The Hebb Advisory Group’s February 2024 Conference Call
A conversation with Murdo MacLean, Client Investment Manager with Walter Scott & Partners.
[00:00:00.330] - Intro
Good morning, ladies and gentlemen. Welcome to the February conference call with Derek Hebb from CIBC Wood Gundy. I would now like to turn the meeting over to Mr. Derek Hebb, Investment Advisor. Please go ahead, Mr. Hebb.
[00:00:15.900] - Derek Hebb
Thank you, Amancha. Today we're joined by Murdo MacLean, Client Investment Manager with Walter Scott and Partners in Edinburgh, Scotland. Murdo, who I last interviewed in November 2022, joined Walter Scott in 2006 and spent twelve years on the research team focused on Japanese and US equities. He joined the Client Service team in January 2019. Prior to Walter Scott, Murdo lived and worked in Japan for six years. He holds a BA (Hons) in Japanese and Marketing from the University of Stirling and level one Japanese language proficiency test. Murdo, thank you for joining us this morning.
[00:00:57.490] - Murdo MacLean
My pleasure, Derek, nice to see you. Nice to speak to you again.
[00:01:00.500] - Derek Hebb
It's great to have you on the call. Just to get us started, Murdo, can you just highlight some of the key company characteristics that must be present for a stock to be considered for your portfolio?
[00:01:16.150] - Murdo MacLean
Absolutely. You know, so we do, given that we really aim to invest in businesses for the very long term, in our sort of parlance, that means as long as, frankly, the original investment rationale sort of stays valid. We do ask quite a lot of companies, or to put it another way, we set the bar very high. But I think if I was to sort of select several key characteristics, the first would be a reasonably long and successful track record of delivering profitable growth. So, the big major issue with a lot of companies that have IPO'd recently is that they just lack the long term track record, which we can then analyze and use that to kind of infer things about the future. So, businesses that have been around since before the Global Financial Crisis are far more likely to get our interest. Given that they have that track record, we can analyze how they've fared in a higher interest rate environment like we are now. So that is definitely very important. And as a starting point within that, the spreadsheet analysis is designed to highlight aspects of their profitability. We want businesses that are typically the most profitable in their sector or in their industry.
[00:02:39.930] - Murdo MacLean
And that's typically measured by obvious things like gross profit margin, operating margin, as well as the consistency of those margins, rather than just how they've done in the last twelve months or so. And then digging in more deeply into other metrics, such as the cash return on capital employed, a sort of return on capital type measure, and also the return on equity of a business. When we consider sort of last 15 years or so, the sectors that have averaged the highest return on equity have also actually delivered the best returns. So, we do think that there is a relationship between profitability and how a share price or stock will perform over the long term. I think also crucially, because in order to own a business for the long term, you will need to expect that there will be bumps in the road for the economy or for the company itself. And therefore, in order to sleep well at night, even through those more tricky patches, we very much want companies to possess a strong balance sheet, and we use that or measure that in a variety of ways. But typically, we would not expect the balance sheet to be utilized to fund the growth of the company itself.
[00:04:04.620] - Murdo MacLean
We would prefer that to be generated through internally generated cash flow with the balance sheet there as a sort of buffer that can be used for acquisitions of companies or other sort of things such as that. But the core funding streams will come from the business itself. And so those are the sort of major sort of financial characteristics that we require before we then move on to analyze the business in more qualitative terms. In other words, performing a sort of swot analysis, or as we would call it, the seven sisters, where you're looking at the industry, the market nature, the size of the market, the participants, the market share, who are the management team, and all those sort of things. So, I think those are the major ones that we would look at.
[00:04:56.350] - Derek Hebb
Thanks, Murdo. The dramatic rise in interest rates will impact some companies more than others. How do you expect companies in your portfolio to emerge from this environment?
[00:05:11.090] - Murdo MacLean
Absolutely, I would agree with you. That is, indeed, why we require businesses to have a strong balance sheet. Many businesses entered this recent sort of tightening cycle with quite a lot of debt on their balance sheets. And the market is supposed to take comfort from the fact that those borrowings were done or were fixed for a certain amount of time in a low interest rate environment. And therefore, the immediate impact of the tightening is not going to affect those companies, but at some point, they're going to refinance at a higher cost of capital. And I think that connects with the fact that between 20% and 30% of corporate America is classified as being a zombie company. So, in other words, it's not the repayment of the debt that's the problem. It's the actual repayment of the interest payments on that debt that they're failing to meet. And so that's a very large number of companies out there that are basically on life support. And if you were to see any sort of change in the circumstances or a persistently high level of interest rate, you can imagine what might happen to those businesses. So we feel, again, when we talk about the reasons for not owning banks in our particular portfolio, we would suggest that the very strongest businesses in the world have plentiful cash to meet all their investment requirements, and therefore, they tend not to have that much debt.
[00:06:47.320] - Murdo MacLean
So, the question is then, to whom are banks lending? Well, it tends to be companies that need that extra little bit of cash to keep the lights on, and we would not consider those to be the strongest of companies. So, I think in this environment, the longer rates stay high, and I think the chances of them going back to nigh on zero are very low. This will really be an environment that will test companies' financial strengths and will probably limit their appetite for further borrowings, which will then magnify whether or not they have enough cash coming in through their operations to fund their business. And so when we look at the companies that we invest in, we would expect them to take advantage of an environment like this, to lean into investment for the future of their business, to acquire the weaker, who, frankly, might need to be bailed out. And that is the sort of behaviour that we've seen time and time again, and which tends to increase the lead or advantage that businesses that we would typically own have over their competition. So, we sort of relish, although we admit that it is a more difficult environment for all companies right now, we kind of relish seeing how these businesses that are selected for financial characteristics that you might suggest are really almost too strong for most environments.
[00:08:18.500] - Murdo MacLean
We really look forward to seeing how that then comes to bear over the next several years.
[00:08:26.930] - Derek Hebb
Thank you. Murdo, can you just highlight any recent changes to the portfolio and what drove those decisions?
[00:08:37.270] - Murdo MacLean
Yeah, absolutely. So, recent changes to the portfolio, really considering the sort of last three or four months then, in the global fund, we sold a position in a company called Illumina, a US medical company that was brought into the portfolio in early 2020. This business is a world leader in gene sequencing technology, selling hardware and consumables to researchers and pharmaceutical companies to better help them understand how their drugs may or may not work for a certain patient population based upon their genetic makeup. Longer term, we believe that that is a very attractive area. But the reasons that caused us to sell that business, very briefly, were that in 2021, they sought to acquire 100% of a company called Grail, which is a business that they were, in fact, involved in starting up. They had an equity stake, but they wanted to fully consolidate this business because it was potentially a pioneer in early cancer screening technology. So, very exciting. The regulator made noises to the effect that they would prefer them not to consolidate that company until they had a chance to run the rule over the acquisition, to make sure it was fair. But Illumina decided to go ahead anyway.
[00:10:01.250] - Murdo MacLean
Fast forward a couple of years. Some of the management team actually lost their jobs as a result of the protracted regulatory review. Investors became somewhat disgruntled by this. And then, to cap it all off at the end of last year, their guidance for the year ahead actually reflected quite a weak industry outlook for the business. It just really felt as though, although the long-term picture is likely to be attractive, the strategic decisions taken by the board, and indeed the near-term sort of financial outlook, looking as weak as it did, we felt that it would be prudent to step away and in fact, invest those proceeds where we have greater conviction. And the business in which we have greater conviction, which we've added in the last couple of weeks, is also a US company by chance, by the name of Mettler-Toledo. The name is a clue to where it's from, obviously, in Ohio. But Mettler was, in fact, established back in 1945 in Switzerland, and subsequently merged with a company called Toledo in the 80s. The key attraction here is that this is the leader in manufacturing a wide range of precision weighting and analytical equipment for use in medical laboratories, industrial settings, and indeed, food retailing applications.
[00:11:29.170] - Murdo MacLean
And they make a whole range of things, from laboratory balances and weights, pipettes, titrators, thermal analysis tools, even right down to the scales that weigh your luggage at the airports sometimes. You can see their name on that. So a very broad, diversified company. In fact, although it's a US company, 60% of its revenues are actually generated outside of the US, including a reasonably healthy emerging market business. And indeed, their dominance is probably best exemplified by saying that 75% of the products that they sell are in markets where they'll hold the number one position. So we really like the position that it's in geographically, as well as being broadly diversified. And then its financial track record is also a real testament to the strength. From 1998 right up to the present day, the company has only had one year where profits declined, and that was in 2009, during the financial crisis. And even then, it was only down by around 10%, which is very impressive and speaks to the sort of sustainability and the consistency of their growth. So, this is a very profitable business with a great balance sheet, and with revenues of around $4 billion, and a market capitalization of only $25 billion.
[00:12:50.970] - Murdo MacLean
We really do believe that there's significant runway for growth with this business and the weakness in the share price last year just offered that additional incentive to bring that into the global portfolio in the last couple of weeks.
[00:13:04.330] - Derek Hebb
That's great. We hear a lot these days, certainly in the news, about artificial intelligence. How does Walter Scott prefer to play the AI theme?
[00:13:18.350] - Murdo MacLean
Yeah, so clearly AI seemed to be the sort of story of 2023 alongside the Magnificent Seven. I think we always are a little bit circumspect when we see these sort of big periods of hype around a company or a technology. I don't want to pour cold water over AI because it's clearly going to be a very important tool for a great many industries and businesses around the world. But what is certainly true also is that all of the good news is not going to arrive in the next six to twelve months. And so I think we feel that it's important that you do have exposure longer term to this space, but that you don't get carried away and invest in companies that are seen to be or touted as being the sort of leaders in AI, necessarily. Until such time as that came along, there wasn't much to look at them for. So, the way that we have access are through companies that already have a long track record of success in multiple other verticals, and that AI is likely to further augment that position. So companies operating in the cloud, for example, like Microsoft or Alphabet, operating in search, again, like Microsoft and Alphabet, where you will see AI being used to better refine online search and so on; advertising as well.
[00:14:52.030] - Murdo MacLean
Adobe is an excellent example of a company which sells software for content creators online. And their recent commercials showing their Firefly product illustrates how they can use generative AI to really enhance the content creation tools that they have across their suite. So that's a major beneficiary right there. And then, of course, there's going to be huge investment required to deliver on these massive expectations here. And so that really means high powered AI chips. And so across our portfolio, we have companies such as Shin Etsu Chemical that manufactures the silicon wafers that go into chips, companies like ASML that supply key tools to design the chips, and of course, Taiwan Semiconductor Manufacturing Company that assembles the chips. And although we don't own Nvidia, it must be kept in mind that all of Nvidia's AI chips are manufactured by Taiwan Semiconductor. So, right across the value chain, there is significant exposure to AI, even though it might not be leaping off the page at investors. Valuation is very important here. A lot of excitement and a lot of it's justified, but it still won't be a good investment if you overpay. And so Taiwan Semiconductor is a really good example of a business that stands to benefit massively.
[00:16:31.970] - Murdo MacLean
They are going to turn a two and a half billion dollar AI-related business into a $10 billion business over the next five years. And their valuation is still trading in the sort of mid to high teens price to earnings ratio, which is significantly cheaper than some of these so-called AI darlings that we see. So, I think it's very important that you look for the long-term beneficiaries. You don't overpay. And you also have the benefit of other revenue streams coming into those businesses, so that if AI takes a little bit longer to materialize, you still have a very credible and strong business underneath that which will see you through.
[00:17:13.770] - Derek Hebb
Thanks, Murdo. As an investor in the Walter Scott portfolio for my own family for almost 20 years, I can attest to the benefits of your disciplined approach. It gives us access to investing in some of the world's best managed companies. And I think it's the consistency of your investment process that has been a key factor in your success.
[00:17:40.050] - Derek Hebb
In the interest of time, this will conclude today's call. If anyone has questions about the information that Murdo discussed, please contact me. Thanks to everyone for listening in, and Murdo, thank you again for joining us on this month's call.
[00:17:54.070] - Murdo MacLean
Thanks so much, Derek. It's always a pleasure. Take care.
[00:17:57.230] - Derek Hebb
Likewise. Take care.
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If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.
The Hebb Advisory Group’s December 2023 Conference Call
A conversation with Aaron Young of CIBC Asset Management about inflation, interest rates and the outlook for bonds.
[00:00:00.330] - Intro
Good morning, ladies and gentlemen. Welcome to the December conference call with Derek Hebb from CIBC Wood Gundy. Please be advised that this call is being recorded. I would now like to turn the meeting over to Derek Hebb, Senior Wealth Advisor. Please go ahead, Mr. Hebb.
[00:00:21.500] - Derek Hebb
Thank you, Amantha. Today we're joined by Aaron Young, Vice President of Fixed Income with CIBC Asset Management. Aaron began his career at CIBC Asset Management in 2010 in institutional client servicing and as an Associate Client Portfolio Manager with the Fixed Income team. He holds a Bachelor of Arts degree from the University of Toronto and he is a CFA charterholder and member of the CFA Society of Toronto. Aaron, thank you for joining us this morning.
[00:00:51.570] - Aaron Young
Thank you, Derek. Thanks for having me.
[00:00:53.830] - Derek Hebb
Oh, it's great to have you on the call. Aaron, what caused the recent spike in inflation and interest rates after decades of declining rates and low inflation?
[00:01:09.030] - Aaron Young
Yeah, so that's a really good question, Derek. And that's something economists and bond portfolio managers like ourselves spend a lot of time looking at, is what drove inflation, what's driving inflation going forward. And really the COVID-19 pandemic is the catalyst for the inflation experience that we've all gone through here in Canada and to be frank, globally. So I want to take everyone back to 2020 when we were all in lockdown, as much as we'd like to forget it because it was such a hard time. But what we need to remember from the economic side is that we saw really aggressive, easy monetary policy and stimulus coming from both the federal government and the central bank. And what that did is it really put money in people's pockets, much needed money, given people were not able to work, we were in lockdown. And it also made the price of money very cheap. And really what that means is lending rates were near zero. You could get loans with very little interest rate costs. And this was, you can't overstate how big the stimulus was. I think if we look back at 2020, it was about 12% of Canada's overall GDP coming out in stimulus from the government.
[00:02:40.470] - Aaron Young
So huge impact. People are at home, they are receiving kind of excess savings into their accounts. It also helps that they're not, say, traveling to work, a lot of their expenses go down. And what you have is you kind of have the spring loaded, so that when things do open up, we would really see demand resurface and quite aggressively, and I would say even to the point that ourselves, as bond managers, central bankers did not expect as aggressively the reopening. So if we walk through inflation from that point onwards, when prices really started to take off. It makes sense from our experience. We saw goods demand go up significantly when we first kind of started coming out of the pandemic. In the first moments, that makes sense, people were renovating their homes, buying new barbecues, things of that nature, kind of durable goods. And that came alongside what everyone's talked about. Supply chain shocks, the ease of movement of goods and component parts that go into making those goods, and even the labour force to make those goods saw a lot of strains. That really pushed up inflation because you got a lot of demand chasing a smaller and smaller amount of goods.
[00:04:09.530] - Aaron Young
We estimate in the first, call it 2021 time, that was accounting for up to a quarter of the inflation numbers we were seeing. We had a bit of a swan event with the Ukraine invasion that put pressure on food prices, energy prices, kind of the export of natural gas and oil from Russia came to a halt that continued to push inflation higher because energy and food and those things are part of the inflation equation. And just to give you an example of how acute it got, I mean, you look at in July 2020, in the US, at least in the month, they produce 11.7 million vehicles. Everyone heard about chip shortages. We're still facing it a little bit here. That production went down to 9 million in 2021. That's quite a drop to see out of the auto sector. Now, a lot of that has changed, and everyone sees the headlines around inflation coming back down. A lot of that has to do with supply chains have now started to retool. Those pressures are gone. People also have less goods demand. We've spent that excess savings on the things we wanted for our homes and renovations, where inflation remains sticky and we're still seeing it to this day, is on the services side.
[00:05:34.720] - Aaron Young
And again, kind of makes sense from a logical perspective. Once economies started opening up, more people were ready to spend money on travel experiences, going out to restaurants. And that's really where the inflation equation shifted. So goods, hard goods, things like that, we saw that come down. And where inflation remains sticky, and even to this day, in some respects, is in the services sectors. People still want to pay for experiences. The demand is very high. If we look at traffic out of Pearson here in Canada or even globally, we're hitting new records in terms of people flying. So this is really what's kept inflation from coming down even further. And just from a headline perspective, when we were going through that in, call it mid-2022, we hit a high of 8% inflation gains, roughly. It's come back down closer to the 4% range. But what's really driving it now is more of the soft services and things of that nature. The one thing again, Derek, I want to get across clearly is we experienced that because we came out of a period of extreme monetary fiscal stimulus which was necessary for COVID-19 and inflation reflected those extremities both in the way it went quickly up and in the way it's come back down now.
[00:07:05.500] - Aaron Young
I think just to finalize that point, what we're looking at right now is what are the steps necessary going forward to bring inflation further down to kind of the long run 2% average and what needs to happen to get there.
[00:07:24.190] - Derek Hebb
Thanks, Aaron. So, what will the Bank of Canada look for before they start cutting rates? And when do you think this will happen?
[00:07:33.870] - Aaron Young
Yeah, exactly. So, in response to that high inflation, obviously we've seen the Bank of Canada increase interest rates, and they're trying to do the opposite of what we spoke about earlier. So bring down demand, make the cost of money more expensive. We're all feeling it with our mortgage payments. For people who have a variable rate mortgage or are refinancing into this higher rate environment, the central bank policy response is doing its job. Inflation has come down. People are feeling it in their pocketbooks, for sure. Businesses, it costs more for them to expand and grow. So it's been successful in that sense. Going back to my previous statement, what's the kind of final shoe to drop where we see the central bank, like the Bank of Canada or the Fed in the States pivot a bit? We would argue we're already there. We saw the Bank of Canada pause this week. That's a sign that they don't feel, at least at this point, that further hikes are necessary to cool the economy. But they haven't shifted to cuts yet, and they haven't signaled cuts because when we look at core inflation, which is really just a way of saying inflation, when you remove the more volatile components like food and energy, core inflation continues to be above the level that they're comfortable with.
[00:09:03.100] - Aaron Young
So, they're not ready yet to cut rates until, we would argue, you see kind of three quarterly prints or headlines with core inflation coming down, then we would expect the Bank of Canada to pivot and start cutting rates. And why do they have to cut rates? It's very clear that at the levels we're at now, with the overnight rate of 5%, that can't be sustained for the long term, especially in Canada, given the amount of debt on the consumer balance sheet, the amount of indebtedness with corporations, to be frank the amount of indebtedness with our federal government and provincial governments, it's not a sustainable level. So we believe that CIBC on the fixed income team, that we've hit a pause. We've probably hit a plateau for now. And as the kind of longer term or the more lagged effects start to hit the real economy, with things like people losing jobs, cutting of the workforce, unemployment rate going up, the central bank will need to pivot and move towards rate cuts. And you know, Derek, you and I have talked about this previously. When we say rate cuts, we don't mean back down to the 0%, near 0% that we experienced during the pandemic.
[00:10:30.660] - Aaron Young
Again, that was an outlier event. We're not returning to that. But we do believe the central bank has to bring down rates by a few cuts to kind of hit that equilibrium state where inflation is not out of control. But they're also not putting the economy into a very deep recession and they need to find that "soft landing". So, things I would look for, if you're trying to look at where central banks are moving things like the unemployment rate, average hourly wages, headlines around companies cutting staff, cutting back hours, these are all signals that the real economy is starting to feel the pain which will naturally bring down inflation. And the central bank will be looking to pivot a bit before, in hopes of not pushing the economy into a deeper recession. And the only other caveat I've given, and we've talked about this, is trying to time perfectly changes in interest rates. And when central banks are going to pivot is a very notoriously hard game. And we look at something like futures markets in the US and Canada that is kind of a consensus market guess as to where central banks are going with interest rates in the future.
[00:11:51.970] - Aaron Young
They've been wrong just as much as they've been right. So very hard to predict. And in our view, there's ways of positioning in a diversified manner that plays out whether they cut or not. But those are some of the key elements that we would look for. If you had to hold me to timing, I would say you probably start to see talk of cuts in June of next year 2024, and then probably down to the 4% range by the end of the year. So that would be two to three cuts.
[00:12:28.910] - Derek Hebb
Thanks, Aaron. 2022 was the worst year on record for bonds. So, how does this set the stage for bond returns going forward and how can we capitalize on this opportunity?
[00:12:45.030] - Aaron Young
Definitely, that's a great question and I think I often like to frame it in the context of, say, stock markets or equity markets, because we often think fixed income is different because they're loans and bonds and they have a fixed maturity. But to your point, having gone through one of the most extreme high velocity hiking cycles that we've seen from central banks in decades, 2022 was not a good year for bonds because the entire market had to reprice to those new interest rates. But again, that analogy to equities, much like when you go through a period where equities have negative returns, there's often value starting to build up in that market. And any kind of value investor, contrarian investor, or just maybe good investor, if they have dry capital on the sidelines that could be put to use. You start looking at equities after experiencing a drawdown and saying there's value here, time to put some additional capital to work or stay invested. The same idea applies to bonds, and it's really simple in terms of given where yields have moved. There's two components to what we think makes bonds really interesting right now. With yields going up, we now have coupons and a kind of running level of income that we can generate in a portfolio that is much more attractive than we have seen in quite a long time.
[00:14:26.520] - Aaron Young
Just given interest rates have generally been moving the other way, further and further towards zero, until we hit the pandemic. For us, looking at 2023, 2024, our starting point is much better than it has ever been. And just to give you an example, if I'm looking at Canadian investment grade corporate bonds, very high quality names we all interact with on a day and day in and day out basis, I can get a yield of, call it 5.85%. So close to 6% in super high quality corporate bonds. That's my baseline. We haven't seen those levels in decades, so that makes it very attractive, going back to our previous questions, around when do central banks pivot, and whether we believe rate cuts are in the future, and by how much, much like equities, when they hit a certain kind of deep value and people buy and they tend to revert back. Same thing in fixed income. So if we do see central bankers begin to cut rates, which is our base case, in the next twelve months, you really capture a lot of good upside in fixed income markets. So again, I'll use the example of the Canadian kind of investment grade corporate bond market.
[00:15:55.750] - Aaron Young
We have that 5.85% yield. Assume nothing else changes. We can clip those nice coupons. That's a great baseline return. If we were to see cuts by the central bank and you do simple bond math, you see that upside build in as well. And we start to get to a return north of seven and a half, closer to eight and a half percent. Again, all else equal, a lot of things can change there and we're active managers, but there's that embedded upside that kicks in, if and when central banks begin to cut rates. And that's why we think not negating the experience of 2022 - 2023, 2024 actually tees up what we believe is going to be really exciting fixed income returns. And when I say really exciting, competing with equities, but remaining a lower risk investment in terms of just the nature of debt markets being higher in the capital structure versus equity holders. So, we think it's an exciting opportunity to have that balance between equities and bonds going into the next year.
[00:17:12.410] - Derek Hebb
Thanks, Aaron. Current GIC rates are enticing. And with your example of an investment grade Canadian corporate bond, you've kind of set the stage for my final question. And that is, how would you compare GICs to discount bonds in terms of their benefits?
[00:17:32.130] - Aaron Young
Definitely. That's a great question and we totally understand the attraction of GICs. And GICs, definitely, I mean, Derek's the expert here, but I would assume GICs definitely have a place in some portfolios. One thing we push back against, know people see the headline yield on GICs, and of course know the most attractive we've again seen in decades, and it becomes an interesting investment. But one thing we don't talk about as much, but I think is very important, is looking at after-tax yield. And again, going back to our initial conversation, having gone through interest rate repricing, if you look across the Canadian and to be frank, global bond markets, all bonds are trading at a discount. So if you think of if $100 is kind of the par value of a bond when it's issued right now, government, corporate, provincial, a lot of it is trading at a discount. So that could be, let's say, ninety five cents on the dollar. And that's because as yields go up, bond prices go down. That's kind of bond math. That's how it works. Now, where that's interesting relative to GICs is the treatment of income versus capital gains is quite different.
[00:19:07.810] - Aaron Young
And so when you own a discount bond and you hold it to maturity, what you're actually doing is you're getting a bit of income and a capital gain as that, say, $95 moves more and more towards par value at maturity. On the GIC front, everything you're earning in return is income. And it gets taxed at that, just for simplicity sake, let's say that 50% level. So I can give you a live example of bonds that we're looking at where there's that after-tax yield advantage. If we look at, let's assume $100 5% three-year GIC. If you think about it on an after-tax basis, 50% tax bracket, you're getting, call it two and a half percent after-tax yield. Well, myself as a bond manager, we can go out and buy you three year, so same term, let's say RBC senior note. So in this case, a bank bond, high quality, issued by, in this case RBC. And it applies to CIBC and the other banks as well. Their bonds are trading at, just for rounding, $91 with a coupon of around 2%. So what that means is your income is only the 2% and the rest is coming from capital gains.
[00:20:35.270] - Aaron Young
And if we do the quick kind of bond math and tax math around it, you end up with an after-tax yield of about, call it 3.7%. So that's 120 basis points, or 1.20% in after-tax yield advantage. That's a phenomenon. That's an opportunity that we have not seen in the market for a very long time, just because most bonds in the market have been trading at a premium above par. So, that's one thing I would highlight to clients, is there's interesting opportunities to design stuff around a similar GIC-type return, but with an after-tax yield advantage. And it is a bit timely in that right now bonds are trading at a very good discount, and that's an opportunity to think about bond funds, how they're capturing that, how that competes with something like a GIC.
[00:21:34.170] - Derek Hebb
Thanks, Aaron. This has certainly been a timely call. If anyone one has questions about the material that Aaron just discussed, please contact me. In the interest of time, this will conclude today's call. Thanks to everyone for listening in, and Aaron, thank you again for joining us on this month's call.
[00:21:55.890] - Aaron Young
Thank you, Derek. I really appreciate it.
[00:21:58.690] - Derek Hebb
Take care.
CIBC Private Wealth consists of services provided by CIBC and certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. The CIBC logo and “CIBC Private Wealth” are trademarks of CIBC, used under license. “Wood Gundy” is a registered trademark of CIBC World Markets Inc.
If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.
This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2023.
Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors.
Yields/rates are as of December 8th 2023, and are subject to availability and change without notification. Minimum investment amounts may apply.
For GIC terms of one year or less, simple interest is paid at maturity. For GIC terms of greater than one year simple interest is paid annually or compound interest is calculated annually and paid at maturity. For more information about this product, please contact your Investment Advisor.
Please note that rate of return projections are for demonstration purposes only. They are based on a number of assumptions and consequently actual results may differ, possibly to a material degree.