Matt Evans, CFA
President & CEO
Change was the theme for our first quarter issue of Grow Together in 2020 and, coincidentally, that was also my first quarter at the helm of CWB Wealth Management. The onset of the COVID-19 pandemic in January and February had quickly driven significant disruption in the financial markets. To add to the action, on March 3, 2020, we announced the acquisition of T.E. Wealth and Leon Frazer & Associates, significantly expanding our footprint and more than doubling the size of our wealth management team.
Change, growth and renewal are themes we’ve continued to explore. As the public health crisis unfolded and severe global economic disruption drove a range of unpredictable outcomes in financial markets, our value as professional financial planners and investment managers was strongly tested. I am proud of how we performed. We encouraged our clients to stay invested and stick with their plans as the market corrected. We seized the opportunity to rebalance near the equity market lows in March, adding to our tactical overweight in quality and value-oriented stocks. These proved to be winning strategies, particularly through the second half of 2020 and into 2021.
Our responsibility to clients, regardless of the market environment, is to understand the changes occurring around us, separate the signals from the noise, and respond with prudent solutions to create long-term value.
Our goal remains to contribute to greater peace of mind for our client families through personalized advisory experiences every day. We believe that one of the ways we deliver on that promise is through our thought leadership. For example, in that first issue of Grow Together in 2020, we tackled an emerging change frontier by highlighting the accelerating influence of environmental, social and governance (ESG) factors in portfolio management. Scott Blair, now our Chief Investment Officer, anticipated that the trend was here to stay, and Imran Usmani explored the impacts of ESG factors for a specific portfolio company. Sure enough, the ESG theme gained further momentum in 2020, and we see evidence that it will likely continue to do so going forward.
In this quarter’s issue, we address two key changes currently driving the narrative in financial markets: the rise of Bitcoin as an asset class, and the challenges presented by historically low interest rates for fixed income investors. Here, we’re exploring change frontiers at polar opposite ends of the spectrum. Bitcoin and cryptocurrencies were innovated only a little more than a decade ago, whereas the impact of rising and falling interest rates on the value of debt investments has been a feature of financial markets for hundreds of years at a minimum. Finally, this issue also highlights important capabilities strengthened through last year’s acquisition by having Trevor Fennessy, a Senior Financial Planner from T.E. Wealth, share key insights on a few COVID-related changes to personal tax for the 2020 tax year.
Our message to introduce Grow Together last year was a positive one: with change, comes opportunity. Growth is the residue of change and we are growing every day to better meet the complex needs of our client families. At the same time, every successful organization has signature attributes that should be cherished and protected. For us, it’s our commitment to put people first in all that we do; to challenge ourselves by building inclusive teams with diverse points of view; and to recognize that the quality of our results extends from the quality of our relationships – with both our clients and one another. These values are in our DNA and will never change.
Scott Blair, CFA
Chief Investment Officer
Bitcoin is everywhere these days. Naturally, any asset that rises over 400% in value in just one year is bound to capture mainstream attention. Of course, Bitcoin has been here before. Back in 2017 we saw similar gains, although the price didn’t get as high as it has this time around. Back then, it was more of a novelty and was mostly associated with the dark web and nefarious activities. Young people were more likely to be interested than older folks and it was primarily contained to retail investors. Today, baby boomers are jumping on board and professional investors are also taking note. Our inboxes are full of research arguing that there should be a place for Bitcoin in a well-diversified portfolio, while different research argues there should not be a place. This is different than 2017 when money managers were mostly curious, but indifferent. Today, everyone has an opinion.
Figure 1: The rise of Bitcoin
Source: Bloomberg, as of February 25, 2021
Our goal with this article is to answer a simple question: Does Bitcoin deserve a place in your portfolio? Despite the sheer volume of material being churned out daily on the subject, it is still one of the most commonly asked questions we get. In order to answer the question let’s look at Bitcoin by asking some of the questions we would normally ask when looking at any new investment. What is Bitcoin? What need does it fill? Is it the best product out there to fulfill that need? How do we value it?
What is Bitcoin?
Bitcoin is a cryptocurrency. Although it is the most well-known cryptocurrency, it is not the only one. In fact, there are thousands of different cryptocurrencies. Unlike regular currencies, cryptocurrencies are digital, meaning they do not exist in the physical world. They are not controlled by any government and they are unregulated. The supply of bitcoin is finite. There are currently 18.5 million bitcoins in existence. New bitcoins are created by computing power solving complex equations. As more coins are created the rewards for solving these equations gets smaller to the point that the number of bitcoins will max out at around 21 million. Although bitcoin is legal in most countries, it is considered an asset and taxed as such. Therefore, if you bought $100 in bitcoin that increased to $500 in value and then sold your bitcoin, you will be paying tax on the $400 gain in the price.
What is the need for Bitcoin?
It has two potential uses. The first is as a currency for which it has many benefits. You do not need an intermediary, like a bank, to use it. You can transfer it anywhere in the world much more quickly than traditional methods and potentially much cheaper than paying bank transaction fees. The second use is as a store of value. Some call it the digital gold. Governments have gone deeply in debt through the pandemic. Money is being printed en masse. Bitcoin could act as a safe haven, should traditional currency be severely devalued. Again, much like gold.
Is Bitcoin the best solution in filling the need?
As a currency, Bitcoin is a disaster. It is simply too volatile. Imagine owning a business selling bikes for $5,000 that you purchase wholesale for $4,000. Someone buys the bike in bitcoin. The next day, the price of Bitcoin falls 20%. All of your profit is gone due to the volatility of the currency. When seen this way, Bitcoin would make running a business very difficult.
Next, consider it as a safe haven asset. Since its supply is finite it could have some scarcity value. In some ways it is more like memorabilia (hockey cards, for example) than gold. Gold has a use outside of a store of value. If the world decided tomorrow that gold was not a suitable store of value, it would still be mined for its other uses, such as jewelry. Hockey cards have no use except as memorabilia.
A Wayne Gretzky rookie card recently sold for over $1M. There are a finite number of these cards and people obviously view them as having value. Bitcoin could also fit this bill with the added benefit of being very liquid.
How do we value Bitcoin?
Unfortunately, this is impossible. Bitcoin produces no interest income or dividends. There are no future earnings, like those that a company has. It is not used for jewellery, like gold.
Its value is literally what someone else is willing to pay for it; that is why it swings so much in value.
There is nothing fundamental behind the price. Like the Gretzky card, maybe people will always want bitcoin, but it is impossible to say today what it should be worth. We can only say what it is worth at any time, based on the price in the market.
So, does Bitcoin deserve a place in your portfolio? We think the answer is no, or at least not at this time. It is currently too volatile to be a currency and although it may have gold-like qualities, the inability to properly value it makes it tough to want to own. Unlike gold, it has a very short history as a safe haven. We need to see how it plays out over time to be convinced. It literally could be worth double or half what it’s trading at today in a week or a month’s time. Assets that trade like that are more for gamblers, than investors.
There are also other factors that need to be considered. Even if cryptocurrencies are sought as a safe haven like gold, there are no guarantees bitcoin will be the one that investors want to own long-term. Perhaps it is like VCRs: bitcoin is the beta that gets overtaken by VHS models down the road. Lastly, consider this: governments are looking at potential regulations and also at creating their own digital currencies. How that would change Bitcoin’s future – or any cryptocurrencies – is anyone’s guess.
Malcolm Jones, CFA
Senior Portfolio Manager, Fixed Income
In previous articles, we have discussed why bonds should be held in most portfolios, even when expected bond returns are low. The reason for this is that bonds are a good diversifier to equities, due to low correlation. Last year was a great example: as the stock market sold off in March, bond prices rose and provided a good return for investors. Another reason to hold bonds is that they have lower volatility than equities. In other words, the highs aren’t as high, and the lows aren’t as low. Bonds generate most of their return through their regular income payment (also known as the coupon).
Even in years where total returns are low (or even negative), the coupon still provides cash flow. For example, in 2013, the total return on benchmark bonds was -1.2%, while coupon income was 4%. So, even though the value of investors’ bonds went down, they still got paid.
How can we leverage low-yield bonds to generate returns?
If you believe as we do that bonds are a key part of an investor’s portfolio, one key question remains: in an environment of low yields, how do we plan on generating returns?
In 2020, we saw very strong fixed income returns. While these returns were welcome, they were primarily due to falling yields (lower yields = higher prices) and narrowing credit spreads. We feel that 2021 is unlikely to have similar returns. Total bond returns for 2021 to date are negative, as yields have risen even though credit spreads have continued to narrow. So, is now the time to abandon bonds? We don’t think so. Bonds still provide diversification. Bonds still provide income. And we can still generate returns in a low yield environment. Let’s explore a bit deeper to understand how we can do that.
Not all bonds are the same. And that’s a good thing.
Individual bonds have different times to maturity, different coupons and different credit risks. That’s where the opportunity lies. Consider the following bonds and the effect of a 1% increase in yields in the chart below.
Figure 1: The effect of a 1% increase in bonds
|Time to maturity||Coupon||Yield before rate increase||Yield after rate increase||Price decline|
|5 years (riskier credit)||2%||3%||4%||-4.58%|
|30 years (riskier credit)||2%||3%||4%||-18.77%|
Source: CWB Wealth Management
As shown above, longer-dated bonds, bonds with lower coupons and bonds with less credit risk all have greater exposure to interest rate movement, when everything else is held equal. Now you can start to get an idea of how we can emphasize different bonds in the portfolio to improve returns. For instance:
- We plan on continuing to emphasize credit products (bonds issued by corporations, for example). These have a higher yield versus government bonds and even though the spread narrowed a lot in 2020 from the height of the pandemic, the spread has continued to narrow so far this year. As the economy recovers, there is further room for spreads to narrow. We feel there is an opportunity to capture extra return here.
- We can adjust duration. Longer-dated bonds tend to underperform when yields rise. We expect more-than-usual ups and downs in yields this year, due to the uncertainty in the economic environment. The effects of government stimulus, the timing and strength of inflationary pressure, the changing effects of globalization and geopolitical pressures will cause some volatility in rates over the coming year. We also need to keep an eye on central bank buying –these are very large buyers who are not interested in economic returns, but instead want to keep yields low to help economic recovery. This could have a dampening effect on yields.
While this volatility will present some risk, it also provides opportunity to capture some extra return.
- We can capture roll yield. With a steeper curve, there is a more substantial difference in yields between bonds of different time to maturity. A 10-year bond bought today will generate one year’s worth of income in one year’s time, but it will also appreciate as it is being valued at the lower 9-year yield. Lower yields equal higher prices. This doesn’t offer a big return, but in a low-yield environment, every little bit counts. This is another opportunity to capture extra return.
- We will actively manage to avoid any credit missteps (as always). In a low-yield environment, it is harder to recover from buying a bond in a company that runs into financial issues. This is why we spend considerable time reviewing holdings to help reduce the risk of an untoward event.
A portfolio with a mix of bonds and equity helps cushion the overall portfolio against the risk of excessive exposure to one asset class. As mentioned, bonds and equities do tend to have low correlation. So, when one asset class does poorly, the other does well. While returns on bonds are unlikely to be where they were over the last two years, they still have a place in a well-diversified portfolio. Your portfolio manager can help ensure that your overall risk level is still appropriate to your investment goals.
Trevor Fennessy, BBA, CFA
Senior Planner, Wealth Management
Following a year of unprecedented change across all facets of life, it should come as no surprise that this year’s tax filing will be different. The federal government’s response to providing financial aid and the transition to working from home have introduced some unique circumstances for the 2020 tax year. In this article, we will explore some of the key areas that may impact you or a family member and how to address them. We will also use this as an opportunity to simplify some of the newly introduced legislation from the pandemic response.
Digital news subscription credit
There has certainly been no shortage of news headlines this year. If you used an eligible digital subscription to keep up with the news, you can claim this non-refundable tax credit for the first time. Some important details to note:
- This credit was introduced in the 2019 federal budget to promote digital journalism and will be available from 2020 to 2024.
- This credit is available to individuals who have paid for an eligible digital subscription with a qualified Canadian journalism organization (QCJO).
- To determine whether you have an eligible subscription, review your receipt. If it includes a QCJO number, you will be able to claim the amount.
- Once included on your return, you will receive a 15% tax credit on your subscriptions up to $500, for a maximum annual tax savings of $75.
COVID-19 emergency and recovery benefits
Following the act passed on March 25, 2020, the Canada Emergency Response Benefit (CERB) paid out $74.08B to more than 8.9 million unique applicants. On September 27, 2020, the CERB benefit was replaced by a series of recovery benefits to continue to support Canadians impacted by the pandemic.
- The following benefits are taxable and must be reported on your 2020 tax return: Canada Emergency Response Benefit (CERB), Canada Emergency Student Benefit (CESB), Canada Recovery Benefit (CRB), Canada Recovery Caregiving Benefit (CRCB) and the Canada Recovery Sickness Benefit (CRSB).
- If you collected any of these benefits, you can expect to receive either a T4A (benefits paid by CRA) and/or a T4E (benefits paid by Service Canada). These slips will be sent to you by mail and can also be accessed via your CRA My Account. On the T4A slip, each benefit will be represented by a unique box number (boxes 197-204). It is important that you verify these boxes to ensure that they match your records.
- Please note that these slips should reflect any repayments that were made up until December 31, 2020. If you made a repayment in 2021, you will still be required to include the full amount shown on your 2020 slip. However, you can expect an additional slip in 2022 to claim a deduction on your 2021 tax return.
- If your records do not match with your reported slip, contact the issuing authority (CRA for T4A, Service Canada for T4E) to obtain an amended slip.
Working from home expenses
CRA has simplified the process for claiming employment expenses for those who worked from home, as a result of the pandemic. If you worked more than 50% of the time from home for a period of at least four consecutive weeks due to COVID-19, you will be able to deduct eligible employment expenses for 2020 on form T777S.
The CRA has offered two methods for calculating your deduction:
Temporary flat rate method:
- This allows a claim of $2 for each day worked from home, up to a maximum of $400.
- To claim this amount, you do not have to calculate your workspace details, keep records of your expenses, or obtain any paperwork from your employer. Please note that your day count cannot include days off, vacation days, sick leave days, or leaves of absence.
- To use the detailed method, you will need to obtain a signed T2200S or T2200 from your employer.
- Eligible expenses for salaried employees include but are not limited to rent, utilities, maintenance costs, home internet and office supplies. For employees who earn commissions (box 42 on the T4 slip), additional expenses, such as home insurance and property taxes, can be included.
- The expenses are pro-rated based on the square footage of your home that you are using for work. If you are using a shared space, the amount will be further pro-rated based on the hours you are using that space for work.
Which method is right for you?
Consider this example to see how both filing methods work:
Matthew has been working full-time from home since March 16, 2020. Matthew rents a condo and is a salaried employee. He has been working out of a spare bedroom which accounts for 14% of his home (140 square feet of his 1,000 square foot condo). During his time working from home, Matthew spent $98.36 on office supplies, $528.66 on electricity, $541.85 on home internet and $15,300.00 on rent.
Temporary flat rate method:
*Number of weekdays between March 16 and December 31, 2020
Based on the $2 allotment per day, Matthew would be able to claim employment expenses of $368.00 under the temporary flat rate method.
|Expenses||Total amount||Eligibility||Pro-rated amount|
If Matthew purchased ink for his home printer and was not reimbursed by his employer, the full amount of this expense can be deducted. All his other expenses will be pro-rated at 14%, based on the square footage of his spare bedroom.
In Matthew’s case, it is much more beneficial to use the detailed reporting method. However, if Matthew owned his condo, he would only be eligible for a deduction of $248.23 under the detailed method since the $2,142.00 from his rent would no longer be deductible.
For home owners, it is important to note that principal mortgage payments and interest payments are not deductible under the detailed method.
As a result, he would be better suited to use the temporary flat rate method.
When reviewing this example, it becomes evident that the flat rate amount is often quite generous for those who own their home or are using a shared workspace. However, these calculations will differ greatly depending on your circumstances. To help decide what method will work best for you, please refer to the CRA website, as they have published a detailed calculator along with numerous examples. As always, it is recommended to contact a qualified tax professional to determine the optimal strategy for you and your family.