Advisor breaks down how he ensures stability in portfolios against a changing CAD
Currency fluctuations can make or break many clients’ short-term goals. Business owners, frequent travellers, and snowbirds can see their plans derailed over a significant weakening in the Canadian dollar. Sometimes, even, they might have to sell assets or realize losses to cover the currency gap, compromising on a long-term plan to make their short-term dreams happen. As the air turns colder in Canada, many snowbirds are preparing for their big trips South. This year it seems they’ll be doing so with the Canadian dollar at an ebb, risking the possibility of higher expenses and poor decisions.
Adam McHenry, portfolio manager with Langill & McHenry Investment Advisors of Raymond James, develops plans to counteract the short-term impacts of a possible currency fluctuation. He told WP that through a proactive approach and long-term planning, he can work to ensure clients aren’t left holding the bag when the value of the CAD drops.
“It’s really about scheduling things,” McHenry says. “I recall one client with a RRIF denominated in US dollars, and we’re making sure that his RRIF requirements are met and, in doing so, he has the money to pay his condo fees and lifestyle expenses. It comes down to understanding what their assets are, what their expenses are, and matching those up with the appropriate income streams.”
Assets to weather currency fluctuation
Asset allocation is a key to managing those plans. Within a roughly 60/40 portfolio balance, McHenry keeps his snowbird clients allocated to US-denominated securities. If they’re spending half the year in the US, roughly 50% of their portfolios will be in USD. He sees that allocation as having a twofold benefit. For one, those USD securities can help with necessary income and decumulation assets during a winter in Florida.
McHenry also believes in USD exposure as a hedge against market volatility. Because the greenback is a global reserve currency, it tends to outperform in periods of lower growth when investors seek security. The Canadian dollar, conversely, is a more ‘growth-oriented’ currency that performs well when other countries want Canadian resources.
Within that asset allocation mix, McHenry is seeing greater opportunities on the fixed income side of his clients’ portfolios. While he largely keeps clients in balanced allocations, he’s relishing the opportunity to lock in safe 5+% returns from safe holdings. In the US market he can also access municipal bonds for his clients, which McHenry says behave somewhat like the preferred share market in Canada.
On the equities side, McHenry extolls the virtues of the US market for the depth and breadth of assets on offer. His team typically takes a direct investing approach, and he has many of his older snowbird clients allocate to US-listed dividend payers. Those equities tend to have better track records of capital protection while offering a steady income stream.
Preparing clients for cross-border complexity
The earlier McHenry knows about his client’s cross-border plans, the better he can help them. He says that most of his older clients will make an investment in cross-border real estate before they retire, which gives him the green light to plan for their needs and expenses.
Whether his clients have cross-border concerns or not, regular check-ins are crucial for McHenry’s approach. He tends to schedule calls in the autumn with snowbird clients, learning what they expect to spend on in the coming year and adjusting their plans accordingly.
When issues arise that he can’t handle alone, McHenry relies on a deep network of professionals on both sides of the border. Functioning as his clients’ ‘quarterback’ he can send them to tax professionals, real estate brokers, or lawyers who can facilitate their needs as they arise.
Advisors looking to capture more of the cross-border market should begin by looking for a mentor, McHenry says. He notes that for a young advisor, the level of complexity and licensing requirements involved in a cross-border practice can seem insurmountable. However, if you partner with an advisor with more experience on cross-border issues you can get a headstart breaking into this market.
“I think [cross-border] is definitely an attractive market,” McHenry says. “I think having a strong mentor is probably the best way to go about it. It seems easy, you think ‘how hard can money management be,’ but some of the rules down there can be very challenging.”
“I’m very fortunate in that I was mentored by someone who had dual licensing.”
