JMRD Market Observer for October 20th 2017 – JMRD Models Revisited

In This Week’s JMRD Market Observer



  • JMRD Models Revisited

  • JMRD Investment Beliefs

  • Changes Targeting the Taxation of Passive Income in a Private Corporation

  • JMRD Basket Corner

  • Retirement Corner

  • Reads of the Week

  • Economic Calendar

  • Earnings Reports



JMRD Models Revisited


After providing quarterly updates on the suite of JMRD Baskets in the past two Market Observers, we wanted to bring them all together by revisiting our JMRD Model Portfolios.  The genesis of the models comes from the work we did in looking for ways to combine our Baskets into one practical investment solution for all clients.  Once the firm developed the technology to achieve this result, we decided to take it to the next level and create different model portfolios. This included holdings in our JMRD Baskets complemented by other actively managed external investment funds and passively managed Exchange Traded Funds (ETFs).   We designed four model portfolios to match each main investment objective – Conservative, Balanced, Growth and Maximum Growth. Since then we have spent a lot of time revising and fine-tuning the inner workings of the Models and have made them more widely available to clients in 2017. Since launching, we have had much success and positive feedback from those clients that are part of the program.


The JMRD Baskets have performed quite well on a collective basis in 2017, contributing nicely to the Model returns.  But in the complex world of investment management, we realize that it is virtually impossible for a specific mandate to outperform each and every year.  It was incumbent upon us to surround our Baskets with complementary investment offerings and it was our belief that structuring the models with this in mind would provide optimal diversification that would translate into lower volatility and improved risk-adjusted returns over the long term. As an example, despite Canada leading most developed nations in economic (GDP) growth in 2017, the TSX Index has lagged most major stock indices this year.  Our decision to include more U.S. and International Equity exposure in the Models has accentuated the returns in the equity sleeve in 2017.  We also feel that actively managed mandates can add value over time.  Much attention is paid to mutual funds lagging their respective benchmarks over the long term.  That may be the case, but if the parameters of the analysis are changed to incorporate funds whose managers invest most of their own investable assets alongside their unitholders, outperformance becomes more commonplace.  This is one of the screening filters we use when selecting complementary asset managers. Mawer Asset Management and Cambridge Asset Management (offered through CI Financial) are two such examples. 


Because each model represents a certain investor profile that reflects an investor’s risk tolerance, time horizon and liquidity concerns, we think the fixed income side of the Model is worth discussing as well.  For the past 20-30 years, we have been in an environment of falling interest rates.  This has been a tailwind for bond investors because as interest rates fall, bond prices rise.  Coming back to 2017 and looking ahead from here, there is a good chance that both the Bank of Canada and the US Federal Reserve will continue to gradually raise interest rates in 2018, which would adversely affect bond prices.  Nobody knows for certain the path that interest rates will follow, but we do know that incorporating different fixed income strategies into the Models rather than just one or two broad mandates, will prove advantageous over future credit cycles.  For instance, earlier in the year we increased our exposure to floating rate income investments and at the same time lowered the weighting in the more traditional, mid-longer term bonds proxies.  This has paid off thus far because higher interest rates came to pass in Canada much earlier than investors had expected. Similar to the equity allocation, another important consideration with fixed income is geographic diversification.  Just because North American Central Banks are raising interest rates does not mean that other countries are following suit.  The differing monetary policies being utilized by central banks around the globe could provide opportunities that may not be available in one’s home country.  Adding global bond management through Pimco Asset Management and Manulife Asset Management has boosted returns in the fixed income portion of the Models in 2017.  As an example, the broad Canadian Bond Index is up 1.24% in 2017, where the Pimco Monthly Income Fund is up over 6% and the Manulife Strategic Income fund is up over 3%.


In summary, we believe that the JMRD Model approach is an effective investment tool that provides adequate portfolio diversification which we feel, in the long run, will translate into better performance with lower volatility and risk.  The models are only offered on a discretionary basis, which means the day-to-day decisions are entrusted to the four licensed portfolio managers on the team, with ongoing collaboration from other team members.  The Models approach isn’t for everybody but the theme has been resonating with some clients this year and we will be continue to rollout the Models in the months ahead.  Please do not hesitate to contact any JMRD Team member if you would like more information on the JMRD models.



JMRD Investment Beliefs


Over the summer months, the principals of the JMRD Team who form the JMRD Investment Committee set about to articulate our Team’s investment beliefs.  We have been a Team for over 10 years and largely have the same investment views.  However, with added members to the Team and an ever changing investment world, we wanted to dig deeper into our key beliefs.  Our team has processes in place and holds regular strategy conference calls in order to improve our investment decision-making process, as you may be able to surmise from the Models commentary above.  We feel that testing and confirming our investment beliefs provides the solid foundation on which to make the all-important investment decisions on an ongoing basis. 


Starting this week and spanning over the next seven weeks, we will unveil one of the eight JMRD Investment Beliefs. 


Belief #1 – We believe investment management for JMRD clients is the management of risks and not just the management of returns.  Successful long-term investing is not easy.  Investors feel the pain of loss much more than the joy of gain.                        



Changes Targeting the Taxation of Passive Income in a Private Corporation


On July 18, the Minister of Finance, Mr. Bill Morneau, announced a consultation on proposals to change the taxation of Canadian private corporations (hereinafter the “Consultation Period”). The proposed measures are complex and, if adopted, will affect tax planning for many clients.


Modifications after the Consultation Period

Since the launch of the Consultation Period, Canadians have provided significant feedback on the proposed changes to the taxation of Canadian private corporations. Accordingly, the Government announced their intention to provide new measures to “modify” the proposals initially made in their July 18 Consultation Paper. More particularly:


– Reminder: on October 16, the Government announced its intention to simplify the proposals initially made to the tax measures limiting income splitting strategies. In addition, they announced that they will NOT be moving forward with the proposed measures to limit access to the Lifetime Capital Gains Exemption (see the Communiqué here).

  • Note: The Government will release, later this fall, the revised draft legislative proposals regarding income splitting, which will be effective for the 2018 and subsequent taxation years.


– On October 18: the Government announced its intention to move forward with measures to limit the tax deferral opportunities related to passive investments within private corporations. More particularly, in further developing these measures, the Government will ensure that:

  • the new measures will apply on a go-forward basis;
  • the new measures will protect “past investments” (accumulated investments already made) and the future income earned from such “past investments”;
  • the new measures will not apply to the first $50,000 of passive income earned per year. Hence, there will be no tax increase on investment income below this threshold.
  • NOTE: The details of the proposed measures will be released in Budget 2018, including a technical description of how the passive investment income threshold will be applied.



JMRD Basket Corner


All-Cap Growth Basket


Shopify (SHOP) – Shopify is expanding in Waterloo, adding new building and up to 500 new workers.


U.S. Growth Basket


Applied Materials (AMAT) – Applied Materials held its analyst day this week, and guided FY20 EPS to $5.08, above Street high Credit Suisse (CS) estimate of $4.85. Upside relative to CS was driven by higher AGS/ Display revs, partially offset by higher OpEx. AMAT has consistently beaten prior target models since Gary Dickerson (CEO) joined. AMAT did a good job highlighting Artificial intelligence as a long term growth driver for the industry, and outlined a growth strategy that is based on a portfolio of products, making growth far less risky than the Companies relying on the success of a single product. AMAT is currently trading at < 10x of its CY20 EPS, versus ~14x for ASML. Credit Suisse expects the C3Q earnings season to be the next positive catalyst for the group (upside to C3Q/C4Q from DRAM).


PayPal (PYPL) – PayPal Surges on Big Earnings Beat: What Wall Street’s Saying


Steel Dynamics (STLD) – Steel Dynamics sales exceeded Credit Suisse expectations by 4%, coming in at $2,443mn, driven primarily by solid steel production output, particularly across long products, as well as a substantial 7% sequential increase in sales from their fabrication division. Total 3Q17 steel shipment volumes were at 2,279kt vs CSe 2,254kt, a ~2% tonnage increase q/q, owing to noticeably higher volumes of engineered bar, structural, and merchant steel products. Flat rolled shipments remained in line with 1H17 levels, leading to a 2% increase in long product mix to 30% of overall mix for 3Q17. Metals recycling continued to perform on par with 1H17 levels owing to higher ferrous metal spreads from increased scrap exports. Credit Suisse expects that sheet steel prices will sharply increase by year end or early 2018 as imports fade, Section 232 provides another jolt to the market, electrode cost pass through, and seasonality kicks in. Scrap price recovery should be dampened by excess flows post hurricanes setting the stage for meaningful metal spread expansion. SDI noted that order books have strengthened recently as the recent price hikes have helped stem temporary destocking event in Sept/Oct which saw US HRC prices fall from $630/ton down to $590/ton.


United Health (UNH) – New leadership and earnings beat propel UnitedHealth stock to all-time high


Vail Resorts (VAIL)Whistler Blackcomb’s journey to becoming part of Vail Resorts a buy-and-hold success story



Retirement Corner




Reads of the week















Economic Reports


Monday October 23rdNone

Tuesday October 24thManufacturing PMI (US)

Wednesday October 25thMortgage applications (US), BoC Rate Announcement (CAD)

Thursday October 26thInitial Jobless Claims (US)

Friday October 27th GDP Q3 (US)



Earnings Reports


Monday October 23rdRestaurant Brands

Tuesday October 24thCanadian National Railway

Wednesday October 25thBarrick Gold Inc, Capital Power Corp, Suncor, Waste Connections

Thursday October 26thCrescent Point Energy, Constellation Software Inc, Amazon, Alphabet, Microsoft Corp, Deutsche Bank AG, Ford

Friday October 27th Imperial Oil


Enjoy the weekend!


By | 2017-10-20T20:00:15+00:00 October 20th, 2017|JMRD Updates|0 Comments

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