Where Smart Money Is Going as Canadian Interest Rates Climb

Many investors are piling into non-bank lenders like First National Financial (TSX:FN), as interest rates climb.

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It often pays to look at where “smart money” (i.e., in-the-know investors) are investing their money. Such investors typically have better returns than most people do. In many cases, they have in-depth knowledge about specific industries that they can use to make informed investments.

These days, one economic factor that many smart money investors are adjusting to is rising interest rates. When interest rates rise, future cash flows become less valuable, and cheap valuations become comparatively more appealing than high growth. With that in mind, here are three places where smart money investors are putting their money in 2023.

Lenders

Famed smart money investor Howard Marks has upped his investments in lenders this year. He seems to prefer non-bank lenders to banks, as such lenders are making an appearance in his portfolio while bank stocks aren’t.

Non-bank lenders are companies that issue loans but don’t take deposits. They operate much like banks, but because they don’t have deposits, they don’t need to worry about bank runs. Instead, they just issue long-term bonds to finance their operations.

Consider First National Financial (TSX:FN), for example. It’s a Canadian non-bank lender that is doing extremely well this year. In its most recent quarter, it grew its mortgage portfolio by 10%, increased its revenue 42% and increased its earnings 108%.

Why is FN growing so rapidly? Quite simply, it’s profiting off higher interest rates. As rates go higher, FN collects more interest on the mortgage loans it issues. First National is indeed collecting higher interest rates on its variable-rate mortgages. Still, it manages to write more mortgages each and every quarter. By the way, FN shares have a 6.5% dividend yield at today’s prices.

Guaranteed Investment Certificates

One place where smart money investor Warren Buffett is putting his money this year is U.S. Treasuries. Treasuries are bonds issued by governments, they yield about 5% this year. Canadian investors can buy Guaranteed Investment Certificates (GICs), which are quite similar to treasury investments. Banks set their yields to match treasury yields in order to attract and retain depositors. By investing in them, you can get yields up to 5.5%. In the past, GICs offered almost no yield. Today, they offer yield aplenty.

Bond funds

Finally, we have bond funds. This is another category of asset that Howard Marks has spoken highly of this year. These funds invest in bonds, including treasuries, corporate bonds, and municipal bonds. Some of these funds offer very high yields. It’s possible to get 13% yields on “distressed debt” funds this year. Such funds are riskier than treasuries, but they can sometimes deliver explosive returns.

High interest rates: The Foolish takeaway

The big thing you need to know about high interest rates is that there are ways to make money off them. People often talk like high interest rates are unequivocally bad, but it really depends on what you’re holding. Bonds, GICs, and shares in lending companies can do well in times when rates are high. Many smart money investors are putting their money into such assets today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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