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How Snowbirds Can Earn $3,000 Per Month in U.S. Income

Portfolio managers Jeff Sutcliffe and Steve Xu discuss how the BMO U.S. Dollar Monthly Income Fund can help snowbirds meet their regular expenses—and avoid exchange rate-related surprises.

October 2022

Steve Xu

CFA, FRM, CAIA, Portfolio Manager, Multi-Asset Solutions

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Jeff Sutcliffe

Director & Portfolio Manager, Multi-Asset Solutions

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Key Takeaways

  • The BMO U.S. Dollar Monthly Income Fund can be an ideal solution for snowbirds
  • The Fund benefits from an active approach to asset allocation, guided by BMO’s Multi-Asset Solutions Team and Five Lenses strategy
  • Asset mix adjustments have enabled it to mitigate some of the negative impact from rising interest rates and higher inflation

1. With markets volatile, exchange rates fluctuating, and snowbirds potentially going back and forth between the U.S. and Canada on a regular basis, what kind of plan can Advisors execute on behalf of their clients?

SX For snowbirds, it’s best to avoid rolling the dice on exchange rates—if the Canadian dollar declines relative to the US dollar (USD), suddenly trips south can get a lot more expensive. The BMO U.S. Dollar Monthly Income Fund is designed precisely for snowbirds and other Canadians who require USD cash flow. Call it an all-American solution—both entry and exit, including distributions, are entirely in USDs. With that kind of strategy, investors are able to completely avoid exchange rate risk. When it comes to series and purchase options, the best solution depends on how Advisors are structuring their client business. For fee-based investors, we’ve got a Series F option, which is very competitively priced. We also offer an Advisor series option, which is great for that space. Either way, the BMO U.S. Dollar Monthly Income Fund is well-suited for clients looking for monthly income and the potential for capital gains without incurring foreign transaction fees.

A common question we hear is—with the greenback as strong as it is right now, wouldn’t it make sense to wait for it to come back down to earth before investing in USD solutions? The key point we emphasize is that Canadians who regularly travel between the U.S. and Canada would either have a USD pool of funds so the exchange rate would not be an issue, or they would not be buying USD solutions all at once. They would start a position but then build it gradually over time. This means that in the long run, costs will average out to a reasonable entry point.

2. What is the biggest benefit of the BMO U.S. Dollar Monthly Income Fund for snowbirds?

SX The USD purchase option is a huge plus. But compared to other strategies available, the number one feature for investors is the Fund’s active asset allocation. Most other funds in the space operate with a static asset base, where your percentage of equities and bonds is essentially fixed and all the alpha comes from the securities themselves, or else it’s the investment house’s equity team making all the macro-level asset allocation decisions. At BMO, our Multi-Asset Solutions Team (MAST) specializes in the kind of meticulously-researched active asset allocation that investors expect. MAST, of which Jeff and I are a part, drives the Fund’s investment decisions AND drives alpha with cross-asset decisions, such as our current strategic overweight to cash. Using our Five Lenses strategy, we examine not only the mix of stocks and bonds, but also geographic tilts, credit duration, sector bets, and more. In 2022, that kind of 360-degree approach is a game-changer.

3. If a snowbird couple needs, say, $3,000 per month in USD income, how much would they need to have invested in the Fund?

SX If an investor were to come into a fee-based plan—our Series F ticker, which generates about 5% yield annually—they would need to invest around $717,000 to generate a monthly income of US$3,000, or a yearly income of US$36,000. Distribution occurs monthly, as the name of the Fund indicates.

4. How has the Fund been impacted by the Fed’s aggressive interest rate hikes?

SX No question that inflation has run rampant this year, and the Federal Reserve (Fed) has thrown down the doomsday gauntlet, so to speak, with its hawkish messaging and aggressive interest rate increases. All of a sudden, the Fed went from being a friend to risk assets to the guy that took the punch bowl away at a party. It’s been a challenging year from an asset allocation perspective. But it’s also been a good year, because it highlights the benefits of active management. One trend we’ve seen this year is yields moving meaningfully higher across the curve. That means that U.S. bonds, which are included in the Fund’s portfolio, are now earning a pretty healthy yield compared to what they were making at the beginning of the year. We’ve responded accordingly. Same with cash: we made the call to overweight cash like never before as we took our foot off the gas with respect to equities and bonds. The Fund is now positioned more conservatively than it has been in over a decade, which has been the right call. “Cash is trash” is the old saying—but 2022 is different. This year, because of the Fed’s actions, it’s been among the top performing asset classes. We’ve been able to max out our cash allocation at just under 10%, while asset managers who operate with a static mix are out of luck.

5. Looking ahead, how is the fund positioned to withstand inflation and a potential recession?

SX Inflation is a thorn in the side of risk assets. But the BMO U.S. Dollar Monthly Income Fund is built from the ground up to be a bit more defensive—we think of it as a balanced solution with a total return approach with a yield tilt. Over the years, we’ve made a number of changes to the asset mix to enhance our positioning. We trimmed our U.S. REITs and S&P 500 exposures and reallocated to dividends and low volatility, both of which have outperformed in the current inflationary environment. Those adjustments were made even before inflation took off. And in 2022, as Steve mentioned, we’ve de-risked the portfolio by shifting from bonds and equities to cash. That’s bolstered the Fund’s defences and gives us the dry powder necessary to reallocate to a more risk-on posture when markets start to rebound.

6. Jeff and Steve, one last question for you. We like to end by asking for book recommendations that have shaped the way you think. What would you suggest for our Advisor audience?

SX My first recommendation would be Superforecasting: The Art and Science of Prediction by Philip E. Tetlock and Dan Gardner. The most challenging part of our job is developing a kind of internal crystal ball, and if I can improve my hit rate by just a couple of percentage points, I know I’m ahead of the game. The second book I’d highlight is The Lessons of History, a collection of essays by Pulitzer Prize-winning historians Will and Ariel Durant. History provides crucial context for what we do, and in an era where geopolitics have gotten so heated, it’s important to understand the factors that led to particular conflicts in order to understand day-to-day developments.

JS My first pick is The Ascent of Money by Niall Ferguson. It traces how, even though we’ve gone from clay tables to computers, we tend to encounter many of the same challenges over and over. In the current economic environment, we’re probably facing many of the issues that societies faced hundreds or even thousands of years ago. I’d also recommend The Intelligent Investor by Benjamin Graham, which is a seminal work on value investing. And finally, Cathy O’Neil’s Weapons of Math Destruction, which is a fascinating look at unintended biases from the perspective of a quant scientist. She examines algorithms and applies her findings to investing and other areas.

Please contact your BMO Global Asset Management wholesaler for any support and guidance.

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