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TriDelta Investment Counsel – Q4 2013 investment review

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Equities maintained strong upward momentum during the fourth quarter of 2013 completing an excellent year. The sustained & better than expected US economic reports, fueled a global market surge that surpassed our expectations.Virtually every major global equity market was up double digits for the year with a few notable exceptions including China and Brazil. Indications suggest that the global recovery following the major market shocks in 2007 & 2008 has taken hold. The recovery is being led by the US economy and is believed to be sustainable although will likely deliver its fair share of surprises as it unfolds further.Emerging market equity returns were slightly positive in the fourth quarter, but as a group recorded slightly negative returns for the year.

Precious metals remained under pressure throughout the quarter and were well down on the year. Gold investors recorded a negative 28.3% return.

Fixed income on the other hand showed signs of stress in light of the broad based US economic strength, exasperated by talks of the US Federal Reserve tapering. Most global bond indices were flat or slightly negative. The DEX Universe of Canadian bonds recorded its first negative return of -1.19% in well over a decade. Losses were driven by government issued debt and bonds with longer maturity dates while corporate bonds in aggregate returned 0.84% for the year.

 

The Bank of Canada remains concerned that inflation remains well below target, but is also troubled by record high consumer debt levels spurred by low interest rates. This dilemma suggests that they will likely remain neutral (in other words, not increase rates) for some time.

Despite the difficulty of double guessing the Bank of Canada, our opinion is that longer dated bond yields may rise albeit not for some time. Once Canadian rates move higher increases will likely remain within a tight range between 2.5% and 3%.

16413399_sWe reiterate that bonds have a key role to play as part of very necessary diversification as we build wealth. We also focus on capital preservation while delivering clients with a steady stream of predictable income. We forecast that our bond portfolios will deliver an approx. 3.5% return in 2014.

In 2013 our Core bond portfolio returned 3.68% and our Pension bond portfolio 1.66%, despite our benchmark DEX losing 1.19%.

US Fed policy remained the big discussion amongst market strategists who debated timing and the extent of QE tapering. December delivered the first decision to begin the easing process with a $10 billion monthly reduction of bond purchases from $85 to $75 billion starting in January 2014. The fear of tapering hindered 2013 bond performance, but we believe it is no longer a big issue and that bond markets have now priced in the effect of eliminating it entirely in 2014.

Despite the positive economic news including the IMF and World Bank forecasts of better global growth in 2014, caution is warranted, particularly after the steep market gains. Our ‘TriDelta 2014 Financial Forecast’ published in late December details our outlook for the year ahead.

How did we do?

2013 was another positive year for TriDelta clients. The Toronto Stock Exchange equity index (TSX) returned 7.3% in the fourth quarter and 13% for the year whilst the Canadian Corporate bond component of the DEX Universe Index was up 0.87% for the year while the overall DEX Universe was down 1.19%.

Most TriDelta clients had a net return for their portfolio between 6% and 16% depending on their risk tolerance/asset mix. Pure equity returns before fees were 22.45% for our Core portfolio and 18.41% for our Pension portfolio.

TriDelta Equity Model Returns in Canadian Dollars (to December 31, 2013):

TriDelta model 1 month 3 month 6 month 1 year (2013)
Core Equity 1.60% 6.64% 9.97% 22.45%
Pension Equity -0.15% 7.44% 11.64% 18.41%

 

What worked well in Q4?

Sectors: Info Tech +15.7%, Industrials +16.8% & Health Care +13.8%

Core Model Stocks: Core – Constellation Software +24.5%, 3M +22%, Priceline +18.8%

Pension Model Stocks: Norfolk Southern + 24.8%, Abbvie +23%, Apple +22.3%

What did not work well in Q4?

One of our beliefs at TriDelta is to be very open about our business, its successes and its weaknesses. Openness is not a hallmark of the financial industry, but something that we believe is important in order to build trust, strong performance and partnership with our clients.

Sectors: Materials +0.8%, Utilities +4.7%

A few of our holdings had negative returns, some of which are listed below:

Core Model Stocks: Manitoba Tel -11.1%, S&P 500 Short -9.4%, Tourmaline -4.5%

Pension Model Stocks: Iamgold -13%, S&P 500 Short -9.4%, Cdn Oil Sands -.9%

The Best and Worst performers of 2013

Pension portfolio:

Company Name Change
Abbvie +68%
Norfolk Southern +64%
Home Capital +39%
Wajax -12.7%
Iamgold -12.9%
Potash -15.2%

 

Core portfolio:

Company Name Change
Priceline +99.9%
Magna +78.6%
3M +64.8%
Marathon Petroleum -15.2%
Barrick Gold -17.0%
Coastal Energy -17.7%

Dividend changes:

We strongly believe in the power of dividend growth and those companies who have a history of increasing their dividends over time. These companies have generally outperformed the market with lower volatility. This quarter was no exception and we were proud to own the following companies that increased their dividends:

Company Name % Dividend Increase
Abbott Labs 57%
3M 34%
Atco Ltd 15%
Canadian Utilities 10%
National Bank 6%
McDonalds 5%
Merck 2%
TD Bank 1%

One company we owned removed their dividend entirely, which was a disappointment. It was Iamgold Corp

Summary

We’re proud to have protected and grown our client wealth in 2013.

We have also successfully delivered on our core beliefs of comprehensive financial planning, tax efficiency and an investment plan that generally lowers volatility, typically increases income and ensures we own many of the best companies as identified by our exclusive quantitative led selection process.

2013 is another example of our achieving above average risk adjusted returns in an extremely low interest rate environment. We remain committed to our proven investment approach and philosophy.

Thanks for your continued support.

 

TriDelta Investment Management Committee

Cameron Winser

VP, Equities

Edward Jong

VP, Fixed Income

Ted Rechtshaffen

President and CEO

Anton Tucker

Executive VP

Lorne Zeiler

VP, Wealth Advisor

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