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The Balanced Income Strategy

May 12, 2020

An Innovative Approach for Conservative Investors

The Balanced Income Strategy is an investment process our team has developed for investors looking for modest yields and are concerned with preserving their capital.

An important type of investment used in this strategy is an income note.

An income note is a type of structured note that is designed to earn a predictable yield and have a high probability of returning the investors principal when the note matures.

It is generally not practical for mutual funds or managed accounts to hold structured notes. To benefit from the unique features structured notes offer, you can purchase them in your investment account at iA Private Wealth.

What Exactly is a Structured Note? 

A structured note is a debt obligation of a bank or other issuer, with a return that is linked to the price of an underlying reference asset (a basket of stocks). The terms of each note will define the payment depending on the behavior of the reference asset. For example, in January 2019 BNS issued a note linked to a basket of Canadian Bank stocks with a yield of 7.65% (BNS Canadian Banks Callable Contingent $7.65 Coupon Notes, Series 39, Fundserv code SSP1796)and a 7-year term. The investor document can be found online at This note will pay out a coupon of 7.75% provided the reference asset doesn’t fall by more than 25%. The note will return the investors principal at maturity provided the reference asset has not declined by more than 25% from the issue date on the final maturity date of the note. It is unlikely, but not impossible, that the reference asset of bank stocks will decline by more than 25% over 7 years.

How Does the Strategy Work? 

The investment process is designed to allocate a portion of available investment funds to structured notes each calendar quarter. Most notes recommended will be an income notes with similar income and protection features to the BNS note referenced above. The investment process may also incorporate other yield investments.

What are the Risks? 

The protection features of structured notes make them a very attractive option for investors. For the structured notes in the Balanced Income Strategy, the maturity protection features, and any the income payments, are conditional on the reference asset not declining by more than a certain amount known as the barrier (typically 25% or 30% depending on the note). At final maturity, if the reference asset has declined but is still above the barrier, the investor will not lose any money. However, in the unlikely event the reference asset has fallen below the barrier at maturity, the investor will experience the same negative return as the reference asset. It is unlikely, but not unheard of, for a reference asset to fall far enough that coupons are suspended, or that the investor loses money at maturity.There is also default risk. The notes are debt obligations of the issuing bank, and investors run the risk of a bank not meeting its debt obligations. Canadian banks are unlikely to default on their obligations.

How Risk is Managed in this Strategy?

The investment process is designed with an objective that the notes in an account have a variety of purchase and maturity dates. It is the protection features of the notes, and the variety of maturity dates, that provide most of the risk reduction of this strategy. The notes employed in this strategy do tend to have more exposure to specific sectors (i.e. Canadian Banks) than a diversified mutual fund.

How is the Income Taxed? 

Income is taxed as regular interest income. All the investments in the Balanced Income Strategy are eligible for investing in registered accounts.

The Role of the Investor & Advisor

As part of the investment process for this strategy, you can expect to be a little more involvement than you would be with a mutual fund portfolio. I may request you approve trades up to four times each year.

Your account will be reviewed four times a year by me (your advisor). If there are trades to recommend in line with your investment policy statement, a brief telephone appointment is scheduled, and I will ask you approve any recommended trades. You normally will hold any notes purchased until they mature.

The Role of the Balanced Income Strategy in Your Portfolio

The Balanced Income Strategy can be combined with other investment strategies to meet your overall

investment objectives. For example, you might choose to combine the Balanced Income Strategy with:

- A group retirement plan you may hold with your employer;

- An iA Private Wealth Strategic Portfolios;

- An all in one mutual fund portfolio;

- A more aggressive momentum strategy such as the iA Private Wealth Diversiflex Plus portfolio; or

- The Cowards Portfolio – a moderate growth strategy that completely protects the investors principle.

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