The Canadian Essentials Portfolio is an affront to the concept of diversification.
Ten stocks in just four sectors – financial services, industrials, utilities and pipelines. Can you possibly achieve a decent return without exposure to sectors such as energy, materials, consumer staples, technology and health care? Looking over the past 18 years, the answer has been yes.
The annualized return since the beginning of 2000 for the Canadian Essentials Portfolio was 13.1 per cent, including dividends, while the S&P/TSX Composite Index made 7.6 per cent on a total return basis over the same time frame. These numbers were delivered recently by the man behind the CEP, a retired political science professor named Mike Henderson.
I wrote about the CEP back in 2010, when it was coming off a decade in which it likewise beat the index. Mr. Henderson, who has a PhD from the London School of Economics, built the portfolio on the idea of investing in companies that are essential to the economy. The 10 holdings are: Canadian National Railway Co. (CNR), Canadian Pacific Railway Ltd. (CP), Enbridge Inc. (ENB), TransCanada Corp. (TRP), Royal Bank of Canada (RY), Toronto-Dominion Bank (TD), Bank of Nova Scotia (BNS), Canadian Utilities Ltd. (CU), Emera Corp. (EMA) and Fortis Inc. (FTS). With remarkable consistency, each of the 10 stocks delivered average annual total returns over the past 17.5 years between 10 per cent and 15 per cent. The outlier is CN, up just more than 18 per cent on average.
The CEP was an index-beater back in 2010, and it continued to power ahead in the ensuing years. But returns for many of the stocks in the portfolio have suffered in recent days, and therein lies a warning about the CEP. It’s lived most of its life in a world of falling interest rates. Many of the stocks in the portfolio don’t perform well in the kind of rising rate environment we’re in now.
Utilities stocks are a good example. Emera, TransCanada and Canadian Utilities were each down 15 per cent to 18 per cent for the past 52 weeks as of early this week. More losses could be in store if rates keep rising. Then again, depressed prices for many of the CEP might offer an opportunity to start building this undiversified portfolio on the cheap.
-- Rob Carrick, Globe Investor columnist
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Stocks to ponder
Bombardier Inc. (BBD-B-T). This stock is the focus of this week’s most oversold and overbought stocks on the TSX. Bombardier’s stock price has been sensitive to both Relative Strength Index (RSI) buy signals and the 200-day moving average trend line in the past 24 months. A March 2017 buy signal (the 200 day trend line appears to have provided price support at this time) forecast a 34-per-cent rally to August 2017. Buyers of the stock on the September 2017 RSI buy signal would have generated a massive 153-per-cent gain by July of 2018. The problem is that selling pressure has been so intense since the summer that RSI buy signals have become less reliable. The stock price did manage a brief rally after an early September buy signal, but then headed directly south again soon after. Scott Barlow reports (for subscribers).
Great Canadian Gaming Corp. (GC-T). This stock appeared on the positive breakouts list (stocks with positive price momentum) earlier this week. The share price has spiked over 22 per cent since the company reported better-than-expected third quarter financial results on Nov. 5. As a result, the share price may pull back to the $50 level now that the buying frenzy post the quarter has passed. Given the company’s solid growth profile and fair valuation, the stock is one to watch. B.C.-based Great Canadian Gaming operates 28 gaming properties with operations in British Columbia, Ontario, New Brunswick, Nova Scotia, and in Washington State. Jennifer Dowty reports (for subscribers).
Freshii Inc. (FRII-T). Freshii Inc., the fast food chain that debuted on the Toronto Stock Exchange in 2017 amid self-generated hype for its healthy menu and international growth prospects, left a bad aftertaste with investors after missing quarterly targets and curtailing guidance on everything from restaurant openings to sales. The share price plummeted as much as 50 per cent on Thursday, before recovering some lost ground. The shares closed in Toronto at $2.65, down $1.33 for the day – and 77 per cent lower than the stock’s starting price of $11.50 after an initial public offering in January, 2017. Its stock continued to fall on Friday. David Berman reports (for subscribers).
Lipper Awards
Fund manager achieves returns nearly double that of TSX by using dividend ‘core and more' strategy
The stock market can be a harsh judge and slow to reconsider excessive punishments. That can make investing in beaten-down companies due for a revival an exercise in endurance. And when patience alone doesn’t work, an accelerant in the form of an acquirer can move things along nicely. “If investors don’t recognize value, sometimes strategic buyers will,” said Ed Sollbach, a portfolio manager at Spartan Fund Management. Successfully identifying turnaround and takeout candidates is one reason Mr. Sollbach is receiving an award for best-in-class returns. U.S. fund-research firm Lipper Inc., a unit of Thomson Reuters, this week handed out awards to Canadian mutual funds and exchange-traded funds for superior returns in a broad set of categories. The Lipper Fund Awards recognized more than 80 Canadian funds, including Spartan’s MM Fund, which beat all its Canadian-equity peers in returns over the past three years, up to the end of July.
Finding the sweet spot: Manager finds mid-caps the recipe for strong returns
The mid-cap market in Canada is a stepping stone for younger success stories en route to greater prominence, such as Shopify Inc., for example. And it’s a kind of penalty box for companies that have fallen afoul of investors and need to attempt a turnaround, such as BlackBerry Ltd. “There’s an element of forced buying and selling” as stocks move in and out of the mid-cap space, said Marcello Montanari, a portfolio manager at RBC Global Asset Management. “It’s a structural thing that gives us a bit of a tailwind every year.” Both Shopify and BlackBerry spent time in the RBC Canadian Mid Cap Equity Fund, which Mr. Montanari co-manages and which had $225-million in assets under management as of the end of September. It was recently recognized by the Lipper Fund Awards for industry-best returns among comparable Canadian funds. Mr. Montanari spoke to The Globe and Mail about the approach that has generated an average annual return of more than 10 per cent over the past three years – the time frame for which he won the award.
Read more: 2018 Lipper Awards: Full coverage of Canada’s top performing mutual funds and ETFs
The Rundown
More Canadians will soon have access to ‘alt funds’
Retail investors will soon have access to a strategy that has been a mainstay of institutional portfolios, as mutual fund companies get set to launch alternative mutual funds, slated to enter the marketplace on Jan. 3. Last month, the Canadian Securities Administrators – an umbrella group for all provincial securities commissions – approved the long-awaited changes aimed at developing a more comprehensive regulatory framework for publicly offered “alt funds” – currently known as commodity pools. While the new rules don’t kick in until the new year, several Canadian fund companies have launched alt funds under “exemptive relief” – where they can offer funds under the proposed rules – in hopes of getting a head start on a market that is expected to be worth tens of billions of dollars over the next five years. Clare O’Hara reports (for subscribers).
Others (for subscribers)
‘There is no slowing down the bear train’ for oil
Friday’s analyst upgrades and downgrades
How much do you need to save for retirement? Here’s what historical data show
John Heinzl’s model dividend growth portfolio as of Oct. 31, 2018
TSX Composite earnings scorecard: How third-quarter results have fared
U.S. investors focus on retailers as wages rise
Ask Globe Investor
Question: Why did Enbridge Inc. suspend its dividend reinvestment plan? Is this a bad sign?
Answer: Well, it’s bad if you like acquiring shares with no commissions. But it’s a good sign as far as Enbridge’s financial position is concerned. By suspending its DRIP, Enbridge is signalling that it doesn’t need – or want – the crutch of being able to pay investors with shares instead of cash.
The company is also effectively saying that it considers its current share price to be well below its intrinsic value. Just as it probably wouldn’t want to do a formal equity issue at the stock’s current levels, it doesn’t want to dilute investors by steadily issuing shares under its DRIP.
Darryl McCoubrey, an analyst with Veritas Investment Research, said Enbridge’s decision to suspend the DRIP is a positive development. “In the long term this is a really good sign because it is suggesting that a lot of that worry around their financial risk and balance sheet should start to fade away,” he said.
Selling new equity – which is effectively what a DRIP accomplishes – is also expensive for Enbridge, Mr. McCoubrey said. Not only do the shares carry a yield of more than 6 per cent – which Enbridge has to pay on every new share it issues – but the company’s DRIP gave investors a 2-per-cent discount on new shares.
Enbridge said on Friday that it no longer needs the DRIP as a source of financing. “The company has elected to suspend the DRIP at this time given substantial progress on its funding and asset sales plan, which will allow it to meet any remaining equity requirement for the balance of its currently secured growth program,” which totals $22-billion for 2018 through 2020, it said.
The pipeline operator announced the DRIP suspension on the same day that it released better-than-expected results. The company reported a net loss of $90-million or 5 cents a share, but on an adjusted basis – excluding unusual and non-recurring items – earnings jumped by 48 per cent to $933-million or 55 cents a share. Distributable cash flow rose 19 per cent to about $1.58-billion.
The DRIP suspension is effective with the scheduled dividend payment of Dec. 1, which means investors enrolled in the plan will receive cash instead of shares on that date. The suspension applies to Enbridge’s own DRIP, which is administered by its transfer agent on behalf of investors whose Enbridge shares are registered in the shareholder’s name.
Many brokers also operate their own DRIPs that let shareholders reinvest dividends from Enbridge and other companies. The status of these “synthetic” broker DRIPs – which allow for whole, but not fractional, share purchases – is less clear. I spoke to one discount broker who said its Enbridge DRIP will continue, with the shares now being acquired in the market instead of from Enbridge’s treasury. Another discount broker said it will discontinue its Enbridge DRIP.
“We can’t comment on the synthetic DRIP programs offered by brokers as it would be up to the broker. We can’t hypothesize on what they may do or not do,” an Enbridge spokeswoman said in an e-mail.
--John Heinzl
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Compiled by Gillian Livingston