JMRD Market Observer for April 8th, 2016 – All Cap and DIG Basket Updates

April 8, 2016

**April 8th Issue of The JMRD Market Observer**

 

In This Week’s JMRD Market Observer

 

  • JMRD Diversified Income & Growth Basket & JMRD All-Cap Growth Basket Q4 Update
  • Asset Allocation Strategy: Risky Business
  • Follow-up comments from last week’s Market Observer
  • Retirement Corner
  • Week at a Glance
  • Reads of the week
  • Economic Calendar
  • Earnings Reports

 

JMRD Diversified Income & Growth Basket & JMRD All-Cap Growth Basket Q4 Update

 

As we have discussed in previous Market Observers, the global markets entered 2016 with the same uncertainties that were present at the end of 2015.  Concerns about global economic instability, the price of oil and the risks associated with negative interest rates were some of the many headlines. The volatility continued into 2016, as we had expected, but concerns eased in the middle of February and the markets have recovered from their lows.  The strong finish to a volatile quarter was helped by a recovery in crude oil prices. Crude, having posted a 13% gain for the month of March and a 3% gain for the quarter, is hovering around $39 US a barrel, a far cry from the 13 year lows in January of US$26.55.

 

Below you can see the performance of some of the major global equities, bonds and commodities for the first quarter.

 

Table 1

 

We always like to lead off the first Market Observer of a new quarter with our Basket updates.  Today we will discuss the two Canadian mandates; The JMRD Diversified Income and Growth (DIG) Basket and the JMRD All Cap Basket (ACB).

 

JMRD Diversified Income & Growth (DIG) Basket: 2015 Update

 

After a bumpy start to 2016, the DIG Basket finished the quarter up 2.61%.  Canadian dividend stocks have recovered this year after selling off last year.  The increase in energy prices has helped sentiment for not only Canadian energy stocks but for the Canadian market in general.   The TSX Total Return index was up 4.5%.  The gold sector, which is inherently quite volatile and to which we have no exposure in DIG, is up about 50% year to date and this has added 2-3% to the TSX return for the year.  For the past five years, the average annual return of the DIG Basket has been 4.7% versus the TSX Total Return at 2.1%

 

Some of the notable performers in the quarter were BCE, up 10%, as investors moved to the more defensive names during the recent spate of volatility.  Dollarama recovered the ground it lost late in 2016 and was up 10% in the quarter after earnings came ahead of expectations.  Hydro One was also higher by 9% due to its safe-haven characteristics.  Just this week we added to our Hydro One position when the price fell after the Ontario government decreased its stake by selling shares to the public at a discounted price.

 

One laggard was Whitecap Resources, down 14% in the quarter.  We still feel that it’s one of the most sustainable energy companies in this lower price environment but it has yet to recover as much from the lows as some of the growth peers have.  We feel that it is a matter of time before it separates itself from the pack.   WSP Global, a global engineering company also lagged, down 9%.  The management team had telegraphed weaker earnings in previous quarterly statements and this came to pass.  The last quarter for the company was more positive and the stock has bounced from its lows.

 

During the quarter we sold our positions in Magna, Telus and Manulife and initiated a position in TransCanada Corp after it entered an agreement to acquire the Columbia Pipeline Group in the US.  TransCanada shares sold off after rumours of the deal surfaced and we bought shares on this dip.   And as mentioned above, we also added to our Hydro One positon.

 

Below is a snapshot of the current holdings.  The current annual cash flow is $385 for a yield of 2.65%.

 

Table 2

 

We consider the DIG Basket a top pick for clients seeking income and growth and feel it is very appropriate for a portion of a client’s equity weighting.  The current value of one DIG Basket is approximately $14,500 making the minimum initial position approximately $29,000, which is two Baskets.  This amount will continuously change as the prices of the DIG Basket components do fluctuate.  Subsequent purchases can be made in one Basket increments.

 

 

JMRD ALL-CAP GROWTH BASKET (ACB):  

 

After posting an impressive 16% return in 2016, the All Cap Basket returned -2.18% in first quarter of 2016.  Some of this performance is attributable to bargain hunters buying last year’s laggards, with last year’s winners being sold.   As mentioned above, the TSX Total Return Index was higher by 4.6%.  Since Inception, the All Cap Basket has averaged a return of 14.0% per year versus the TSX Total Return of 5.26%.

 

CGI Group (GIB.A), a Canadian IT Services company whose business spans the globe, was up 14% for the quarter.  New Flyer Industries (NFI), the transit bus manufacturer was up over 17% after a number of contract wins and posting better than expected earnings. Lastly, Boyd Group (BYD.UN), the predominantly US auto collision repair company, was up over 11% with a solid Q4 earnings result.

 

The main laggards were Cara Operations (CAO), a restaurant chain, which we subsequently sold after the recent recovery.  Uni-Select (UNS), a Canadian-based distributor of auto parts and paint products slid after global growth concerns affected companies connected to the auto sector.  We are still holding UNS as we feeling its management team has a number of acquisition prospects that would be accretive to earnings.

 

In the quarter we added Innergex Renewable Energy (INE) because of the increasing awareness and improving sentiment toward renewable energy projects.  We also added Milestone Apartment Real Estate Investment Trust, a company focused on the US apartment market, which offers a 4.3% yield and access to a traditionally more stable form of real estate.   We also added to our position in Enercare after the company made an acquisition and raised money through a share issuance.  We also added to our position in FirstService Corp with proceeds from the sale of its sister company, Colliers International (CIG). Colliers, a global commercial real estate service provider, a spin-off from FirstService in 2015, was a name that we sold in the quarter as we felt its prospects were limited due to the run up it had in 2015.  FirstService announced this week that it has acquired Century Fire Protection, one of the largest full-service fire protection companies in the Southeastern United States. We also sold our position in Element Financial and Cara Operations, as per above.

 

Below are the current All Cap Basket holdings.

 

Table 3

 

The All Cap Basket more of a growth oriented investment to complement the DIG Basket.  The minimum purchase for the All Cap Basket is 4 Baskets or $56,000, with subsequent purchases of 1.5 Baskets, or about $21,000 at current prices. And again, this amount will continuously change as the prices of it constituents change on a daily basis.

 

Asset Allocation Strategy: Risky Business

 

Highlights

Risk-on was the theme all through the month and March was a textbook example of the importance of focusing on long-term objectives and not submitting to panic. Investors who stayed the course were rewarded with a performance that erased all the previous 2016 losses. All the S&P 500 sectors showed positive numbers and helped the index record a solid 6.8% performance. As for the S&P/TSX it posted a respectable +5.3% as the energy sector (+9.0%) offset healthcare’s crash (-53.1%).

On the fixed income side and currency side, U.S. 10-year bond yields closed the month at 1.78% (up 0.04%). Canadian counterparts posted the same increase to end the period with a yield of 1.23%. The Fed’s dovish stance dragged the U.S. dollar down as it weakened materially against the Euro (1.38, +0.05) and Canadian dollar (1.30, -0.05).

 

Asset allocation strategy

  • In crude oil, the story has been the same for some time: unless an unforeseen event occurs, we expect the supply-and-demand picture to be balanced by the end of the year.
  • We also think WTI prices are currently in the higher part of the range we have witnessed since December.
  • The Fed does not want to be ahead of the inflation curve and, by using this approach, it has more leeway in delaying hikes as it sees fit.
  • Technically the S&P 500 is currently subject to some resistance levels. The recent run-up in prices is at risk of running out of steam during the next few weeks before trying for a new breakout.
  • In fixed income, yields have already priced-in the new FOMC stance and, consequently, we think being neutral (both duration- and credit-wise) is the best course of action.

 

Asset Allocation

 

 

Comments from Last Week’s Market Observer (M.O)

 

We are getting great feedback from last week’s M.O.  Reg’s tales from two decades ago definitely conjured up some thoughts from yesteryear and how technology has changed our lives.   We wanted to share with you a few below.  Please continue to send your stories/thoughts to us because we are always interested in hearing them.

 

STORY #1:

I started my career (Graphic Art/Design) in 1975… We used drawing boards/tables, T-squares, rulers, drawing compasses, paper, illustration board, pencils, pencil crayons, pen & ink, paints & brushes, exacto knives & Letra-set burnish down static lettering etc. …By the time I retired in 2014, we were efficiently moving & rearranging colour pixels on HD monitors to depict any form/shape/image & transmit these images to anywhere on the planet, via hi-speed internet connections for mass production… Wow! …In 20 years or less, we will be doing the same with 3D holographic projections… & beyond that who knows?

 

STORY #2:

 

20 years ago…the company’s engineering was switching from drafting boards to computers, overseas work from telex to fax to Internet, water flow patterns from Robertson formulas to computational fluid dynamics computer models, what we did in weeks we did in hours. What never changed was the integrity of and trust we had/have in people, people like you and the entire JMRD team, never forget that it will always be number one and will never change.

 

STORY #3:

20 years ago…I drove a big V8 powered tank that just made it to Toronto and home on a full load of fuel. Today that fuel will get me about 600 miles. The investment data available today in seconds compares to a once a month 5 page summary of the market’s event.  Does this make us better investors? If you believe you make a plan and stick with it you should continue to do well and sleep at night.

 

 

Retirement Corner

 

 

 

 

Week at a Glance

 

Full report attached.

Week at a Glance

 

 

Reads of the Week

 

 

 

 

 

 

  • Hot Charts – Canada: Record home sales for a Q1 in Vancouver and Toronto

 

 

 

Economic Reports

 

Monday April 11th – None

Tuesday April 12th – None

Wednesday April 13th – Canada Teranet/National Bank Home Price Index, Bank of Canada Interest Rate Decision; US Retail Sales, US FED Beige Book, US PPI

Thursday April 14th – Canada New Housing Price Index; US Initial Jobless Claims, US Inflation

Friday April 15th – Canada Manufacturing Sales, Canada Existing Home Sales; US Industrial Production, U. of Michigan Consumer Sentiment

 

 

Earnings Reports

 

Monday April 11th – Alcoa

Tuesday April 12th – None

Wednesday April 13th – JP Morgan Chase

Thursday April 14th – Bank of America, Wells Fargo

Friday April 15th – Citigroup

 

 

Have a good weekend!

 

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