**October 16th Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer
- JMRD Diversified Income & Growth (DIG) Basket Q3 Update
- JMRD All-Cap Growth (ACB) Basket Q3 Update
- NBF Asset Allocation Strategy: Autumn Red
- JMRD Basket Corner
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
JMRD’s Canadian Baskets
Last week’s ‘Market Observer’ provided a timely update on the US Growth Basket and our Maximum Growth ETF Basket. This week, the focus turns to Canada and below you will fund updates on both of our Canadian Baskets.
As most of you know, the Diversified Income & Growth Basket (DIG) focuses on higher yielding names with income being a top priority. On the other hand, the All-Cap Basket (ACB) focuses on growth with less emphasis on income. The DIG Basket has a much longer track record as the ACB is a relatively new Basket for JMRD.
As we discussed last week, extreme volatility was the main theme in Q3, especially in August and September, with the only positive asset classes being Federal bonds and cash. In what has become a standard feature in these updates, included below is the chart that shows the returns for a number of indices up to the end of the third quarter of 2015:
JMRD ALL-CAP GROWTH BASKET (ACB): Posts a 9.14% gain to the end of the Q3
JMRD Wealth Management Team is pleased to provide the ACB Basket return of 9.14% to the end of the third quarter. The All-Cap outperformed the TSX Composite Total Return Index which posted a loss of 7.0% over the same period. In Q3 alone, the ACB was up 1.08% versus a benchmark return of -7.86%. Since we launched the ACB Basket at the start of October 2013, it has returned 15.34% annualized, to the end of Q3 2015. The TSX Composite Total Return Index has an annualized return of 5.02% for the same period.
Additions to the ACB this quarter were Element Financial, a finance and leasing company, and Concordia Healthcare, a generic drug manufacturer and distributer. Main contributors to the performance in the Q3 were: CCL Industries, the packaging and labelling company, whose US exposure has helped it continue its growth trajectory. Boyd Group, the US auto collision company also benefitted from a strong quarter. First Service and its spinoff company, Colliers International, were also stronger as the spinoff resulted in each business unit becoming more reflective of its true value once they traded separately. The position that lagged the most was Concordia, which announced an acquisition in September amidst the market volatility, especially within the biotech and pharma sectors. The acquisition was announced right after we purchased the initial position in the stock. After a delay in securing financing for the deal, which didn’t help the optics of the transaction, Concordia looks to be nearing the closing of this acquisition, which we feel will be accretive to earnings. Other names that lagged were Magna, because of the Volkswagen issues and Badger Daylighting as low energy prices continue to hamper companies tied to the energy patch. We have since sold Badger. We also sold Spartan Energy and New Look Eyewear in the quarter.
You can see the current holdings below.
- For clients interested in the Basket, we will need to get your Basket form up-dated for coding purposes / please request if you have not already signed up and wish to do so.
- The minimum purchase for the new Basket is 4 Baskets or $53,500, with subsequent purchases of 1.5 Baskets, or $20,000 at current prices.
JMRD Diversified Income & Growth (DIG) Basket: Q3 Update
As you would expect from the comments above, the DIG Basket has under-performed the ACB. Why? Again, because high dividend paying stocks have lagged. Falling interest rates, like we’ve seen in Canada this year, usually help dividend-paying stocks but this year has been a bit of an aberration. The cause of the weakness could be the fact that the Federal Reserve in the US is actually expected to increase rates this year (usually a negative for dividend-payers) or perhaps it could be that some US investors are shorting Canadian bank stocks (a strategy to profit from a drop in the share price) because of their beliefs that our housing market and consumer debt load is over-extended. Shares of energy and pipeline companies have also been a target of short sellers.
The DIG Basket was off to a strong start in 2015 with a gain of 2.9% for the first quarter. The trouble began in the second quarter and remained in the third quarter as the DIG Basket gave back those gains. The basket return at the end of the third quarter was
-4.41%, which again compares to a TSX Composite Total Return of -7.0%.
Below is a snapshot of the current holdings. The current annual cash flow is $441 for a yield of 2.85%.
New positions added to the DIG Basket in Q3 were Brookfield Asset Management, Gildan Activewear, and Emera Inc. We lowered our exposure to energy infrastructure names by selling Gibson Energy and CP Rail, and trimming Pembina Pipelines. The best performer in the Basket was WSP Global as it continues to make successful acquisitions on an international scale. Dollarama also had a strong quarter after a very good earnings report and because it was added to the TSX index, which increased demand for its shares, pushing the price up at the same time. Metro also had a positive quarter as investors flocked to the safer consumer discretionary sector in light of the quarterly volatility. The underperformers were Magna (we own in both the DIG and ACB Baskets), and the energy related names like Whitecap and Gibson Energy.
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 $15,400 making the minimum initial position approximately $30,800 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 Baskets: Final Thoughts
After reviewing each of our four Basket offerings over the past two weeks, we continue to suggest that clients have a good mix of investments that are diversified by asset class, geography and currency. Diversify, diversify, diversify.
Asset Allocation Strategy: Autumn Red
All major indices were down this month, which closed the worst quarter since 2011. Uncertainty about Chinese growth and volatility are affecting market sentiment ‐ weighed down by the energy (‐6.7%) and materials (‐7.4%) sectors, the S&P 500 lost 2.5% of its value in September. Its Canadian counterpart didn’t fare any better, losing 3.7% for the month. On the bond and currency side, volatility was much more subdued, with the U.S. dollar index increasing by 0.6% and U.S. 10‐year treasury yields decreasing by 0.14% to close out the month at 2.06%.
Asset allocation strategy
- We think the majority of the appreciation in the greenback is now behind us and the negative impact should eventually subside as its level stabilizes following the “one that‐ everybody‐as‐been‐waiting‐for” first rate hike.
- While the Fed is right in thinking that the effect of the recent drop in energy is transitory and should lead to a jump in total inflation in 2016, we continue to interpret the statement as evolving from negative to neutral for energy inflation.
- We believe the recent bout of market volatility is the factor that tipped the balance towards the Fed waiting a bit more before instigating a hike.
- The correction certainly helped in getting global equities to better valuation levels, but light of the recent events in China, and the stock market volatility, it would be wise to maintain a little bit of extra cash while waiting for the dust to settle and getting more clarity about the situation. Better opportunities should arise in the next couple of months to add to the equity exposure.
- The deceleration of growth in China will not impact growth in the U.S. and other non‐commodity‐related developed markets in any material way.
(Full report attached)
JMRD Basket Corner
All-Cap Growth Basket
Alimentation Couche-Tard (ATD.b) – Alimentation Couche-Tard Inc. announced on Wednesday that it has signed, through its wholly–owned indirect subsidiary Circle K Stores Inc., an agreement to purchase all the assets operated under the Texas Star brand from Texas Star Investments, Inc. and its affiliates. The assets are comprised of 18 convenience stores, two free-standing Subway stores and a dealer fuel supply network located in the southern part of State of Texas. The transaction is anticipated to close in the second half of Couche-Tard’s fiscal year 2016 and is subject to the standard regulatory approvals and closing conditions.
Element Financial (EFN) – In a company update that contained a number of corporate developments/updates, EFN announced on Wednesday that they will divest its Canadian Commercial and Vendor Finance business. The capital generated from the eventual sale will be redeployed to within the Fleet Management vertical. The timing of these transactions is expected sometime in Q1 2016.
(Full report attached)
Week At a Glance
See Week At a Glance Report.
Reads of the Week
- Mohamed El-Erian: 7 Bland Takeaways on the Global Economy (Bloomberg)
- Three Canadian grocery stocks well worth checking out Three Canadian grocery stocks well worth checking out (The Globe and Mail)
- “Fourteen Wall Street Veterans Share the Best Advice They’ve Ever Received” (Bloomberg) Be first, be nice (but not too nice)—and stay cool
- Byron Wein, Blackstone “Better Times are Ahead”
- Canadian banks tighten expenses amid shifts in sector, slower growth (The Globe and Mail)
Monday October 19th – None
Tuesday October 20th – US Housing Starts and Building Permits
Wednesday October 21st – Canada Bank of Canada Interest Rate Decision
Thursday October 22nd – Canada Retail Sales; US Initial Jobless Claims, US Existing Home Sales, US Leading Indicators Index
Friday October 23rd – Canada CPI; US Markit US Manufacturing PMI
Monday October 19th – Halliburton, Morgan Stanley, IBM
Tuesday October 20th – CP Rail, Lockheed Martin, Verizon, Yahoo!
Wednesday October 21st – eBay, GM, Coca-Cola,
Thursday October 22nd – Rogers Communications, Teck Resources, Transforce, Precision Drilling, 3M Co, Amazon, AT&T Inc., Caterpillar, Dow Chemical, McDonalds
Friday October 23rd – Thomson Reuters, Proctor and Gamble
Have a good weekend!