if you go by a sampling of short, medium and long-term Government of Canada bonds providing total returns of 3.2%, 4.2% and 5.4% respectively.

Corporate bonds did far better than governments, however, where total returns of 10.0%, 10.4% and 26.1% were seen in another sampling. The big difference between corporate and government bond returns was the dramatic decline in credit spreads over the course of the year, with the lowest-rated corporate issues experiencing the biggest gains. It was a complete reverse of 2008, when governments outperformed corporates.

So what did we as investors learn in 2009? Was it to always have some money in stocks and trusts, some in cash, some in corporates and some in government bonds? Naw, we already knew that because, as much as we try to forecast/guess which asset class will outperform each coming year and overweight it, we know we have to have at least a little bit in each of them in case we’re wrong on our primary bet.

Instead, what we learned in 2009 is that our group of asset classes should also always include often forgotten preferred shares. Because if you thought that falling credit spreads helped boost corporate bond total returns above those of governments, the return premium earned by preferred shares in 2009 was nothing short of outstanding.

And it wasn’t because interest rates fell over the year, even though the target overnight interest rate started the year at 1.50% and ended it 84% lower than that at 0.25%, nor did it matter whether you were in straight preferreds or preferreds of the floating rate variety.

What mattered was that huge decline in credit spreads, to the effect that a sampling of six quality straight preferreds provided an average total return in 2009 of 36.8%, and that a sampling of six quality floating rate preferreds generated an average total return of 42.8%.

As just one example, the Brookfield Asset Management Preferred G (TSX:BAM.PR.G) shares that could be bought for $10.00 at the beginning of the year were selling for $18.19 at the end of it. Add an annual dividend of $1.09 to that gain of $8.19 and you have a total return on that issue of 92.8%.

Makes you wonder what we’re going to learn in 2010, doesn’t it? Maybe that we should always carry a bit of international equities in our portfolios as well?

We’ll see when next year comes. In the meantime, enjoy the holidays!

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