Articles

Lorne Zeiler on BNN’s The Street – March 21, 2018

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Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor, TriDelta Investment Counsel, was the guest co-host on BNN’s The Street on Wednesday, March 21st discussing the following:

Income Investing Strategies in the Current Environment

Given the expectations of rising interest rates and renewed market volatility a traditional bond or dividend focused portfolio may be incapable of generating sufficient income at low volatility needed by investors. Lorne Zeiler, Portfolio Manager, discusses how to design a stable, income producing portfolio in this environment on BNN’s the Street.
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Keeping Calm and Profiting from Volatile Markets

When markets drop significantly in short periods investors often let emotions take over and make bad investment decisions. Lorne Zeiler, Portfolio Manager, discusses how to take emotions out of investing by designing a stable, diversified portfolio, including alternative assets, on BNN’s the Street.
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Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

Investing like the pros

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The traditional so-called 60-40 asset allocation model, has 60% invested in stocks and 40% in government or other high-quality bonds. But after a decade or more of out-of-the-ordinary market conditions, many investment professionals are tweaking the model or abandoning it altogether.

The historical 60/40 investment management approach performed reasonably well throughout the 80’s and 90’s, but a series of bear markets that started in 2000 coupled with a three decade period of declining interest rates have eroded the popularity of this approach to investing.

Bob Rice, the Chief Investment Strategist for Tangent Capital, spoke at the fifth annual Investment News conference for alternative investments and predicted that a 60/40 portfolio was only projected to grow by a mere 2.2% per year in the future and that those who wished to become adequately diversified will need to explore other alternatives such as private equity, venture capital, hedge funds, timber, collectibles and precious metals.

“You cannot invest in one future anymore; you have to invest in multiple futures,” Rice said. “The things that drove 60/40 portfolios to work are broken. The old 60/40 portfolio did the things that clients wanted, but those two asset classes alone cannot provide that anymore,” he said. “It was convenient, it was easy, and it’s over. We don’t trust stocks and bonds completely to do the job of providing income, growth, inflation protection, and downside protection anymore.”

At TriDelta we put together a brochure that summarizes alternative investments titled, Alternative Investments, A proven path to higher and stable returns (Click to download).

A case in point is the continued success of Yale Universities USD27 billion endowment plan. They recently published an update that confirms excellent performance, a return of 11.3% ending June 2017 as a result of a highly diversified portfolio that significantly limited exposure to bonds of only 7.5% and equities to 19.5% (4% domestic US and 15.5% global, ex US). The rest comprised real estate, absolute return, venture capital, leveraged buyouts and natural resources – these are so called ‘alternative investments.’

Yale University as a prime example of how traditional stocks and bonds were no longer adequate to produce material growth with manageable risk.

Alex Shahidi, JD, CIMA, CFA, CFP, CLU, ChFC, adjunct professor at California Lutheran University and managing director of investments, institutional consultant with Merrill Lynch & Co. in Century City, California published a paper for the IMCA Investment and Wealth Management magazine a few years ago. This paper outlined the shortcomings of the 60/40 mix and how it has not historically performed well in certain economic environments. He states that this mix is almost exactly as risky as a portfolio composed entirely of equities, using historical return data going back to 1926.

At TriDelta Financial we recognize the short-comings of a portfolio limited to the old traditional 60/40 stock, bond model and as a result have embraced alternative solutions as an integral part of our investment management platform.

Anton Tucker
Compiled By:
Anton Tucker, CFP, FMA, CIM, FCSI
Executive VP and Portfolio Manager
anton@tridelta.ca
(905) 330-7448

Lorne Zeiler on BNN’s Market Call, February 7, 2018

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Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor, TriDelta Financial, was the guest on Market Call last night (February 7, 2018).

Below is a link to Lorne’s top picks, market commentary and past picks

Click here to view

Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

Buying Low: Investing Strategy in Frothy Times (from the Globe and Mail)

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When stock markets have risen significantly, often some of the best investing opportunities is in the sectors that have been unloved and overlooked. Lorne Zeiler, Portfolio Manager and Wealth Advisor at TriDelta Investment Counsel was one of three portfolio managers asked where to look for value investments today by Globe and Mail reporter Joel Schlesinger (February 28, 2017).

As stock markets reach new heights, especially in the United States, investors might be recalling the adage “what goes up must come down.”

But by the same token, what has been down – the unloved, undervalued and overlooked – usually bounces back, eventually. With that in mind, consider these investments.

Health-care stocks

Even though the U.S. equity market has experienced a record-breaking runup, health-care stocks still have attractive valuations, says Lorne Zeiler, portfolio manager and wealth adviser with TriDelta Financial in Toronto.

“The sector was held back in 2016 due to concerns of increased regulation affecting drug pricing, first by a potential Clinton presidency and then from comments by President-elect Trump,” Mr. Zeiler says.

But these fears are likely exaggerated, he says. Earnings are forecast to grow by 8 per cent in 2017, and stocks are trading at about 15 times forward earnings around their five-year average, while nearly every other sector trades significantly higher.

Here are two stocks to consider:

  • AbbVie Inc.: The maker of Humira, a popular drug to treat rheumatoid arthritis, AbbVie has a “strong pipeline of new medications expected to be approved” soon. Moreover it has a decent dividend yield of about 4 per cent and trades at less than 12 times estimated forward earnings. One concern is that the company is heavily reliant on the performance of Humira, which makes up half of its sales.
  • Abbott Laboratories Ltd.: This diversified company earns revenue from generic pharmaceuticals, medical products and nutritional supplements such as Ensure. Abbott is forecasting good earnings growth due to its expanding sales of diagnostic technologies and recent acquisitions. “Risks to the stock price include pricing pressure from competitors and foreign exchange, particularly for its emerging-market sales,” Mr. Zeiler says.

Emerging markets

These generally fast-growing economies have faced a laundry list of problems, says Navid Boostani, a portfolio manager and co-founder of ModernAdvisor, a robo-advisory in Vancouver.

“Slowing growth in China, political turmoil in Turkey and Brazil, and economic sanctions against Russia have all been headwinds,” Mr. Boostani says. “But we think the bad news is already priced in, and long-term investors have a unique opportunity today” to buy low.

Here are two exchange-traded funds (ETFs) for investors who want to tap into emerging-market growth:

  • Vanguard FTSE Emerging Markets All Cap Index ETF: Rather than playing one particular market, this fund provides exposure across the board. It charges an industry-low management expense ratio (MER) of 0.24 per cent (for the TSX) with a distribution yield of 1.24 per cent. Most importantly, this sector has room to grow. “Both [emerging market] currencies and equities are trading at close to historical lows,” Mr. Boostani says. A bumpy ride could lie ahead, though, as the U.S. becomes increasingly protectionist and its dollar increases in value, pushing up borrowing costs in developing nations.
  • PowerShares DB Base Metals Fund ETF: Another play on emerging-market growth is to invest in commodities, and this ETF provides that exposure without the complications and barriers that retail investors face in buying futures contracts directly. Investors in this fund get access to a basket of futures contracts for base metals such as aluminum, zinc and copper, all key to industrial and manufacturing growth. “Commodities came off of a five-year bear market in 2016, with industrial metals leading the charge,” Mr. Boostani says. “The bulk of demand growth is expected to come from robust economic activity in China.” Commodities tend to be very volatile, however, so they should make up only a small portion of a well diversified portfolio, he adds.

Playing volatility

Mark Yamada, portfolio manager and chief executive officer of PUR Investing in Toronto, cites two ways to capitalize on volatility. For those who can handle large swings in price, China has been unloved of late. Yet it offers a lot of upside, he says. At the opposite end of the spectrum, consider low-volatility equities, such as banks, utilities and consumer staples, which have fallen out of favour recently as investors set their sights on recovering energy and other commodity related stocks.

Two to consider:

  • iShares China Index ETF: China is the largest of the emerging markets, so it has great influence on the world economy. “China has been in the doldrums, albeit with 5- to 6-per-cent GDP growth,” he says. With Mr. Trump pushing an America-first agenda, likely increasing barriers to global trade rather than removing them, “the Chinese will benefit,” Mr. Yamada says, filling the void in global leadership for free trade. Moreover its growing middle class is increasingly driving the Chinese economy, meaning China will rely less and less on U.S. consumption. Still, the Chinese marketplace can be a pricing rollercoaster, he notes.
  • BMO Low Volatility Canadian Equity ETF: If the ups and downs of emerging markets make you queasy, consider a low volatility approach that focuses on steady parts of the equity market. Many experts have been down on low volatility stocks of late, arguing that they are overvalued and will be outperformed by growth stocks with greater volatility. But Mr. Yamada contends that high volatility stocks do not add value to portfolios over the long term as much as their low volatility counterparts. This BMO ETF offers investors a diversified basket of Canadian banks, utilities and other defensive stocks. And while it may have “lagged the S&P TSX Composite for the past year because it was underweight energy and minerals … it is a great long-term core holding.”

 

Lorne Zeiler
Contributed By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

Top consumer discretionary stock picks

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Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor at TriDelta Financial, was recently invited by the Globe and Mail to provide top stock picks in the consumer discretionary sector.

Special to The Globe and Mail, Published Tuesday, May 10, 2016

16413399_sConsumer discretionary stocks can capture the momentum of an improving economy. In good times, money flows into this sector as retailers, media companies and automotive manufacturers benefit from increased spending by consumers with more disposable income. In turn, investors are rewarded with rising share prices and dividends. Yet during a more uncertain economic environment – such as the one we are in now – the sector can be tricky to navigate, so we asked three investment professionals for their top picks.

Lorne Zeiler, portfolio manager with TriDelta Financial in Toronto

  • L Brands Inc. (LB-N)
  • Last close: $70.03 (U.S.)
  • Dividend yield: 3.43 per cent

Based in Columbus, Ohio, this retailer owns Victoria’s Secret and Bath and Body Works – two chains with global reach and leaders in their respective retail categories. “Both brands have strong customer loyalty, providing the company with pricing power and ability to maintain its strong margins,” Mr. Zeiler says. Benefiting from an improving environment in the United States, the company is also expanding rapidly into emerging markets, building its revenue overseas while increasing efficiencies in existing stores in North America and Europe to improve margins. Also of note, L Brands has “a history of dividend growth and trades at a reasonable valuation to its peers,” he says.

  • Tupperware Brands Corp. (TUP-N)
  • Last close: $55.49 (U.S.)
  • Dividend yield: 4.90 per cent

The world’s largest direct seller of plastic storage containers and cosmetics, the company has consistently strong sales in mature markets such as North America and Europe. Where the company’s real growth lies, however, is in emerging markets such as China, Brazil, Argentina and South Africa. “Tupperware offers a high dividend for yield-hungry investors and trades at an attractive multiple of less than 14 times forecasted earnings,” Mr. Zeiler says. A strong U.S. dollar did negatively affect earnings in 2015 because of Tupperware’s exposure to foreign markets where, despite increased sales, revenue was lower when converted back to dollars. “This headwind may now be a positive as Tupperware recently increased its earnings per share estimate for 2016 by 5 per cent solely based on the decline in the U.S. dollar.”

Here is the link to the original Globe & Mail article.

Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

TriDelta Investment Counsel – Q1 2015 investment review

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Executive Summary – Good times in the stock markets may last a while

16413399_s

Another quarter rolls by, and overall, it was another quarter of very solid returns for our clients. Can the good times for investment markets continue?
 
The pessimists of this world say “this has got to end soon”. The optimists say “maybe this is the new reality”. Our general view is that both are wrong. History teaches us that there are few to no “new realities” – eventually it repeats itself. At the same time, should we expect strong stock markets to end in the near future? We don’t think so.
 
Here are three reasons:

  1. Valuations are not unreasonable. The chart below is from JP Morgan based on the US S&P 500 index as of March 31, 2015. It shows current Price/Earnings ratios today as a percentage of the 20 year average of Price/Earnings ratios – so 100% would suggest things are at the 20 year average, 110% would be 10% over the average and 90% would be 10% under the average.
     

      Value Blend Growth
    Large 116.4% 104.3% 91.7%
    Mid 124.4% 118.1% 98.5%
    Small 114.3% 107.1% 97.4%

    This chart shows that while the overall market has a higher P/E ratio than the 20 year average, the higher valuation is skewed toward Value stocks, and in fact Growth stocks currently have valuations that are UNDER the 20 year average – especially among large companies. While this can provide some guidance for which types of names to buy in the market, it would suggest that on a purely valuation basis, despite several years of good markets, corporate earnings have mostly kept up. On its own, valuations would not drive us to lower our stock weightings.

  2. Rising interest rates should actually help stock markets. Over the past 52 years, a study of weekly stock market returns (S&P500) and 10 Year US Treasury yields, showed that when the Treasury yield was under 5%, there was a positive correlation between rising rates and stock market returns. Once the 10 year yields were over 5%, it became a negative correlation. Today’s 10 year US Treasury Yield stands at 1.9%.
     
    Based on this data, the next 3% of interest rate increases will actually correlate to a rising stock market. It is our view that this process will take a few years. When you consider that German 10 year bonds are trading at 0.15%, you realize that there still is room for US 10 year bond rates to decline from here. Even if there is no decline, at least rising rates will be constrained within this type of Global rate environment.
     
    There are a couple of reasons why stock markets would rise as interest rates climb. The first is that rising interest rates are often connected to growth in an economy, and if that growth is coupled with cheap money in the form of interest rates under 5%, it tends to be a good environment for stocks.
     
    The other reason might be that rising interest rates are not good for bond returns, and if that is coupled with bond yields under 5%, it tends to be a weak incentive to invest in bonds. If money doesn’t want to be in bonds, it tends to create inflows to stocks. If bond yields were 10%, but there were some capital losses, most people would still be comfortable holding bonds.
  3. Retirees are forced to invest in stocks at these interest rates. Today, a 65 year old couple has a 47% chance of at least one of them living to age 90. Essentially this means that 65 year olds need their money to last at least 25 more years – probably 30 years to be ‘safe’.
     
    If you have $1 million and GICs pay 8%, then they can spin off $80,000 a year and even with high inflation, you are in good shape.
     
    Today, retirees can invest it in GICs and it will spin off $18,000 if they are lucky. This means they would have to drawn down their savings each year to make ends meet. Can retirees afford to do that for 30 years?
     
    As a result, those with the largest portfolios (mostly those aged 65+), who used to have a much lower portion invested in stock markets, will need to be meaningfully invested in stocks (or high yield bonds) at least until they can get 4% or 5% on their GICs. That will take a while.

In the short term anything can happen. We fully expect there to be a 5% to 10% downturn at some point in 2015 because that happens most years. However, overall, we think that valuations, interest rates and demographics remain supportive for stock markets.

The Quarter that Was

The TSX had an OK start to the year, with a 1.8% return over the quarter. Of course, energy was down another 1.9% and financials were down 1.1%, but most of the smaller sectors helped to keep returns above water.
 
Declining crude prices continued to put pressure on energy stocks, but technically stocks are behaving well having put in what may be their low in December with higher highs and higher lows since then.
 
TSX earnings seem to have stabilized. Trailing 12 month corporate earnings numbers continue to fall, but the forward 12 month estimates have started moving up.
 
The Canadian financials have recovered from a very weak January where the index was down more than 8% on fears of a weaker Canadian economy (mainly Western Canada) and housing market.

The US S&P 500 was up just 0.4% in the quarter. But currencies added 9.1% for Canadian investors!!
In the US the best performing sector was Health Care, up 6.1%. The worst sector was Utilities, down 6.0%.
 
There was a very weak start in U.S. stocks on lackluster Q4 earnings where concerns over a strong dollar and slowing global growth were a recurring theme. This seems to have recovered somewhat.
Consumer sentiment has held up with the Consumer Confidence Index hitting a 7 ½ year high in January in the U.S.
 
Economic numbers were mixed with decent housing starts but weaker consumer spending, which may be somewhat related to the cold winter and heavy snowfall in the Northeast.
Earnings are stable as trailing numbers and forward estimates continue to rise.
 
With continuing drops in interest rates, bonds had a very good quarter, up 4.1%.
Global Central Bank policies continue to be the focus of headlines.
In Europe the ECB maintained a bias towards lowering rates and quantitative easing (governments buying their own bonds to keep rates low) in an attempt to keep their currency low and to stimulate growth.
 
In Canada, the Bank of Canada surprised with a 25 basis point rate cut on January 21st when no policy move was expected. The overriding concern is how Canada and its economy will deal with a US$50 a barrel environment for oil.

In the US, the Federal Reserve was quick to change its tone towards keeping rates steady instead of an expected increase. This was driven by deflationary concerns that came about from lower energy prices coupled with a strong US dollar.

How did TriDelta Do?

First quarter 2015 was very positive for TriDelta clients. Depending on risk tolerance/asset mix, most clients were up between 3% and 5.5% for the quarter, with the high growth oriented clients doing better, and the most conservative returning at the lower end of that range.
 
The TriDelta High Income Balanced Fund – was up 7.1% on the quarter.
 
The fund – which currently delivers a yield of over 7% – aims to provide income from diversified sources that include Global Bond yields, options, dividends and leverage. The fund is essentially a Global Balanced fund but we utilize a wide number of investment tools to achieve higher returns.
 
Some good regulatory news came through this quarter, which will allow all TriDelta clients the opportunity to own the fund (as opposed to only Accredited investors). This will come into effect in May and will allow for new investments as of the end of May.
 
Given a TSX return of 1.8%, we were very pleased with the results overall.
 
Our two biggest drivers for outperformance were:

  1. Between 30% and 40% of our stock weighting has been outside of Canada (U.S., Europe and Emerging Markets). Because of US currency gains and strong stock markets in Europe and Asia, these parts of the portfolio have done better than Canadian stock numbers.
  2. TriDelta has been significantly underweight energy, particularly with our Pension clients. In July we sold one of our two pure Energy stocks (Suncor), and bought the Pharmacy, Jean Coutu. To date, this trade has been a 40% swing to the positive. While we may find the value in Energy compelling at some point, for the most part, we find that our clients don’t want the volatility that comes with a high energy weighting, and we can find other industries and names that are more appropriate alternatives.

What worked well in Q1?

In our equity portfolios we continued to see the US$ working in our benefit. The leading performers had a US and technology slant with Avago Technologies and Apple leading the way.
 
Best Equity Performers – Core – Avago Technologies +31.0%, Fairfax Financial +18.9%, Moody’s +18.9%
 
Best Equity Performers – Pension – Apple + 23.7%, GlaxoSmithKline +22.1%, General Mills +16.9%
 
In the Bond and Preferred space, lower interest rates produced some nice winners.
 
Highway 407 6.47%, July 27,2029 bond was up 9.0% on the quarter as it benefits from a high yield and declining long term rates.
 
Brookfield Asset Series 18 preferred share was up 8.1% on the quarter.

What did not work well in Q1?

Before we talk details on what didn’t work, we have been asked by some industry colleagues “Why do you show people what didn’t work?” Our answer to that is simple:

  1. Transparency with clients is important
  2. It always helps an organization to review what isn’t going well
  3. It reminds everyone that even strong investment management returns include weak performers in a portfolio
  4. We like to be a bit different from the rest of the industry

This quarter, after the currency effect, Canadian stocks lagged the US (and most other world markets). Energy, Canadian Financials, and any business that seemed closely tied to Western Canada suffered.
 
Our weakest performing stocks were as follows:
 
Core – Michael Kors -4.3%, TransCanadaPipeline -4.3%, TD Bank -1.5%
 
Pension – Home Capital -10.9, ConocoPhillips -7.3%*, Corus Entertainment -6.5%
 
In the Core/Growth model, we still own all 3 of the weaker performers from this quarter. While we continually review our holdings for signs of problems, for now we are planning to continue to hold these names (always subject to change).
 
In the Pension model, we only continue to hold Home Capital. Its decline was largely based on fears of real estate declines and risk among non ‘A’ level borrowers. Home Capital is such a strongly managed company that has been able to work through much worse times than today, and we continue to like the name.
 
ConocoPhillips was actually sold on January 8th so we didn’t really participate in the losses for the quarter. Corus was sold (just in time) at roughly $22 on March 13th. It has since dropped 20%!
 
In the Preferred Share space, all rate reset preferreds (those that have dividends that will reset to a rate that is tied to the Government of Canada 5 year yield) had a very poor quarter. While we don’t see much in the way of increased interest rates in the very near future, we do believe that this sector of the market has been overly beaten up and is undervalued – and we may add to some beaten up names.
 
Cannaccord Series A 5.5% Variable was down 24.3% in the quarter, and represented our worst holding.
 
Its 5.5% dividend won’t reset until September 30, 2016, and at that time will reset at 3.12% above the 5 year Government of Canada yield, which today stands at just 0.6%, but could certainly rise in the next 18 months.

Dividend Changes in Our Portfolios

We continue to be pleased with a steady flow of dividend increases and no dividend cuts in our investment portfolios.
 
This quarter in our income oriented portfolios the top four dividend increases were:

Company Name % Dividend Increase Company Name % Dividend Increase
Canadian Utilities +10.3% Home Capital +10.0%
Potash +8.6% General Mills +7.3%

In our Growth portfolios, the overall dividend yields tend to be lower, but some of the trends of dividend increases have been very solid. Below are the four biggest percentage increases in the quarter:

Company Name % Dividend Increase Company Name % Dividend Increase
Sherwin-Williams +21.8% Moody’s +21.4%
3M +19.9% Magna +15.8%

What do we see in the Quarter Ahead

  • More volatility by sector – you won’t see as much of the overall market moving higher or lower as much as a few sectors pushing much higher or lower.
  • Interest rates remaining mostly stable to lower in Canada and Europe. The United States won’t likely see the Fed raising rates this quarter, but we still expect to see it this year.
  • Oil looks to have found a base from a technical perspective and may allow for some trading gains, but we can’t see any big move forward as long as oil inventories keep pushing new heights. We believe it will be a lot of ‘one step forward, one step back’.
  • Canadian dollar remains under some pressure, but seems to have found some support in the 78 to 80 cent range unless Oil makes a major move from here in either direction or there is another Bank of Canada rate cut.

Summary

TriDelta Financial is celebrating its 10th Anniversary this month and we are very thankful to our clients for helping us to reach this milestone.
 
We are planning to do a couple of special client thank you events in the coming year to celebrate – details to follow.
 
Enjoy the soon to be realized Spring!!

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, Portfolio Manager and
Wealth Advisor

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