In the good old days, people retiring would implement a simple ladder strategy using guaranteed investment certificates that would provide some liquidity and more than enough income to supplement their lifestyle needs and then have the peace of mind of knowing the principal would be protected and not be drawn down.

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Then the 2008 financial crisis happened, taking interest rates much lower and staying at record low rates as central bankers used two per cent inflation as an excuse to keep stimulating the economy, thereby driving asset prices significantly higher.

Things changed upon the reopening of the economy after the COVID-19 shutdown in 2020, forcing central bankers to significantly raise interest rates to tame out-of-control inflation. As supply chain log jams cleared up and the surge in consumer spending slowed, inflation responded, but it still has a way to go before getting back to the two per cent target.

Governments such as ours and the United States have become addicted to running large fiscal deficits and that paired with the resurgence of supply disruptions due to the Middle East conflict has the potential to drive commodity prices back up from their recent lows, making it rather difficult to reduce inflation back to pre-COVID-19 levels.

The positive in all this is that interest rates are finally high enough to start paying investors a decent amount of income, albeit it is front-end loaded with shorter term rates paying more than longer term. Therefore, that laddered GIC strategy is still not that appealing for the majority of income-seeking investors out there.

This is forcing many into owning dividend stocks, but this segment of the market has dramatically underperformed. Take the iShares Select Dividend ETF, which has a 3.8 per cent yield so it needs to generate some capital gains to boost income targets. Over the past 12 months, however, it is down nearly three per cent while the mega-tech-heavy S&P 500 is up 22 per cent. Even over the past two years, the ETF is up a paltry 1.8 per cent compared to the S&P 500’s 11 per cent total gain.

Should the “softer” economic outlook play out, dividend companies will be challenged to grow their revenues, earnings and dividends, so these returns are simply not going to cut it.

Some investors have turned to investment-grade corporate bonds, such as the iShares iBoxx $ Investment Grade Corporate Bond ETF or the iShares Core Canadian Corporate Bond Index ETF, but while their respective 4.36 per cent and 5.1 per cent yields are OK, they are likely still not high enough.

As a result, institutional investors, high-net-worth families and family offices have turned to private debt markets to meet some of their targeted income needs, but this isn’t without risk. There is the lack of liquidity since funds are locked in for the next five to seven years, and there’s uncertainty around the value of the underlying assets being pledged as security.

This isn’t to say that private debt shouldn’t be in your portfolio, but it can create some challenges, especially for those who don’t have the size and resources of a large pension plan.

This is where we’ve found structured notes to be especially helpful because they take an option overlay on a particular index and package it up as a bond-like security backstopped by the credit rating of a bank. We can, therefore, custom build and manage a portfolio of notes to meet a specific income target for a high-net-worth client, family office or even smaller institution.

The terms can be laddered to manage the maturity risk, with downside protection ranging from 25 per cent to as much as 100 per cent, depending on the client’s overall risk tolerance.

In a way, this is a form of active management on top of a passive-like portfolio if indexes are used, or one can even do it on a group of stocks that research has already been done on. Notes can be closed out before expiry and so they at least offer liquidity if required.

Investors can also choose them off the shelf of capital market dealers, but we find there is value in seeking the best pricing by doing them in size and then custom building them around a client’s particular goals and objectives.

Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.

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