In This Week’s Market Observer…
- JMRD Maximum Growth Exchange Traded Basket update
- Energy Sector update
- JMRD Basket Corner
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
JMRD Maximum Growth Exchange Traded Fund (ETF) Basket
As many clients know, we have an Exchange-Traded Fund Basket and we will provide a full update on the Basket below. The ETF Basket is managed by the JMRD Wealth Management Team and is invested solely in exchange traded funds. This Basket is meant to provide a diversified portfolio that can be used as a long term core holding.
- The ETF Basket posted a 9.68% gain for 2013
- The first quarter return was a very respectable 1.75%
Changes to the Basket: Re-Print
The January Asset Allocation Strategy attachment below includes a chart on page one summarizing the returns across various asset classes in 2013.
Change #1: A New Name
We changed the name of the Basket from the ETF Basket to the JMRD Maximum Growth Exchanged Traded Fund Basket. The new name better reflects the risk profile and the current and future asset allocation.
Change #2: New Asset Allocation
It is our belief that interest rates will continue to rise in 2014 and the new trend will be towards tightening. This ‘tightening’ of financial conditions by the US Federal Reserve will create an environment that is difficult for most fixed income investments to perform as well as they had in the years prior to 2013. Our belief is that GICs, principal protected notes and individual securities with shorter terms to maturity should be used for the bulk of a client’s fixed income instead of a higher fixed income allocation within the ETF Basket.
The end result is that we will be targeting a higher equity weighting, which translates into a MAXIMUM GROWTH profile. For some clients who have large ETF Basket positions, we will need to reduce the Basket position and add the stand alone fixed income (GICs, principal protected notes or individual bonds) if the client’s risk profile calls for the adjustment.
Asset Allocation: Target is 10% fixed income and 90% equity
Current breakdown of the ETF Basket is follows
Cash and fixed Income: 12.5%
- Cash is 2.5%
- Laddered Corporate Bond ETF 1-5 Year – 5.1%
- US High Yield Bonds – 4.9%
The 2014 Themes:
Investment Theme #1: Agriculture
- Agriculture is approximately a 5% weighting in the ETF Basket and provided superb returns in 2013.
- A top holding in our ETF Basket is the Claymore Global Agriculture ETF (COW) which provides excellent one stop exposure to this theme.
- A US dollar alternative would be the Market Vectors Agribusiness ETF (MOO).
- Individual names we like include Agrium Inc (AGU), Deere & Co (DE).
Investment Theme #2: Buy Multi-National corporations
- We want to buy Multi-National Corporations (MNC) as we like large companies that pay a dividend and are global in scope.
- The Claymore US Fundamental Index ETF (C$ Hedged)(ticker: CLU) provides one stop with top holdings such as GE, Chevron, Bank of America & Verizon.
- Many of these MNC stocks focus on global consumer staples that serve growing markets. A short list to consider would include Diageo, Coke, Nestle, McDonalds, Johnson and Johnson, Proctor and Gamble.
- Top US based technology companies like Apple and Google would be considered MNCs as well.
- CLU is in the ETF Basket.
- ZQQ is in the ETF Basket for technology exposure.
Investment Theme #3: US dollar Exposure
- Our expectation is that the US dollar will continue to appreciate in 2014
- To take advantage of this call we have purchased certain ETFs that trade in US dollars.
- The potential is we can win two ways – the ETFs go up and the US dollar goes up.
- Two top picks here are the Healthcare ETF and the Financial Select Sector ETF.
- Both trade in US dollars / both pay a dividend / both hold multi-national corporations.
Investment Theme #4: Interest rates will rise further
- This is more a call on what we are trying to avoid.
- As per above, we have reduced the fixed income exposure as it is difficult to manage interest rate risk within an ETF investments.
- We elected to hold the iShares Laddered Corporate Bond ETF (ticker CBO) and iShares High Yield Bond ETF because we like the shorter average term to maturity with CBO and typically High Yield Bonds hold up better than most other bond prices in a rising rate environment.
- Minimize exposure to utilities, REITs and other interest rate sensitive sectors.
Canadian Energy Sector Update
The biggest contributor to the TSX Index performance this year has been the Canadian Energy sector, up 14.46% year-to-date. In October, when we summarized our Calgary due diligence trip after meeting with 10 Canadian Energy companies, we wrote that “the Canadian Energy sector has been affected by pipeline constraints and has suffered from a discount in pricing, both for oil and natural gas.” Since that time, the transportation of crude by rail continues to ramp up and companies continue to look at alternatives to moving product to improve pricing. Other positives include a narrowing of the discount for Canadian oil and gas and improvement in technology to extract oil and gas which improves efficiencies. Natural Gas prices have also traded significantly higher thanks to a very cold winter in North America. Lastly, there has been a notable increase in Mergers & Acquisitions in the sector. Both large and small cap producers have announced transactions. With increased cash flows in the sector, we expect this trend to continue.
Sector related news:
Hot Charts – U.S.: Americans consume a record amount of Canadian oil: Americans are still a long way off from achieving oil independence and we think that Keystone XL would help serve that purpose within a North American framework as to strengthen the NAFTA economies (Canada, Mexico and the U.S.).
JMRD Basket Corner
Crescent Point Energy (CPG) – Crescent Point announced a strategic acquisition of CanEra Energy (private) in SE Saskatchewan. This $1.1B acquisition further consolidates CPG’s key area. The transaction will be funded with $192M cash, $348M in assumed debt and ~$574M of CPG equity based on $44.50/share. This was CPG’s first significant acquisition in nearly 18-months and was an accretive transaction that lowered the company’s payout ratio by 5%
All-Cap Growth Basket
Alimentation Couche-Tard (ATD.b) – Alimentation completed a 3-for-1 stock split this week.
AutoCanada (ACQ) – Announced an increase to their credit facility to $550M which provides more flexibility for the company to acquire further dealerships in Canada.
Boyd Group (BYD.un): Boyd announced they were acquiring a chain of 25 collision repair centres located in Illinois (23), Indiana (1) and Florida (1) operating under the “Collision Revision” (CR) banner. This $32.5 mln acquisition grows Boyd’s store count by ~10% to 288 (249 in the U.S. & 39 in Canada) and expands its exposure to the attractive Illinois market (now ~18% of the total portfolio). BYD.un traded up 6.5% this week to a new all-time high of $39.70. We remain opportunistic buyers of the name.
1) “How to talk to your children about Money” (Globe and Mail)
Week at a Glance
Reads of the Week
- “Turnaround ace: Inside the Hunter Harrison era at CP Railway” (Globe and Mail)
- “The fracking divide: Mexico’s oil frontier beckons U.S. drillers in wake of new law” (Washington Post)
- NBF Hot Charts – Canada: Foreigners continue to favour Canadian equities Foreign investors increased their exposure to Canada with net purchases of $6.1 billion of securities in February. This inflow, the largest in three months, was evenly spread between money markets instruments, bonds, and equity & investment fund shares. For the latter, February marked the sixth consecutive month of inflows. As today’s Hot Chart shows, foreigners have accumulated $27 billion of equities over that period, the best showing in a decade. The attractiveness of Canadian equities most likely stems from the relatively strong outlook for Canadian earnings. As shown, earnings estimate in the past month are showing the most upward revisions in three years, a striking divergence with the situation in the U.S. Hot Charts
Monday April 28th – US Pending Home Sales
Tuesday April 29th – US Consumer Confidence Index
Wednesday April 30th – Canada GDP; US ADP Employment Change, US FOMC Interest Rate Decision
Thursday May 1st – US ISM Manufacturing Index, US Initial Jobless Claims
Friday May 2nd – US Change in Non-Farm Payrolls and Unemployment Rate
Monday April 28th – Suncor Energy, Precision Drilling
Tuesday April 29th – Cameco, Davis + Henderson, Horizon North Logistics, Methanex, Transalta, eBay, Bristol Myers
Wednesday April 30th – Barrick Gold, Canadian Oil Sands, Cenovus, CGI Group, Loblaw, Maple Leaf Foods, Sherritt, MetLife, Sealed Air Corp
Thursday May 1st – Bombardier, Goldcorp, Manulife, Macdonald Dettwiler, Kraft
Friday May 2nd – Norbord, TransCanada, Vermillion Energy, Chevron