Louis Luc, subscriber to the Courrier de l’économie, asks what to think of the stock market bonds of Épargne Placements Québec, offered with a maturity of five and ten years. They are on sale until March 15.
Épargne Placements Québec talks about an ongoing promotion. The maximum return on the ten-year term, usually set at 100%, is now 400%. That of the five-year term, usually set at 40%, increases to 100%. According to the institution’s calculations, the maximum annualized (compounded) return is 14.87% for the five-year term and 17.46% for the ten-year term.
The big advantage this year is precisely the increase in this limit. For the five-year term, it has evolved in the past from 60% to 40%. For the ten-year-old, it went from unlimited to 100%. Hence the increased interest.
Another advantage. We are talking about a stock market investment based on the performance of the Indice Québec 30 (IQ-30), that is, the 30 largest companies having their head office in Québec. We are familiar with stock market volatility, but unlike other index investments, the capital here is guaranteed by the Government of Quebec and fully repayable at maturity. So, no risk of capital loss.
Finally, the actual yield to maturity is calculated from the average of three closing values of the IQ-30 during the first three weeks of the term and the average of four closing values during the last four months of the term. There is therefore what is called a smoothing which can be interesting in the event of a market setback at maturity. Let’s take the example of a five-year bond maturing on March 15, 2020 (in the midst of the mini-crash linked to COVID-19). The yield would have gone from double to simple depending on whether the calculation at maturity was based on an average of four closings or on the closing price on March 15.
History is no guarantee of the future. That said, according to calculations by Placements Québec, the historical annualized return of the index is 7.1% over five years and 9.4% over ten years (as of February 10). Of the 82 issues that matured, there was no negative return. Depending on the issue, the annualized return fluctuates between a low of 1.1% and a high of 9.9% for five-year issues, and 4.5% to 12.7% for ten-year issues. Of the sixty maturities in progress, there is only one negative return, on 1er February, i.e. the September 2021 issue. The annualized return fluctuates between a low of 2.2% and a high of 18.5%.
Need we remind you that we are coming out of a particularly difficult year in 2022 on the stock market and that Quebec large caps generally post a superior performance?
Invest Quebec
History shows that “Investissement Québec” holds up to comparison. Thus, the IQ-30’s annualized return of 7.1% for five years and 9.4% for ten years compares favorably to that of 7.4% and 8.6% respectively of the TSX 60 index containing the 60 largest caps on the Toronto Stock Exchange. Especially since the payment of the dividend is not taken into account in the IQ-30, whereas we are talking about a total return in the case of the TSX 60, which includes the payment of the dividend.
A study published in 2015 by the National Bank also showed that Canadian public companies under family control produced a higher return than that of the S&P/TSX, the composite index of the Toronto Stock Exchange, during the decade that had just end. And since this type of business is found more in Quebec, all things considered, we can therefore conclude that it can be profitable to “invest Quebec”.
In the institution’s spring 2022 report, it is written that the BNC Index of family businesses currently includes 44 Canadian companies controlled by families, including 11 from Quebec. Ten of these also make up the IQ-30. “The index results demonstrate the superior performance of family-controlled Canadian companies compared to widely held public Canadian companies. From June 2005 to June 2021, the Index generated a cumulative total return of 325.1% compared to 221.9% for the S&P/TSX. The average annual return for the period was 9.4% for the Family Index versus 7.6% for the S&P/TSX.
It is also interesting to note that, both during the 2008 financial crisis and during the COVID-19 related market disruptions in 2020-2021, the BNC Family Business Index has outperformed the S&P/TSX. For its part, the long-term volatility of the Family Index was similar to that of the S&P/TSX.
“Family advantage”
National Bank associated this superior performance with a “family advantage”. It evokes the ability of family businesses to implement long-term strategies without being under the pressure of the diktat of the short term. These firms also tend to allocate capital more efficiently and generally at lower risk. Attention is given to the use of multiple voting shares, which very often serve to consolidate the control of controlling shareholders within a family business. Well supervised and marked out, these actions have no negative effect as long as the legal framework and the principles of governance provide adequate protection to subordinate shareholders.
On the other hand, they are known to provide a longer-term view, to ward off hostile takeovers and other attempts by predatory investors, and to discourage speculative attacks from activist shareholders with only short-term valuations. of the shareholder, without any concern for the other stakeholders.