JMRD Market Observer for October 14th, 2016 – JMRD U.S. Growth Basket & JMRD ETF Basket Q3 Update

October 14, 2016

In This Week’s JMRD Market Observer Market

 

  • JMRD U.S. Growth Basket Q3 Update
  • JMRD Maximum Growth ETF Basket Q3 Update
  • NBFM Monthly Fixed Income Monitor – October
  • Retirement Corner
  • Reads of the Week
  • Economic Calendar
  • Earnings Reports

 

 

We profiled the JMRD DIG and All Cap Baskets in last week’s Market Observer and this week we will be discussing the JMRD US Growth and JMRD Maximum Growth Exchange Traded Fund (ETF) Baskets.  Before we delve into the numbers, we have once again included the following chart as a reference point for Q3 returns across different asset classes.

 

chart-1

 

 

JMRD U.S. Growth Basket Q3 Update

 

The JMRD US Basket posted a return of 1.11% in the third quarter.  Year-to-date, as at the end of September, the JMRD US Growth Basket has returned 4.16%.  For comparison, the S&P 500 Total return was up 3.85% in Q3, and is up 7.84% year-to-date to September 30th.  This basket was launched on January 1st, 2014 and since that time is up an average of 6.84% annually versus the S&P 500 Total Return of 8.23%.

 

A main contributor to the return in the third quarter was Applied Materials (AMAT), the maker of equipment used in the manufacturing of semiconductors.  It posted a return of 26% from July to September.  Two other tech stocks worth noting were Broadcom (AVGO) and Facebook (FB), both up 12% in the quarter.  Tech stocks have had a good run in the quarter after lagging in the first half of this year.  At this stage in the economic cycle, we continue to feel that maintaining the tech exposure will add value in the basket in the quarters to come.  Vail Resorts (MTN) was 13% higher in the quarter as more people are frequenting its resorts due to higher employment and consumer spending trends.  The same can be said for Visa, which posted a return of 11% last quarter after consumer spending ticks up with the gradually improving economic backdrop in the US.

 

As we alluded to last week, Dollarama in Canada was a big contributor to the DIG Basket in Q3.  Conversely, Dollar General (DG) in the US suffered from higher competition resulting in disappointing quarterly numbers.  We have since sold this position. Gartner Inc. (IT), a technology advisory firm, missed its earnings estimates in September and we took that as a sign to exit the position.

 

Aside from the sales mentioned above, we also sold Six Flags Entertainment (SIX) during the quarter.  We were busy on the buy side adding to existing positions in Boston Scientific (BSX), and we even added more Broadcom (AVGO) after its encouraging quarterly report.  We initiated positions in Transdigm Group, a designer, producer and supplier of engineered aircraft components and MSCI Inc. (MSCI), the provider of applications and services to assist institutional investors with their investment processes. We are currently sitting on 9% cash in the US Basket, which has perhaps acted as a drag on short term performance.  However, with this excess cash, we feel that we will be able to take advantage of the seasonally stronger fourth quarter in the equity markets.

 

Which companies are currently held in the Basket?

 

  • We will continue to include company updates on the US Growth Basket holdings in the BASKET CORNER section in the weekly Market Observers so you can become more familiar with the individual positions.
  • You will find below a full snapshot of all holdings.

 

chart-2

 

As a refresher, the JMRD US basket is best held in US dollar accounts.  The minimum purchase is 2½ Baskets, or approximately $60,000 USD.  Each subsequent purchase is by ½ Basket, or about $12,000.  These are minimums mandated by the Baskets department at NBF, not JMRD.

 

 

JMRD Maximum Growth Exchange Traded Fund (ETF) Basket Q2 Update

 

As we have discussed in previous Market Observers, JMRD offers an Exchange-Traded Fund (ETF) Basket.  This Basket is meant to provide a diversified equity portfolio that can be used as a long term core holding.

 

In the second quarter the ETF Basket posted a gain of 3.67%, which brings the year to date return as of September 30th to 0.48%.  The MSCI World Total Return Index was up 5.74% in Q3 and is just breaking even for the year at 0.04% to the end of September.  Not much has changed since the second quarter update, although the markets did have an unusually calm summer.   Last year it was the higher global component that somewhat mitigated the portfolio losses, but in 2016, the international component, namely EAFE (Europe Australasia Far East), continues to hold the ETF basket back a bit.  The Brexit ordeal plus stagnating economic conditions throughout the region and a troubled Italian banking sector are the main reasons for the region’s underperformance.  That said, EAFE was up 6.5% in Q3, which eclipsed both the Canadian and US market returns in the quarter.  Month to date, EAFE is also higher where North American markets have been weaker.  With the expectation of an interest rate hike coming in the US in December, our exposure to the US Banks got a lift in the quarter as well.  Banks tend to be more profitable when longer term interest rates are higher.  The opposite is true for REITs (real estate investment trusts) and the gold sector.  Higher rates lead to higher interest expenses for REITs.  Higher rates in the US can also lead to a higher US dollar relative other currencies, and gold stocks typically move inversely with the USD.  Despite the impending rate hike, interest rates will still remain very low and we expect a recovery in some of the interest-sensitive stocks once the increase actually occurs.

 

The current allocation of the ETF Basket is as follows:

 

Cash: 3%

 

Equities: 97%

 

Geographic breakdown:

 

33.3% Canada, which includes 4.93% in Real Estate Investment Trusts (REITs)

38.4% United States

19.0% International

6.3% Other (A diversified hedge fund ETF position)

 

Note that ETFs have underlying management fees as well.  The blended annual Management Expense Ratio (MER) for the ETFs in the Basket is 0.38%.

 

A portfolio snapshot is provided below.

 

chart-3

 

The minimum JMRD ETF Basket purchase is 2 Baskets or approximately $36,400 at present which again is mandated by NBF, not JMRD.  Subsequent purchases are in ½ Basket increments, or approximately $9,100.  Because of its geographical diversification, the JMRD ETF Basket is a good core holding in any account.

 

 

NBFM Monthly Fixed Income Monitor – October

 

Highlights

 

  • We see the FOMC raising the target range of the fed funds rate a quarter-point in December with two more hikes in 2017. Further out, the view gets foggy. At this point we see only one hike in 2018. We see 10-years Treasuries trading around 1.88% by year end and market participants revising up their expectations for the 2017 fed funds target range.

 

  • We continue to see the Canadian economy growing 1.8% next year and the Bank of Canada on the sidelines until late in that year. As for the longer portion of the yield curve, we think the economic outlook will support a move of the 10-year Canada yield back toward a 1.40%–1.55% trading range by the middle of next year.

 

See the full article.

 

 

Retirement Corner

 

 

 

Reads of the Week

 

 

 

 

 

 

 

 

Economic Reports

 

Monday October 17th – US Empire State Index, US Industrial Production

Tuesday October 18th – Canada Manufacturing Sales; US Inflation Index

Wednesday October 19th – Bank of Canada Interest Rate Announcement; US Housing Starts, US Beige Book

Thursday October 20th – US Initial Jobless Claims, US Existing Home Sales, US Leading Indicators, US Philly FED Index

Friday October 21st – Canada Inflation Index, Canada Retail Sales

 

 

Earnings Reports

 

Monday October 17th – IBM,

Tuesday October 18th – Intel, J&J, Yahoo!

Wednesday October 19th – American Express, Halliburton Co., Las Vegas Sands, Morgan Stanley

Thursday October 20th – Altagas, Atrium Mortgage Investment Corp., Danaher Corp., Microsoft, Verizon

Friday October 21st – GE

 

 

Have a good weekend…Go Jays!

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