**July 15th Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer Market
- JMRD U.S. Growth Basket Q2 Update
- JMRD Maximum Growth ETF Basket Q2 Update
- Bank of Canada Policy Monitor
- TSX Diversified Income Equities
- 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 Q2 returns across different asset classes.
JMRD U.S. Growth Basket Q1 Update
After a return of 0.42% in Q1 2016, the JMRD US Basket posted a return of 2.57% in the subsequent quarter. Year-to-date, as at the end of June, the JMRD US Growth Basket has returned 3.00%. For comparison, the S&P 500 Total return was up 1.2% in Q1, 2.46% in Q2 and 3.84% year-to-date to June 30th. This basket was launched on January 1st, 2014 and after a 15.0% return in its first year, the Basket returned 0.14% in 2015.
A main contributor to the return in the second quarter was Altria (MO), the maker of tobacco and tobacco related products. It posted a return of 9% from April to June. Whether one agrees with the notion that cigarettes are a “consumer staple”, Altria usually exhibits traits similar to the less volatile staples sector and that was the case during the tumultuous first and second quarters of 2016. With geo-political tensions rising over the years, and especially over the past few months, countries are increasingly taking measures to bolster their domestic defense and security systems. Our position in Lockheed Martin (LMT) has benefited from this theme. It posted a return of 11% in Q2. Waste Management Inc. was up 11% in the quarter and is up 12% since we initiated the position in March/April. Like Altria, “garbage” companies are seen as more stable businesses regardless of the business cycle and usually perform well during periods of market volatility.
Laggards to the portfolio were Nike (NKE) and Starbucks (SBUX). Despite the fact these are very solid global franchises, we decided to sell our positions in both names during the quarter. We felt there were better opportunities at that time. We had held Nike since late 2013 and it returned over 10% per year including dividends.
Aside from the sales mentioned above, we also sold CVS Corp (CVS) during the quarter. We were busy on the buy side initiating positions in Boston Scientific (BSX), Steel Dynamics (STLD), Gartner Inc. (IT), Applied Materials (AMAT) and Prologis Inc. (PLD). Boston Scientific is a developer and manufacturer of medical devices, Steel Dynamics is a steel producing and metal recycling company, Gartner advises companies on how to better use information technology, Applied Materials provides manufacturing equipment, services and software to the semiconductor, display and solar industries and Prologis is a real estate logistics business. Steel Dynamics is up 16% since we bought in May, which added to the Basket return in Q2. We also added to our positions in Dollar General (DG), Waste Management (WM) and United Health Group (UNH).
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.
As a refresher, the JMRD US basket is best held in US dollar accounts. The minimum purchase is 2½ Baskets, or approximately $62,200 USD. Each subsequent purchase is by ½ Basket, or about $12,500. These are minimums mandated by the Baskets department at NBF, not JMRD.
JMRD Maximum Growth Exchange Traded Fund (ETF) Basket Q2 Update
As many of you know, JMRD offers an Exchange-Traded Fund (ETF) Basket. We will focus on how we are currently positioned to take advantage of the ever 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 equity portfolio that can be used as a long term core holding.
In the second quarter the ETF Basket posted a gain of 0.81%, which brings the year to date return as of June 30th to -3.07%. The MSCI World Total Return Index was up 1.3% in Q2 but is still down 5.4% to the end of June. 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), has underperformed this year, attributable most recently to the Brexit ordeal but also because of stagnating economic conditions throughout the region and a troubled Italian banking sector. Another important consideration in 2016 is the decline in the US dollar. This year it’s down over 6% versus the Canadian dollar and this is a drag on performance when converting USD holdings back to CAD, much the same as it is a contributor to performance when the USD rises, like it did in 2015.
We increased the exposure to Canada throughout Q2, which added to returns. The TSX is leading most major markets in 2016, up close to 10% to the end of June. The majority of that return is due to a resurgence in the gold and energy indices which are up 95% and 18% respectively. To put these moves into perspective, the gold sector is still down an average of 6% per year over the past five years and the energy sector is down 7% per year on average over the same period. The recent moves higher are coming after years of underperformance and hence, off of really low bases. We took positions in two sector ETFs during the quarter. One was the BMO Junior Gold ETF. We believe that with the continuing uncertainty surrounding the timing and actual logistics of the UK leaving the EU combined with the fact that the US FED will most likely not be raising interest rates until December, at the earliest, gold could continue to gain in the near-term. We also initiated a position in the iShares Real Estate Investment Trust (REIT) ETF. REITs are interest rate sensitive and if rates stay lower for longer, the dividends that REITs provide should continue to be attractive to investors in a low interest rate environment. The Gold ETF is up over 10% since it was purchased and the REIT ETF is up almost 6%. These investments are bearing fruit early on and have helped to propel the ETF Basket back close to break-even for 2016.
The current allocation of the ETF Basket is as follows:
32.9% Canada which includes 5.33% in Real Estate Investment Trusts (REITs)
36.8% United States
6.4% 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 0.37%.
A portfolio snapshot is provided below.
The minimum JMRD ETF Basket purchase is 2 Baskets or approximately $36,300 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.
Bank of Canada Policy Monitor – Bank of Canada stays put
Bottom line: Canada continues to grapple with the fallout from the oil shock. While Q1’s 2.4% annualized growth rate for real GDP was more than decent, there are reasons to believe such a pace is not sustainable over the medium term. For one, the BoC estimates Canadian potential GDP to fall within a 1.0 – 2.0% range in 2017. For another, trade is still expected to be major driver of Canadian growth this year and next. However, with U.S. industrial production having recorded 14 monthly declines in the last 18 months, one may want to temper his/her expectations. In that context, we noticed that the Bank has revised down its expected contribution from net export to GDP from 1.3% to 0.8% in 2016. Our Canadian GDP growth forecasts are 1.2% this year and 1.7% for 2017. This is much weaker than the BoC`s forecast for 2017 (2.2%). Consequently we do not expect the Bank of Canada to tighten policy any time soon, more so with inflation expected to soften in synch with softer import prices. (Full report attached)
TSX Diversified Income Equities: Ranking Dividend Attractiveness
Although the Bank of Canada left the overnight rate unchanged at 0.50%, yesterday’s fiscal update continues to reinforce our view that domestic interest rates will remain low for the foreseeable future (Canada’s 2016 GDP growth forecasts to 1.3% from 1.7%; Global GDP growth estimates down 0.1% through 2018; U.S. kept flat at 2-2.1% through 2018). With this backdrop in mind we summarized our TSX diversified yield coverage list according to who presents the best income opportunities in terms of: 1) size; 2) capacity to grow payout; 3) management’s willingness to grow payout; and 4) free cash flow yield. Based on these criteria our top ideas for income-oriented investors include: Exchange Income, Alaris, EnerCare, Parkland Fuels, New Flyer, Tricon Capital and Boyd Group, each of which are rated Outperform. Of note, EnerCare, Parkland Fuels, New Flyer and Boyd Group are held in JMRD’s All-Cap Growth Basket. (Full report attached)
- “Home sweet retirement-funding home: One in five Canadians plan to sell property to pay for retirement” (Financial Post)
- “Get maximum benefit out of an RDSP” (Advisor.ca)
Reads of the Week
- “The Canada Child Benefit cheques are about to be mailed out — here’s what to do with yours” (Financial Post)
- “The Bull Market You Haven’t Seen” (Bloomberg)
- “The Best Annual Letters From an Investor Who Read Nearly 3,000 of Them” (Wall Street Journal)
- “Peter Tertzakian: Are electric-vehicle sales running out of gas?” (Financial Post)
- “Paying Farmers to go organic even before the crops come in” (New York Times)
- “Missing the Best Weeks: A Mistake Investors Should Fear” (CFA Institute)
- “This will end badly” (FMD Capital)
Monday July 18th – US NAHB Housing Market Index
Tuesday July 19th – US Housing Starts
Wednesday July 20th – None
Thursday July 21st – US Initial Jobless Claims, US Existing Home Sales, US Leading Indicators, US Philadelphia and Chicago Fed Economic Activity Indexes
Friday July 22nd – Canada Inflation (CPI), Canada Retail Sales; US Manufacturing PMI Index
Monday July 18th – Bank of America, IBM, Yahoo!, Netflix
Tuesday July 19th – Microsoft, Goldman Sachs, J&J, Lockheed Martin, United Health Group
Wednesday July 20th – eBay, Intel, American Express, Las Vegas Sands, Morgan Stanley
Thursday July 21st – Altagas, Atrium Mortgage Investment Corp, Encana Corp, Precision Drilling, Visa, Amazon, AT&T
Friday July 22nd – GE, Honeywell
Have a good weekend!