By: Enrique J. Gelpí Abarca
Manager, Vice President
Advisory Group, Popular Securities
So begins Evelyn Waugh’s classic novel Brideshead Revisited – loosely translated it means “and I in Paradise stand,” which brings us to our topic: Paradise Puerto Rico. It is time to take a closer look at diversification for portfolios concentrated in Puerto Rico securities. For a very long time, Puerto Rico securities provided a safe haven for its residents against income taxes and, for its island-born or naturalized residents, also against estate taxes. In Paradise it is possible to have your cake and eat it too, so a relatively high income was also thrown in, resulting in a tradition that a 6% tax-exempt yield is a “requirement.” Once our traditions take root they take lives of their own (e.g. applauding airline pilots for safe landing in PR tarmacs, a holiday on Election Day, extended Christmas, coquito, etc.) and in some ways these provides comfort and joy. So it is easy to see how a 6% tax-exempt tradition would be sweeter than coquito and easily find its way into our traditions.
For those overly concerned with the consequences of breaking with this tradition, keep in mind one does not have to exit PR Fixed Income securities in a radical manner, nor in all cases. It does suggest strongly considering diversifying a portion. How much is up to each investor and his financial advisors, but a needs-based analysis grounded on a thorough financial planning process is the best way to proceed. We recommend professional management that emphasizes capital preservation, independent credit research and analysis, and institutional execution.
Even partial diversification can improve the portfolio without sacrificing too much yield. In some cases it will be easier to diversify a much larger portion of a portfolio’s assets away from PR (possibly in some corporate and trust accounts where capital preservation is paramount, when high income is not a key consideration, or when certain risks have been mitigated through a will, etc).
As a starting point for diversification one may consider, among other asset classes, US Municipal Bonds that provide tax-exempt income and a higher credit quality (AA average). For example, a portfolio may include high quality US tax-exempt, intermediate municipal bonds. For equities, when an PR investor who wishes to reduce PR securities exposure, but does not have the ability to own non-PR assets due to estate tax issues, he or she could consider PR-domiciled funds that invest in US and foreign equities and have a high degree of liquidity.
Your Popular Securities financial consultant and his team of advisors can help you determine how to meet your investment goals while properly diversifying your portfolio.
Investment products and services are offered by Popular Securities, registered broker/dealer and member of FINRA and SIPC. Popular Inc. and Banco Popular de Puerto Rico are not registered brokers. Investment products are not insured by the FDIC, are not deposits or obligations, are not guaranteed by Banco Popular de Puerto Rico and may lose value. Popular Securities is a subsidiary of Popular, Inc and affiliates of Banco Popular. The suggestions and recommendations included in the financial plan are offered only as an advice, with no guarantee of the yields of any product that may have been acquired pursuant to such recommendations. Banco Popular de Puerto Rico, its subsidiaries and affiliates, do not engage in the offering of accounting, legal or tax advice. If you need accounting, legal or tax advice you should request the services of a competent professional in these areas. Tax benefits vary according to investor’s profile. Please consult your tax advisor to identify which products are best suited for your goals and needs.