Portfolio update

General market commentary

May 10, 2017

As stated in our previous communication, portfolios will be adjusted monthly with exceptions made for special circumstances.

Using our rules-based methodology we incorporate a multi-factor approach which includes:

  • Value
  • Quality
  • Momentum
  • Growth

This month we have minimal to nil adjustments depending on the model you are invested into.

RBI Models

There were no changes for the month of April, 2017

RADAR Models

In the Canadian stock component we lowered our exposure to financials, replacing them with small positions in utilities and metals/mining.

No changes to the US or European components which are the same for both RBI and RADAR.
Our European and International ETFs both pay a nice yield as does one of our US equity ETFs

We have some exposure to the US currency through a two ETFs, ZDY and ZWH.

The Sector specific component still holds four ETF positions representing:

  • Technology
  • Healthcare
  • US Banks
  • Gold

We have not had any signal to change any of these this month. Gold remains despite a drop off as it represents insurance and the ETF we own utilizes a conservative covered call strategy to generate in excess of 8% in dividend yield.

Covered call strategies are also utilized in our Healthcare and Technology ETFs to garner substantive yields.

The Fixed Income component remains well represented by a cross section of professional money managers including Renaissance, Manulife, Horizons, First Trust and iShares. Annualized yields for the various managers for month of April 2017 ranged from 3.3% to 4.4% depending on the manager.

Fixed Income managers are evaluated monthly and monitored daily with changes being made if their style drifts, if the mandate is no longer in favour or if a better opportunity presents itself. For this month we remain satisfied with our money managers.

USA Model

There are no changes to the USA model this month.

All models remain conservative with some cash available to invest should we get a pullback in the market. None of our portfolios contain anything like Notes, Mortgages, Independent Real Estate or New Issues. We do not chase the flavour of the day such as the recent excitement surrounding marijuana stocks.

We remain true to our principles of capital protection first, income and dividends and capital growth.

Market update

This is not a comprehensive update by any means but we hope to discuss the biggest talking points as of late, what our signals are telling us and what our common sense tells us intuitively.

Canadian Market

Canada’s stock markets represent less than 2% of the world’s equity opportunities http://www.bankofcanada.ca/wp-content/uploads/2010/06/kennedy.pdf. 55% of that 3% is made up of financials and energy. https://tmx.com/ Both of those sectors struggled mightily in April.

We remain significantly underweight both of these sectors and will continue to remain underweight until we see improvements in the underlying fundamentals and momentum.

The financials sold off due to the financial concerns surrounding one company, Home Capital, a major mortgage lender in the heated Toronto real estate market. The financials dismal showing was amplified by a CMHC report that stated the Toronto and Vancouver housing markets were overheated giving cause for concern that Canada may experience a housing bubble similar to the US in 2008.

The energy sector cannot catch a break. Even with the Organization of the Petroleum Exporting Countries stating that they have cut production the price of crude has remained soft. But the price of crude isn’t the only reason Canadian energy stocks remain depressed. Major multi-national oil companies including ExxonMobile, Statoil, ConocoPhillips and Royal Dutch Shell are selling their Canadian oil holdings at a pace not seen for decades. While this is good news for environmentalists it is not so good for the Canadian economy. Sadly, the oil will be produced in some part of the world; it just appears that Canada is not the choice right now. Many reasons are given including our pending carbon tax, the US find of vast pool of oil in Texas that is cheaper to extract then much of the oil in Canada at a time when the USA represents 97% of our exports, the lack of pipelines to get our oil to port to sell to someone other than the US and the fact that we still import over 50% of oil from foreign sources.

So when you package up international fears over a real estate bubble and Canada’s dependence on resource revenue the Canadian market has been taking it on the chin.

USA market

The indexes in the USA continue to flirt with all-time highs on what is technically a strong market. The “Trump-trade” as it is called still carries the day and improving economic conditions have helped lift the US market to new highs. Technology, Consumer goods and Healthcare have done the heavy lifting and appear poised to continue that leadership alongside Financials.

International markets have rallied based on better economic conditions, cheaper valuations and improving political environment.

Asset allocation

We left our geographical positions and our equity to fixed income ratio intact for this month. If the trend for the Canadian equity market continues to deteriorate we may get a signal to make a tactical reduction at some point in the future. If this happens we will add to the best geographical region or regions or specific sectors come the first of June.

Conclusion

Volatility has been extremely tame for many months but volatility is a normal feature of any market, specifically equity markets and it is important to monitor these markets daily. That said barring any major geopolitical event risk of a recession in the next 12 months remains low. We expect equities to outperform bonds in the intermediate term but remind everyone that we have not had a correction of 5% for over 6 months or a 10% correction for over 12 months and as such, volatility always remains a possibility.

Daryl Cooper, Portfolio Manager, Scotia Wealth Management, 306-343-3255.