JMRD Market Observer for April 10, 2015: JMRD ALL-CAP BASKET Update‏

April 10, 2015

**April 10th Issue of The JMRD Market Observer**

In This Week’s Market Observer

  • JMRD All Cap (ACB) Basket First Quarter Update
  • Multiple Asset Class (MAC) Basket Update
  • NBF Asset Allocation Strategy: April showers bring May flowers
  • Retirement Corner
  • Week at a Glance
  • Reads of the week
  • Economic Calendar
  • Earnings Reports

 As long time readers of the MO know, at the end each quarter, the Team provides an update on each of the four Baskets managed by JMRD.

 This week we kick off the updates with the top performing Basket for the first quarter of 2015

 

JMRD ALL-CAP GROWTH BASKET (ACB) Update: 

 

Posts 6.85% gain in the first quarter

 

JMRD Wealth Management Team is pleased to provide the ACB Basket first quarter 2015 return of 6.85%.  The All-Cap outperformed the TSX Composite Total Return Index that has returned 2.58% to start the year.  Since we launched the ACB Basket on October 7th, 2013, it has returned 19.48% annualized, to the end of Q1 2015.   The TSX Composite Total Return Index has an annualized return of 14.13% for the same period.

 

In what has become a standard feature in these updates, below we provide a chart that shows the returns for a number of indices up to and including the first quarter of 2015:

 Screen Shot 2015-05-07 at 4.34.24 PM

 

There were four primary reasons for the launch of ACB in late 2013:

1)  A great complement to the DIG Basket

 

  • Our flagship portfolio is the Diversified Income & Growth Basket (DIG) and is currently held by close to 600 clients.
  • Clients who don’t own DIG own some or all of the holdings so exposure to DIG is even larger.
  • Clients were asking for some new names and we listened!
  • Diversify Diversify Diversify

2)  DIG Basket is getting bigger

  •  A combination of solid returns and more clients buying have increased total assets in the DIG Basket which makes making changes more difficult to execute.
  • The larger ‘size’ makes it difficult to add smaller names to DIG from a liquidity point of view.
  • However, there are several of these ‘smaller’ or ‘less liquid’ companies that we like and we needed to have a mechanism for all clients to invest in these names.
  • A NEW BASKET was the answer and the results have been encouraging.
  • All-Cap means that we are able to invest in any company regardless of size (cap is short for market capitalisation).
  • We are excited to get these new companies in more client accounts.

 3)  The investment environment has changed and we need to adjust:

  •  Interest rates are remaining lower for longer, we think that growth equities will perform well 
  • JMRD All-Cap Growth Basket will have less focus on low-growth / high income companies. Rather, the priority will be to a higher growth / lower dividend strategy.
  • We have added another new twist in that stocks selected for the JMRD All-Cap Basket do not need to pay a dividend to be eligible for inclusion.
  • We continue to favour those companies that have a history of increasing their dividends and the majority of the stocks in the Basket will pay a dividend.

4)  Timing is good

  • ACB has been around for over a year now and the main reasons we launched it in the first place still apply.
  • Our base case is similar to that of 2014 in that we feel the global economy is continuing to gain traction and this improving environment will be favorable for equities.
  • Combining this stronger outlook with a low interest rate environment, we feel clients need to be positioned to take advantage of the potential for attractive equity gains.
  • A mix of growth and income is ideal.
  • Again, remember asset allocation and diversification.

Additional notes

  • For clients interested in the new Basket, we will need to get your Basket form up-dated for coding purposes / please request if you have not already signed up and wish to do so.
  • The minimum purchase for the new Basket is 4 Baskets or $52,000, with subsequent purchases of 1.5 Baskets, or $19,500 at current prices.
  • We are working with NBF to lower the minimum purchase amount.

 

Some of the main contributors to the 6.85% return in the first quarter were First Service (FSV), a real estate management company which gained 38%; Constellation Software (CSU), a Canadian-based company engaged in acquiring, managing and building vertical market software businesses which gained 26%; Stella Jones (SJ), the maker of rail ties and utility poles was up 20%, CCL Industries (CCL.B), a specialty packaging company, gained 13% and Boyd Group Income Fund (BYD.UN) an auto collision repair company was up 11%.

 

Two detractors were Canadian Energy Services (CEU) and Surge Energy (SGY), both adversely affected by the downturn in energy prices.  Although we still like both companies’ management teams and prospects for the future, we felt that there were better opportunities in the near term.  We will not hesitate to revisit CEU and SGY in the future if the situation improves.  Recent additions to the Basket have been CGI Group (GIB.A), a provider of IT consulting and outsourcing for a number of industries, Exco Technologies (XTC), a designer developer and manufacturer of dies, moulds, equipment, components and assemblies for the automotive sector and Restaurant Brands (QSR), which is the entity that emerged from the Tim Hortons/Burger King merger.

 

Another note is that many of the ACB names have US operations with significant revenue sources coming from south of the border, which is a bit of a bonus for clients looking for this type of exposure.  The names include: Boyd Group, Stella Jones, Alimentation Couche Tarde, Restaurant Brands and Sun Life.

 

 A current snapshot of the JMRD All-Cap Growth Basket is below:

 

Multiple Asset Class (MAC) Basket

Another Basket that is held across some JMRD client accounts is the Multiple Asset Class (MAC) Basket, which is managed by FNB Capital Asset Management in Montreal.  The two principals of FNB are former NBF portfolio managers who decided to start their own firm.  The two originally started the MAC Basket at NBF in 2005, took a hiatus from managing for a period of two years and are now back at the helm, taking over from Fiera Capital in January 2015.  The Team at FBN Capital uses a pension-like management approach with the MAC Basket with special attention paid to providing superior risk adjusted returns – striving to optimize returns with less volatility than the general equity markets.  The MAC basket is a tactically managed portfolio which uses Exchange Traded Funds (ETFS) of various asset classes (cash, fixed income and equities and alternative investments) and geographies.  Please see the attached file for more information on the MAC Basket.

MAC Basket Monthly Report – March 2015

 

NBF Asset Allocation Strategy: April showers bring May flowers

We believe that most of the headwinds the U.S. economy has faced recently will subside as the year progresses. The labour market is a key driver of economic growth and it is still posting robust numbers. Once the winter effect fades, the remaining economic indicators should follow. Although the Fed is expected to raise its key rates sometime in the second half of 2015, a pickup in U.S. activity, liquidity injections by the ECB and low energy prices should help risk assets, particularly equities, deliver superior returns over the medium to long term compared to other asset classes.

With regard to fixed income, the U.S.-E.U. rate differential makes the U.S. market an attractive destination for capital inflows, and we think that this will limit any significant pick-up in yields for the short-term. We also favor riskier assets such as investment-grade corporate bonds or high-yield bonds over treasuries since we don’t foresee any major negative credit-related events in the short/medium term, and given that the higher coupon rates offered by those assets will offer some protection against the eventual tightening of monetary policy.

 

(See attached for the full report)

 NBF Asset Allocation April

 

JMRD Basket Corner

 

DIG Basket

DH Corp (DH)- DH announced closing of its $950.1M bought deal financing. The net proceeds of the offering will be used to finance a portion of the acquisition of Fundtech for approximately US$1.25 billion. DH expects the acquisition to be completed in early May 2015. DH shares moved higher by 7% this week.

 Manulife (MFC) – Manulife announced this week that DBS Bank Ltd. has selected MFC to be the exclusive provider of bancassurance solutions to DBS customers in Singapore, Hong Kong, Indonesia, and China. Attached is a research note with details on the transaction.

TD Bank (TD) – “Interview: TD Bank CEO Bharat Masrani on the future of banking” “It took us 160 years to build our Canadian business. We’ve been in the U.S. about nine years. So give us time” http://www.canadianbusiness.com/leadership/interview-td-bank-ceo-bharat-masrani-on-the-future-of-banking/

Whitecap Resources (WCP) – Whitecap announced closing of its $110 bought deal financing, the proceeds of which are being directed toward the acquisition of Beaumont Energy, a privately-held company for $587.5M including bank debt. The acquisition has been well received by the market since the acquisition was announced in March as the acquisition consolidates interests along the Viking fairway of west central Saskatchewan. The deal also provides further support for the company’s long-term sustainability equation, which stems form the high netback nature of production, resulting from a high crude quality, an extensive “in-the-money” hedge book and a favourable cost structure (the assets realized a blended royalty rate of only 1.6% in 2014). Moreover, the deal provides Whitecap with the opportunity to extract significant value through primary and secondary development, given an extensive inventory of drilling prospects (10+ years), exposure to significant Original Oil In Place (OOIP) and low recovery factors to date.

Whitecap Resources

 

All Cap Growth Basket

 

Spartan Energy (SPE) – Spartan was added to NBF’s Action List this week with the view that company is underpinned by a very high quality, high netback, light oil conventional asset base in Sask with a pristine balance to weather the oil downturn. In addition, the company has an attractive cost of capital and its financial flexibility should enable the company to become opportunistic with respect to execution of accretive transactions. While SPE trades at a premium 2015e EV/DACF of 10.4x vs peers at 7.3x, we continue to stand by our view regarding owning the premium/”expensive” names in this market – these will be the companies (as seen to date) that have the ability to consolidate and build their business in a trough market environment. Now is the time to be putting money to work in stories like SPE which offer some of the best upside exposure to the eventual recovery in oil prices. And in the meantime, SPE is

U.S. Growth Basket

Global Payments (GPN) – GPN said Wednesday that sales grew 8% from the year earlier and increased its earnings guidance for the year.  The payment-transaction company now expects per-share earnings to $4.77 to $4.84, up from $4.75 to $4.83 a share. It reaffirmed its sales guidance as the share price surged by 6% on the day.

Retirement Corner

1)     “Will you die with a mortgage? 10 reasons why more people will” (Globe and Mail)

2)     Avoid nightmare on retirement street: Pay off your mortgage” (Globe and Mail)

 3)     What happens when an RESP subscriber dies?” (Advisor.ca)  

Week at a Glance

 (See attached Week at a Glance report)

WeekAtaGlance

Reads of the Week

 

Economic Reports

           Monday April 13th – U.S. Retail Sales Advance, U.S. PPI Final Demand

Tuesday April 14th – Teranet/National Bank Home Price Index, U.S. Industrial Production

Wednesday April 15th – Canadian Manufacturing Sales, Canadian Existing Home Sales, Bank of Canada Rate Decision, U.S. Federal Reserve Releases Beige Book

Thursday April 16th – U.S. Housing Starts, U.S. Building Permits, U.S. Initial Jobless Claims

Friday April 17th – Canadian CPI, Canadian Retail Sales, U.S. CPI, U. of Michigan Sentiment, U.S. Leading Index

Earnings Reports

Monday April 13th – None

Tuesday April 14th – Intel, Johnson & Johnson, JP Morgan Chase, Wells Fargo & Co

Wednesday April 15th – Bank of America, Delta Air Lines

Thursday April 16th – American Express, BlackRock, Citigroup, Kinder Morgan

Friday April 17th – General Electric

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