Asset allocation is key for retired chemist
This week TONY MARTIN profiles an Alberta man who looks after his own investment portfolio and particularly likes dividend-paying stocks such as the banks
By TONY MARTIN
Saturday, July 27, 2002  Page B8

Keith Betty says he made a deliberate decision in the eighties to learn about investing. Why?

"I'm the one that cares the most about my money," says the analytical chemist, 53, who retired at 50 and moved to Lethbridge, Alta. "I recognized that it would cost me in terms of mistakes, but I wanted the freedom to make my own decisions, and the satisfaction that would bring."
How he does it

Mr. Betty begins with a big picture approach to his portfolio where asset allocation is key, along with keeping fees to a minimum. Currently, his registered investments count for 55 per cent of his holdings, and non-registered, 45 per cent.

Right now, just 10 per cent of his over-all portfolio is invested in the United States. His holdings there are all ishares, Barclay's line of exchange-traded funds.

"I believe the U.S. market is sufficiently effective that ETFs are advantageous compared to active management." His money is evenly spread among ishares that track the large-capitalization Russell 1000, the large-cap value-focused S&P Barra Value, the small-cap S&P 600, and the small-cap value Russell 2000.

As for the Canadian market, he shuns indexing. The reason, he says, is that the Canadian market is both too narrow, meaning there are too few companies to chose from, and too shallow, meaning that after you get through the larger companies, the size in terms of market capitalization drops off rapidly.

By investing in Canadian indexes, he says, "You end up overweight in a few stocks."

He also doesn't like the fact that indexing here at home means investing in resource stocks.

"In the long run, you can't make money by holding cyclicals," he says. "You have to trade them, and that means making buy-and-sell decisions, and that's hard."

Given his pension, he depends on his unregistered investments to kick out about 40 per cent of his needed income. Add in his focus on keeping his tax bill down, and it leads to stocks paying a strong and steady dividend. He holds all the big banks (except for Toronto-Dominion Bank),as well as Canadian Utilities Ltd. and BCE Inc.

As to what makes a good dividend stock, he looks for solid companies that have a consistent pattern of increasing dividends and earnings.

That's why, for example, he doesn't own Emera Inc. -- "It has a high yield but low growth" -- and TransAlta Corp., which he avoids because of the inconsistency of both its earning and the stock price. "I prize consistency because it implies reliability."

Given his interest in income, it's not surprising that he's also a fan of REITs (real estate investment trusts). He has 10 per cent of his portfolio split between Canadian Real Estate Fund, H&R, RioCan and Retirement Residences. He has a rather neat twist on why REITs make particular sense for someone depending on their investments for cash flow. "They should provide you with inflation-indexed payments, since if inflation goes up, they can raise their rents, and raise their payments."

In the same vein, he has 1 per cent of his portfolio in an oil and gas royalty trust as a hedge against energy costs. "If your heating bills go up, so will the distributions."

In his first year of managing his own money, he had chosen to hold some strip bonds outside his registered retirement savings plan, with an eye to keeping some cash free and perhaps making some capital gains. But despite the fact the bonds don't pay interest until maturity, you have to pay tax on the accrued interest. That really cut into his cash flow, so all his bonds -- which currently make up 10 per cent of his over-all portfolio -- are now held inside his RRSP.

While he earlier had this money spread evenly between bonds ranging from one- to seven years in duration, he now has a heavier weighting at the longer-term end. Last November he noticed the yields on bonds had become low, and yields on real return bonds were a good deal higher. As a result, he switched three-quarters of his bond money out of shorter-term strips, and into 2021 Government of Canada real returns bonds.
Best move

He calls his best move getting into -- and staying invested in -- the banks. And the luckiest? In the fall of 1998 he saw his units of Trimark Discovery were climbing, so moved more money into the science and technology fund. At the end of 1999, he began to steadily cash out his holdings to rebalance his portfolio as the tech bubble continued to climb and then collapsed. The result?

His disciplined rebalancing meant he kept a full three-quarters of what he could potentially have made by selling at the peak, netting about $37,000. "I actually paid the tax on that quite happily," he says. "Getting into it was luck, but cashing out of the bubble was risk management."
Worst move

Buying into Luscar Coal Income Fund turned out to be a money-loser. Mr. Betty paid $10.85 a share in the fall of 1997, and bought more the next spring at $7.85. But the Asian economic crisis pounded the price of coal, and Luscar's shares collapsed. Sherritt International Corp. took over Luscar in the spring of 2001 for just $4 a share.
Advice

"You have to be able to see what everybody else is missing and have the courage to go against the crowd."
Tony Martin is the co- author of the book Investing For Canadians For Dummies, published by CDG. Interested in being profiled in Me and My Money?
tony.martin1@sympatico.ca
The investor
Keith Betty. Age
53.
Occupation
Retired analytical chemist.
Investment personality
Conservative.
Portfolio
International equities exchange-traded fund (XIN-TSX), Templeton Growth Fund, Canadian REITs, oil and gas royalty trust units, 2021 real return bond, bonds with laddered maturities, dividend-paying Canadian blue-chip stocks.
Portfolio size
Six figures.
Rate of Return
'About 9% compounded since mid-1989.'