My
June quarterly blog is a little bit later than usual as I am always willing to
defer the writing of the quarterly blog in favor of spending the time required
for an existing investment in the portfolio or for the analysis of a promising
new investment.
The
summer heat is upon us, after the first 6 months of the year, where overall
returns have been strong – especially in Canada – recent history suggests that
the summer is a quieter time for the markets – although July has seen strong
volatility with Argentina defaulting and the Ukraine situation. The recent
string of 1%+ return months may just come to an end. The key is not to
overreact to the ‘interesting’ items like seasonality or external events, but
to remain focused on earnings, interest rates, and your asset allocation.
Allocating
Your Assets: How Much Stock Is Too Much?
Don't
go overboard when deciding how much of your portfolio to put into stocks.. This
advice is particularly timely now, as memories fade of the 2007-09 bear market
and many investors find themselves with swollen stock allocations—either
consciously, or unwittingly through failing to rebalance their holdings. Recently
I took some profits in a few positions to rebalance my non registered holdings
to 60% in stocks and the other 40% in mostly cash.
Most
people recognize they need to lean heavily on stocks to fund retirement, etc.
Yet the extra return you earn for going with an all-equity portfolio is small
relative to a traditional balanced portfolio that puts just 60% in stocks and
the other 40% in bonds.
Since
Jan. 1, 1926, according to Ibbotson Associates, an index fund benchmarked to
the S&P 500 or its predecessor would have produced a 10% average annual
return, assuming dividends were reinvested. A portfolio that allocated just 60%
to this S&P index fund and the remainder to intermediate-term U.S.
Treasurys (which are considered risk-free) would have gained 8.7% annualized,
or 1.4 percentage points a year less, on average.
That
certainly appears to be a rather modest price to pay for cutting your
portfolio's risk nearly in half, as measured by volatility of returns.
Furthermore,
many all-stock investors who at some point bail out do so at the worst possible
times—near the bottom of a bear market—and don't get back in until a bull-market
recovery is well under way. As a result of this counterproductive behavior, it
is extremely rare for an investor's real-world return to be anywhere close to
an all-stock index fund's theoretical potential.
You
are much less likely to engage in this destructive behavior with a 60/40
portfolio, and therefore odds are good that you will perform just as well over
time—if not better—than if you were to invest 100% in stocks.
The
non registered and registered portfolio performance was particularly strong
given that over 17% of the above portfolios is invested outside of Canada
It
is important to remember that with investing 17%+ of stocks outside of Canada
The
Dow's top four stocks (Caterpillar Inc., Intel Corp., Merck, Johnson & Johnson) by share-price
performance so far this year, all have dividend yields, or the ratio of annual
payouts to share prices, that are higher than average for the blue-chip index. Currently the portfolio owns three of the
following Caterpillar Inc., Merck and Johnson
& Johnson.
Positioning
for the potential for higher interest rates
Canadian
equities (particularly interest-sensitive equities) have benefitted from an extended
period of falling interest rates, which begs the question: “What happens as interest
rates rise?”.
In
Canada
Regardless,
we believe it is important to understand the potential shifts in market
leadership, which are likely to impact portfolios when interest rates do rise. Sectors
at risk – Share prices in some sectors appear to have benefitted significantly
from falling interest rates, most notably, Energy Infrastructure and Real
Estate/REITs.
How
about a raise!
I continue to pay close attention to dividend growing stocks because who doesn’t like getting raises each quarter. I believe that this is a strong part of long term, lower volatile investment success.
I am pleased to say that there were no dividend declines in this year, and the list of 2014 dividend growers year to date included 22 of my 45 positions!
I look forward to even more dividend increases in the second half of 2014
Portfolio Update
SNC-Lavalin
In
APRIL, 2012 given ongoing investigations and shareholder uncertainty re outcome
and potential impact to firm reputation and future contract awards SNC-Lavalin
stock drop from the mid 50s to the mid 30s – this is when I initiated a
position in - SNC Lavalin. The corruption news has abated, and we believe that
the initiatives by the new CEO are more than veneer.
SNC
Lavalin is Canada
The
Infrastructure (ICI) portfolio is in the sweet spot. Infrastructure assets are in demand and
valuations appear attractive for vendors. .Even at a price in the mid $50s the
stock looks attractive. There could be upside to the ICI portfolio that is value
at book, that have been growing in value, but at this point I am comfortable
valuing the ICI portfolio at $30/SNC share after tax. This implies that the
engineering business is trading at 8.5x our 2015 engineering EPS estimate of
$1.70. I believe that this valuation is attractive enough to provide investors
with enough of a return to be compensated for the volatility that they are
likely to encounter in the next few quarters.
