Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about guaranteed investment certificates with Paul Ghoche, a private wealth counsellor with Canada Life. We talked about how to use GICs in client portfolios, developing GIC strategies, and about the investment differences between GICs and fixed income. And we started by asking which makes more sense for today’s nervous investor.

Paul Ghoche (PG): Periods of market volatility can provide portfolio managers with opportunities to add to positions at more attractive valuations, perhaps even positions they were highly interested in in the past but found that prices were less compelling. So, if you happen to have your money locked up in a GIC during these times, you may be incurring a significant opportunity cost. We believe the right approach is to focus on a client’s time horizon. For example, will they be needing the money in the short term? If that’s the case, then a GIC strategy may well be warranted. Does the client have access to other means of short-term cash, like, say, a credit line? And if so, could it make more sense to access this source of funds, rather than keep potential money out of the equity or fixed-income markets We’re not sure there is that one-size-fits-all solution here. Again, answers will depend on a client’s overall financial picture.

The tax efficiency of GICs and bonds.

PG: You have bonds and GICs. Assuming they’re both paying a fixed rate of return, if they are guaranteeing the same rate then the coupon component of the bond would be taxed like the interest paid on the GIC, and that would be taxed at a client’s highest marginal rate in a non-registered account. And so, the net return could look similar. But there is a second component that has to be considered in bonds, which differentiates it from a GIC. So, when bonds are sold prior to maturity, this may generate a capital gain or loss. If a bond whose par value was $100 was purchased at a discount, say at $95, and sold, there would be a capital gain, which would also be an additional taxable component. And in this case, the net return of the bond would prove to be greater than that of the GIC because even after tax there is that added benefit of the growth of bond price. So, there’s a lot to consider, but I would say, in summary, bonds have that potential of providing an overall net return that is greater than that of a GIC, especially if they are purchased at a discount.

Whether bonds tend to outperform GICs over the long term.

PG: I would say it is generally true that bonds do outperform GICs over the long term. Generally, the longer the holding period on the bond, the greater likelihood it will produce better after-tax returns than the GIC. Some recent data also suggest that bonds tend to rebound quite strongly following periods where GIC rates have begun to peak. And this may be what we are seeing currently.

Using GICs effectively in a client portfolio.

PG: It’s definitely a tricky question, determining the right balance of GICs to bonds. Trying to time the markets is a very risky proposition. As 2020 and 2021 have shown us, we should be expecting the unexpected. And in that sense, having a properly diversified portfolio, with a variety of bonds and equities, is still the best approach. We certainly don’t think that it should replace the fixed-income portion of a portfolio.

GIC laddering.

PG: GIC laddering is a viable solution for investors who want to maximize their GIC returns without locking in all their money for the longer term. It’s also a way of mitigating the influence of fluctuating interest rates. Essentially what GIC laddering means is that you’re dividing your money in different segments. Each of these would be invested for a different term at the interest rate being offered for that term. Once each of these portions matures, the funds can now be flipped to buy a new GIC. The money becomes available earlier than if you were to put all your money into one longer-term GIC. It is not a fool-proof strategy, but it is certainly one that should be considered to mitigate liquidity risk.

And finally, what advisors should consider about GICs when looking for client solutions.

PG: We generally think that GICs need to be incorporated in a client portfolio as part of a cash-flow management strategy. It is obviously a risk-free option and perhaps a logical solution for those who will be requiring a guaranteed fixed amount at a specific date. But obviously, there are opportunity costs, and taxation, and the possibility of needing the money before the maturity date. All these have to be weighed into that overall equation. It should not be used as a replacement for fixed income in a properly diversified portfolio, for those who have that longer-term time horizon. But it does have its place for individuals who have a short-term holding period, and who may be requiring liquidity at a specific point in time. It certainly has its place in an overall investment strategy.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Paul Ghoche of Canada Life. Visit us at investmentexecutive.com where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.


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