In This Week’s Market Observer…
- JMRD Exchange Traded Fund (ETF) Basket: Update and Changes for 2014!
- NBF Economics & Strategy: Outlook 2014
- Asset Allocation Strategy – January 2014
- 2014 Tax Reminders
- National Bank Tops Canada’s Mobile Banking Services
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
JMRD Exchange Traded Fund (ETF) Basket: Update and Revisions for 2014!
The ETF Basket posted a 9.68% gain for 2013.
As many clients know, we have an Exchange-Traded Fund Basket and we will provide a full update on the Basket below. We will focus on how we are positioned going into 2014 to take advantage of changing financial markets.
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.
Changes to the Basket
Most equity markets posted very good returns in 2013 as the chart below shows. Obviously, clients who had large equity weightings (more risk) did well, while those with higher fixed income weightings (less risk) lagged. It is with fixed income in mind that we made two major changes to the ETF Baskets
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 should be used for the bulk of a client’s fixed income rather than using individual ETFs. Our change involves less fixed income in the Basket and more stand alone positions.
The end result is that we will be targeting a higher equity weighting that 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) so a client’s risk profile remains current and fits the objectives.
Asset Allocation: Target is 10% fixed income and 90% equity
Current breakdown of the ETF Basket is follows
Cash and fixed Income: 12%
- Cash is 1.8%
- Laddered Corporate Bond ETF 1-5 Year – 5.2%
- US High Yield Bonds – 5%
- 26.5% Canadian
- 34.3% US
- 22.3% Foreign
- 5% Other which is a diversified hedge fund position
See the chart below for a full listing of all positions.
As indicated earlier, fixed income had a poor year with most fixed income ETFs posting flat to negative returns for the calendar year. We started 2013 with a 30% weighting in fixed income and gradually reduced that to the current 12%. In hindsight, we would have been better off with an even lower weighting as equities ended up having a very strong year.
The majority of our equity positions performed quite well in 2013 but the overall performance was held back by a single holding that ‘surprisingly’ had a very weak year. XGD is the ETF for gold companies and was included in the portfolio to provide some ‘insurance’ or ‘downside’ protection in the face of expected volatility. We started the year with a weighting of 8.50% in XGD. Gold bullion had a horrible year as did the gold miners and we made a good call to sell our entire position on April 30th at $12.31 at a loss. We do wish we sold it earlier but at least we did as XGD went on to end the year much lower than our sale price at $9.76.
Our top performers in 2013 were those based on the US markets (technology / financials / health care)and dividend plays.
The ETF Basket currently generates $339 in annual cash flow per basket, which equates to a yield of approximately 1.97%. We consider the ETF Basket a TOP PICK for 2014. The current value of one ETF Basket is approximately $17,275 making the minimum initial position approximately $34,550, which is 2 Baskets. This amount will continuously change as the prices of the ETF Basket components do fluctuate daily. Subsequent purchases can be made in one Basket increments.
The 2014 Themes:
Investment Theme #1: Agriculture
- Agriculture is a large weighting in the ETF Basket and provided superb returns in 2013
- A top holding in our ETF Basket is the Claymore Global Agriculture ETF (COW) which provides excellent one stop exposure to this theme
- A US dollar alternative would be the Market Vectors Agribusiness ETF (MOO).
- Individual names we like include Agrium Inc (AGU), Deere & Co (DE) and Vicwest (VIC) or MBAC Fertilizer (MBC) for more speculative investors
Investment Theme #2: Buy Multi-National corporations
- We want to buy Multi National Corporations (MNC) as we like large companies that pay a dividend and are global in scope.
- The Claymore US Fundamental Index ETF (C$ Hedged)(ticker: CLU) provides one stop exposure where top holdings include GE, Chevron, Bank of America, Verizon and JP Morgan.
- 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 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 significantly reduced the fixed income exposure as it is difficult to manage interest rate risk with ETFs
- Minimize exposure to utilities, REITs and other interest rate sensitive sectors
Next week we will provide an update on the JMRD All-Cap Basket.
Economy & Strategy Morning Comment: Outlook 2014
The global economy is accelerating
Inflation remains low
Monetary policy to remain accommodative
Tight corporate spreads, low default rates
A rise in inflation expectations (money multipliers or velocity begins to surprise on the upside)
Corporate profit margins deteriorate
Missteps in China as authorities attempt to transition the economy
Deflation pressures in the euro zone
Regulatory environment that creates headwind to growth
Full report on a look back at 2013 as well as an economic and currency outlook for 2014;
Asset allocation strategy – January 2014
December was another good month for the stock market, bringing to a close what happened to be an exceptional year. Who would have thought that the Fed’s surprising announcement of a reduction in its bond purchases at the December meeting would turn out to be market friendly? After losing ground for most of the month, global equities ended up 3.5% following this news. This helped push annual gains to 23.4% in U.S. dollar terms for the all-country index. The S&P 500 was up 32.4%, outperforming EAFE markets (23.3%) and the S&PTSX (5.5% in USD). Fixed-income securities continued to lose ground, with yields on U.S. 10-year notes backing up to 3% by the end of the month for a total loss in 2013 of 7.6%. However, the big disappointment was the price of gold, which fell 28% last year.
Asset allocation strategy
We expect global growth to gather some steam but still remain tepid in 2014. Inflation should be contained, which will help global monetary policy to stay highly accommodative.
Although it remains to be seen what the impact of the Fed’s reduction of bond purchases will be, we see fewer risks on the horizon. Of course, the potential for deflation in Europe remains a concern, but consensus “bullishness” could well turn out to be the biggest hurdle to overcome this year.
We recommend keeping government bond exposure at a minimum, with a corresponding overweight position in riskier issuers. Duration should be kept short but closer to benchmark.
We are maintaining an overweight equity position at the expense of fixed income securities. While it would be tempting to bet on underperformers and undervalued securities to start the year, we believe U.S. and EAFE markets will continue to outperform markets linked to commodity prices. Although double digit growth is not our base case scenario for 2014, we wouldn’t be surprised if this turned out to be the case again.
2014 Tax Reminders
- 2014 TFSA contributions – contribution limit $5,500.00 can be made in cash or securities.
- 2013 RSP contribution deadline – Monday March 3, 2014. The 2013 maximum RRSP contribution limit is 18% of “earned income” in 2012, to an annual maximum $23,820. The RSP contribution limit for 2014 increases to $24,270.
National Bank Tops Canada’s Mobile Banking Services
Jan 09 2014
National Bank is No. 1 in mobile banking services among the country’s six largest banks, according to a study conducted by Surviscor.
This distinction reinforces the efforts deployed in 2013 by National Bank to improve its digital services offer. In addition to its iPhone and iPod touch application that has been available for two years, the Bank released an Android application and a BlackBerry launcher this year as well. It also unveiled its Investment Track app, an online tool used for retirement planning.
“Our objective is to make our products and services more accessible. We want our clients to be able to bank with us wherever and whenever they want. That’s why we are constantly improving our Mobile Banking Solutions,” stated David Furlong, Vice-President – E-Channels.
To establish its ranking, Surviscor assessed the mobile banking services offered for multiple smart phones and digital tablets. The company then measured the performance of services offered in four categories: Getting connected, Application design, Mobile transactions and Customer support.
“With mobile devices showing the highest growth among online banking solutions, National Bank has worked diligently to ensure that key online features available on traditional computers can also be accessible while on the go,” explained Glenn A. LaCoste, President of Surviscor.
Week at a Glance
Reads of the week
“Solar energy stocks riding a hot streak” (The Globe and Mail) As for 2014, “the companies that have the greatest growth opportunities will outperform,” said Rupert Merer, an analyst at National Bank Financial who covers the renewable energy sector. He is particularly keen on Innergex, Boralex and Algonquin, all companies with several new projects in the pipeline. “They should see rising cash flow per share in the coming year,” he said. The mediocre showing by some of these firms in 2013 was partly due to concerns about possible interest-rate increases, which tend to dent dividend-paying stocks, Mr. Merer said. But he thinks those worries over higher rates are now baked in. “They look like they are priced for another half per cent rise in rates, which is where our economists see things going over the next year or two.”
Monday January 13th – US Monthly Budget Statement
Tuesday January 14th – Canada Teranet/National Bank Home Price Index; US Retail Sales
Wednesday January 15th – Canada Existing Home Sales; US Empire Manufacturing Index, FED Beige Book, US Purchasing Price Index
Thursday January 16th – US Consumer Price Index, US Initial Jobless Claims, US Philadelphia Business Outlook
Friday January 17th – US Housing Starts, US U. of M. Consumer Confidence, US Industrial Production
Monday January 13th – None
Tuesday January 14th – Cogeco, Shaw Communications, JP Morgan, Wells Fargo
Wednesday January 15th – Bank of America, CSX Corp
Thursday January 16th – American Express, Citigroup, Goldman Sachs, Intel
Friday January 17th – GE, Morgan Stanley, Schlumberger