Tax-friendly bond exposure

By Dan Hallett, CFA, CFP on August 10th, 2010

In this morning’s Globe & Mail, I gave an overview of investors’ three main options for bond (or bond-like) exposure in taxable accounts.  It seems at least two preferred share funds escaped my radar.  I’d also like to touch on some other products – some mentioned in the article and some not.

First, the mea culpa.  There aren’t many preferred share funds around.  In fact, I thought I listed all of the open-ended preferred share funds but neglected to mention the Invesco PowerShares Canadian Preferred Share Index Class and the JOV Leon Frazer Preferred Equity Fund.  Both funds should sport management expense ratios in the 1.8% to 1.9% range, including HST.  This is competitive with other preferred share funds mentioned in the article.

Hymas Investment Management‘s Malachite Aggressive Preferred fund, however, deserves a special mention.  While it is only available to accredited investors – i.e. it is sold by Declaration of Trust, not by Prospectus – the fund offers more transparency than any prospectus-sold mutual fund.  For example, while mutual funds now refuse to show trading summaries (because they don’t have to), Hymas freely posts statements of portfolio transactions on his website.

Hymas, who previously ran the GBC Bond Fund, also boasts a track record that is nothing short of superb.  With large investors having exited the preferred share market over the past 15 years, the opportunity grew for astute investors like Hymas to capitalize on this inefficient market.  While we have yet to complete our formal work on Hymas and his fund, there is a lot to like.  You can also peek into Hymas’ brain by checking out his blog – PrefBlog.

Finally, I deliberately omitted the ecclectic mix of closed-end preferred share funds, like those offered by Sentry and RBC.  At one time, more of these funds existed.  But I left them out of today’s article because they can involve additional liquidity risk and can sometimes use leverage.  Those are additional risks that otherwise conservative bond investors probably don’t want or need.