Laying the Firm Foundation of an Investment Structure

A. W. BLUE June 1 1927

Laying the Firm Foundation of an Investment Structure

A. W. BLUE June 1 1927

Laying the Firm Foundation of an Investment Structure



THE trend of interest yields on giltedged securities in the Canadian bond market continues gradually downward. This declining tendency has been under way since the turning point from the extreme post-war inflation was reached in 1920. Standard investment issues have returned to their 1914 levels which indicates that current price levels are at the highest point of the past twelve or thirteen years. Government issues, the highest form of security, are now selling on a price basis to yield from 4.5 to 4.75 per cent.; provincial issues 4.60 to 4.80 per cent., and municipals from 4.80 to five per cent. Corporation bonds can be purchased at prices to yield from five to six per cent, and preferred stocks of the investment type, from 5.5 to 6.5 per cent. The most important contributing factor to the steady rise of the bond market has been the comparative ease of money throughout the past five or six years. Business depression has tended to release large sums of money for invstment purposes which would otherwise be retained and employed in business pursuits.

There has been an unprecedented accumulation of funds, therefore, with the financial institutions of the country, banks, insurance companies and loan corporations, and the bulk of this money has found its way into the investment market, for want of more remunerative avenues of employment. Latterly, there has been much evidence of business recovery, but certain fundamental changes in our business practices have eliminated any disturbing influence upon the investment market that such a condition would otherwise entail. Business improvement, moreover, has tended to create additional wealth, and a valuable contribution to the revenues of the country has been forthcoming out of the prosperity of. the agricultural industry of the Dominion this past two or three years. All this has made for an easy monetary situation, despite the huge burdens imposed by the war, and has been reflected in a steady appreciation of investment values, and a corresponding reduction of yields. Business recovery has been strikingly evident in the action of the speculative markets, which have risen to unprecedented levels, and continue to perform in the most buoyant fashion.

There are several features in the present situation, which the potential investor should weigh very carefully. The speculative markets have advanced to a point of extreme hazard. Investment securities are high, but will they go higher? There is no reason to anticipate that the forward movement has carried prices to the peak of the cycle. It may be recalled that in the decade before the war interest rates were substantially lower and bond prices considerably higher than present levels. And the market advance was maintained throughout the greatest period of business prosperity in Canada’s history to that date, and despite the attendant call for funds to finance extended business operations. There is every reason to believe that Canada is moving into another era of pronounced prosperity, which will tend to create more wealth and release additional funds for investment. The most

astute opinion in investment and financial circles is that the trend of interest rates will continue downgrade for some years to come, with a corresponding appreciation of prices in the gilt edged market.

Cycles in Financial Market

/^AREFUL study of the money markets ^ over a long period indicates definite cycles in which interest rates move in one direction for a series of years under a certain stimulus, and then move in the contrary direction under a reverse influence. The war created an era of high money rates. The forward movement in the bond market of the pre-war period was terminated in 1913, when the speculative real estate bubble of Western Canada showed signs of collapse, and the general price recession gained momentum under the stimulus of the European war. Interest rates continued steadily forward throughout the war, as the requirements of funds to finance war undertakings imposed a constant drain upon the financial markets of the country. The strain was augmented in the short-lived industrial boom of 1919 and early 1920. The succeeding recession brought the release of funds from business, and thus initiated a broad forward swing of the investment market which has continued until the present.

There are several factors contributing to-day to the ease of money which should make their influence felt for some years to come. A new tendency in business was born of the war. The practice of buying on a hand-to-mouth basis is generally pursued. The highly efficient transportation services of the country ensure immediate delivery of goods at all times, and business interests therefore are not prone to stock up heavily, knowing that the goods are available as required. Inventories are, therefore, comparatively light, and thus the requirements for funds are greatly reduced. Declining commodity prices have also been an influence in reducing the financial requirements of business.

Savings Set Record

THEN, the savings deposits of the citizens of the Dominion have reached the highest point on record, now standing at $1,389,609,000. There is a steady increase in production in the primary industries of the country, all contributingnew wealth, while the secondary industries are showing increasing profits in their operations.

Large sums of money are released through investment channels. It has been computed that $50,000,000 per month, or $600,000,000 annually, is being distributed to private investors in Canada. And it is obvious that the bulk of these funds will seek re-investment. These influences and others are market stimulants which may be expected to wield a potent influence for some time to come.

The small investor who buys investments of the highest type is pursuing a wise course of procedure. He is minimizing risk, if not eliminating it entirely, and he is establishing a firm foundation for his investment structure.

An investment query that is fairly typical of the investment problem of every small investor was submitted to a number of the leading investment banking houses of the Dominion for suggestions and advice. The recommendations by these houses, published below, should be studied by every reader who is perplexed at some time or other as to the best disposition he should make of funds. It will be observed that government bonds head the list in every case, and where diversification is suggested, only the highest type of corporation issue is selected. Mining stocks and other highly speculative vehicles are eliminated as entirely unsuited to the small investor. The problem in question was submitted by a reader in Neepawa, Manitoba, and was as follows:

'Financial Editor,

‘MacLean’s Magazine.

T am in the position of having $5,000 to invest, with probably $400 per annum additional for the next few years. As I wish this to yield the best interest possible consistent with safety, I would like you to advise me. Certain selected mining stocks have been recommended to me as a suitable investment for part of my funds. I am not a business man, and this money represents my life savings, so you will see that whatever I buy must be safe. What form of security would you suggest? —R.T.’

The following suggestions were contributed:

Wood, Gundy & Co., Toronto—Our

suggestion would be that the initial fund of $4,000 be invested in government or municipal securities, and that subsequent investments might include higher yielding securities until such time as your correspondent’s holdings of such other securities would equal the amount of his holdings of government and municipal bonds. As an initial investment we would suggest a selection such as the following:

Dominion of Canada Guaranteed five per cent, bonds, issued by C.N.R. Company, due 1st February, 1954. Present market price 104 and interest, to yield about 4.74 per cent.

City of Toronto five per cent, bonds, due 1st July, 1948, price: 102.66 and interest, yielding 4.80 per cent.

Township of York five per cent bonds, due 1st March, 1928 to 1952, price: ■according to maturity to yield 4.90 per cent, and 4.95 per cent.

City of Edmonton five and a half per cent, bonds, due 1st November, 1945, price: 104.512 and interest, yielding five and an eighth per cent.

An investment divided evenly among the above securities would give an average yield of over 4.90 per cent. For further investments we would suggest securities of the following type:

Belgo Canadian Paper Company Limited six per cent., first mortgage bonds, due 1st July, 1943, price: 104 and interest, yielding 5% per cent.

Gatineau Power Company six per cent. Sinking Fund, gold debentures, due 15th June, 1941, price: 101 and interest yielding 5.93 per cent.

Canada Steamship Lines Limited six per cent, first and general mortgage bonds, due 1st October, 1941. Price: 99.25 and interest, yielding about 6.08 per cent.

In each case the issuing Company is in a strong position and we believe that these bonds offer a very attractive investment opportunity.

Royal Securities Corp., Montreal—

As safety appears to be the prime requirement of your correspondent, it is our recommendation that the investment referred to be confined strictly to government obligations, high grade public utility and industrial first mortgage bonds and we suggest, therefore, the following: $1,000. Dominion of Canada, 4}^ per cent, bonds, due 1946, at about 99.60 and accrued interest to yield over 4.50 er cent.

$1,000. State of New South Wales, five per cent, bonds, due April 1st, 1958, at 9634 and accrued interest, to yield 5.25 per cent.

$1,000. Ottawa Traction Co., 534 per cent, first mortgage and collateral trust' bonds, due July 1st, 1955, at 103 and accrued interest, to yield, 5.30 per cent.

$1,000. Northern Ontario Light and Power, six per cent, first mortgage bonds due January 1st, 1946, at 102 and accrued interest to yield 5.80 per cent.

$1,000. Abitibi Fibre Co., Limited, six per cent, first mortgage bonds due February 1st, 1947, at 100 and accrued interest, to yield six per cent.

In our opiniontheabovesecuritieswould give your correspondent the margin of safety that he requires, with an average yield of 5.37 per cent.

C. H. Burgess & Co., Toronto—We would suggest that the $5,000 fund be invested as follows:

$1,000 in municipal bonds yielding about five per cent.

$1,000 in foreign government bonds yielding about seven per cent.

$1,000 in two preferred stocks yielding seven per cent.

$1,000. in corporation bonds yielding six per cent, and over.

$1,000 in selected mining stocks, giving an average yield of about seven per cent.

To get the best results from this plan care would, of course, be necessary in the selection in any and all of the securities. This diversification would bring a very satisfactory interest return, well over six per cent., together with excellent prospects of appreciation in the value of the total investment, at the same time minimizing the possibility of any serious loss.

It would be easy, of course, to suggest that the total investment be made in government or municipal bonds yielding from 4% to five per cent, which might be said to give a greater degree of safety but we believe that the above investment plan carefully carried out would prove much more profitable to the investor.

F. H. Deacon & Co., Toronto—In

view of the statement that this sum represents practically the whole life-savings of this man, coupled with the fact that he only has a modest sum yearly for investment, leads us to state that in our opinion he would be warranted in buying only the very highest grade securities, as he is apparently not in a position to take any risk whatsoever. Government or municipal bonds should be his only consideration, and mining stocks quite out of the question.

Investment Yields

'T'HE following is a representative list of standard investment issues, embracing the major groups, federal government, provincial, municipal, and corporation bonds and preferred stocks, with yields at current market prices:

Int. Current Maturity Rate Price Yield Government— Victory ........ 1934 51/2 104.05 4.75 •Victory ......... 1937 51/2 108.05 4.56 War Loan ....... 1937 5 103.60 4.55 Refunding ...... 1943 5 103.90 4.62 Refunding...... 1944 41/0 100 00 4.50 Provincial— Ontario ......... 1942 5V2 107.76 4.80 Alberta ........ 1940 5 101.43 4.85 New Brunswick . . 1945 5 Vo 107.75 4.85 British Columbia . 1939 5 y2 105.40 4.90 Municipal— Quebec ......... 1935 5 101.65 4.75 Ottawa ......... 1936 5 101.51 4.80 Toronto ........ 1936 5 101.13 4.85 Corporation Bonds C. P. R....... 1944 4% 96 4.84 Montreal Power 1951 5 100.50 4.97 Gatineau ... 1956 97.75 5.15 Can. Steamships 1943 5 99.75 5.40 Manitoba Power 1951 51/2 100. 5.50 Bell Telephone 1955 5 102.50 4.83 Investment stocks Can. Cement pref. 7 119 5.88 Bell Telephone . . . 8 144 5.55 C. P. R.......... 10 181 5.52 Consumers Gas ... 10 180 5.55