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TriDelta Investment Counsel – Q1 2013 Investment Review and Outlook

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How did the Markets Perform?

The first quarter of 2013 was one of degrees of good for stock markets.

  • For the U.S. stock markets it was great. S&P 500 was up 10.5% (in Canadian currency).
  • For Global stock markets it was very good. The Global (outside of the Americas) EAFE was up 8.3% (in Canadian currency).
  • For the Toronto stock market it was good. The TSX ended the quarter up 3.3%.

The Canadian Bond Universe was up about 0.6%.

So the message for the quarter:

Everything was up, but Canada was a bit of a laggard versus the rest of the world.

 

How did TriDelta Perform?

The first quarter of 2013 was a very good one for TriDelta.

Virtually all clients outperformed both the Toronto Stock market and the Canadian bond index. Returns ranged from 3% to 7%.

This range of performances is tied closely to the clients risk tolerance.  Those with more of a stock & growth focus have outperformed to a larger extent than those with a conservative, fixed income weighted portfolio.

What is key for TriDelta is that our portfolios overall have a lower risk profile designed to outperform in poor stock markets. This is why we are particularly pleased that we also managed to outperform in strong markets.

The key reasons for our strong performance would include:

  1. Meaningful stock exposure to the U.S. Market. This has been a focus for TriDelta, and will likely continue for the foreseeable future. Among the reasons is that for risk management, we believe that Canadians need greater diversification than the Toronto market provides, and that at this point, there still remains many cases of better value outside of Canada.
  2. Focus on corporate bonds vs. Governments, and a belief that greater returns will be found in longer term bonds. We believe that long term interest rates will continue to remain low for the near future, and will allow us to deliver better bond returns than in the short term end of the market. This view may change during the course of 2013, but not today.
  3. Focus on companies with growing cash flows, which leads to growing dividends. This is not a get rich quick strategy. This is a ‘slow and steady wins the race’ strategy. This quarter, 16 of our holdings raised dividends and not one lowered. These are signs of stable growth.

 

Will we see Good Markets the rest of the Year?

In 2iStock_000000674097XSmall010, markets were up over 10%. However, there was still a period of over 15% decline during the year.

In 2012, the S&P 500 was up over 10%. During the year, it still had a 10% decline during the year.

The answer to the question is that at some point in 2013 there will likely be a meaningful decline. Possibly trading down to a 10% decline from its high. We’re unlikely to see consistently good markets for the rest of the year, but the key word is ‘consistently’. The markets remain volatile as they trend higher or lower, but we see many reasons to be positive for the rest of the year.

They include:

  • The U.S. economic trend is positive. There is growing house prices and an improvement in the unemployment numbers.
  • This positive economic trend is coupled with U.S. Government economic stimulus which is allowing companies (and individuals) to borrow funds at incredibly low rates. This combination is very rare and leads to extra strong stock market returns. The U.S. government is essentially committed to most of this stimulus through the end of the year.
  • If not investing in the market, you can only earn 1% or 2% (if invested well) on GICs and cash. The safe alternative is looking much weaker.
  • Europe is bad but stable. The Cyprus banking ‘crisis’ was met with a yawn from Global markets.  This was because of the confidence that is now in place in the European Central Bank and major governments to be able to stick handle their way through. Perhaps this confidence is unfounded, but it seems to be in place.
  • Asian growth appears to be on track despite some bumps over the past year.

One other note might be helpful for those looking for more positive signals.

There have been nine years since 1960 in which the S&P 500 rose more than 5% in January. 2013 is the tenth year it has happened. In eight of those nine instances, the market finished those years higher, with the lone outlier coming in 1987, due to the October crash.

The S&P 500 has averaged a 13% gain from February through the end of the year in those nine years.

 

When will Canadian Markets catch up?
This is a tough one to answer. Because of the concentrated nature of the Toronto Stock Exchange, the question really is, “When Will Energy, Mining and Precious Metals Do Better than the US Market?”

There are certainly components of the Canadian market that remain strong and steady, but Energy and particularly Mining and Precious Metals has underperformed. The Global Gold index is down 22% over the last year!! The Energy index is down 2%, while the Global Mining Index is down 12%.

These areas of the market are very cyclical and because of their volatility, tend to be areas that TriDelta is often underweight. We’re typically overweight companies that are under-valued, have good balanced sheets and have growing dividends. While these aren’t the hallmarks of energy and metals stocks, because of the downturn, there are several names that are looking more attractive.

While we are not going to predict when this cycle will turn, the catalysts will include strong growth signs from China and India, along with the natural sector rotation from a hot sector like Health Care (up 28% in the past year) to a cold sector. We consistently seek value among names regardless of sector, and look to sell some winners that become expensive. Given what has been happening in the market, this may involve some new money going into energy and metals in the coming months.

 

Dividend changes

We are strong believers in the power of dividend growth, and look to hold stocks that based on our analysis, are good bets to grow their dividends over time. This quarter was no exception, with 16 companies increasing dividends, and none decreasing.

 

Company Name % Dividend Increase
Cisco Systems 21%
Magna International 16%
Canadian National Railways 15%
Atco 15%
Rogers Communications 10%
Colgate Palmolive 10%
Canadian Utilities 10%
United Parcel Service (UPS) 9%
3M 8%
Pason Systems 8%
Lorillard 6%
Bank of Nova Scotia 5%
TD Bank 5%
RBC 5%
Transcanada Corp. 5%
BCE 3%

 

SUMMARY
At TriDelta we look forward to providing our current clients and new clients with three key deliverables:

  • A financial plan that gives you a roadmap, financial peace of mind to do more with your wealth and smart tax planning.
  • An investment plan that fits within your larger financial plan. An investment plan that will help you to achieve the long term life goals that you have set out.
  • An investment approach that lowers volatility, delivers increasing income, and uses proven financial discipline and mathematics to underscore buy and sell decisions.

The first quarter extends our strong 2012 performance, and has been a great example of achieving above average risk adjusted returns. In a world of low interest rates and low growth, we strongly believe our investment approach and philosophy is well suited to outperform.

We look forward to the challenges and celebrations in front of us in the remaining 9 months of 2013.

 

TriDelta Investment Management Committee
 

Cameron Winser

VP, Equities

Edward Jong

VP, Fixed Income

 

Ted Rechtshaffen

President and CEO

Anton Tucker

VP, Business Development

 
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