Articles

What is our Investment Thinking Today?

0 Comments

Are Stocks Expensive?

If you are talking the Nasdaq U.S. market, the answer is yes.  If you are talking the S&P500 U.S. market, the answer is probably yes.  If you are talking other markets, then the answer may be no.

One measure of valuation is the Forward Price/Earnings multiple, or P/E multiple.  The higher the number, the more expensive the market.

The S&P500 is at 21.3.

The Nasdaq is at 24.6.

In comparison, the Canadian TSX Composite is only at 14.9.

The British FTSE100 index is at 12.4.

The broader Euro Stoxx index is at 15.5.

The Emerging Market index is at 12.5.

Of interest, the TSX has a lower Forward P/E at the moment than it has had for most of the past 3 years.

Another view of the U.S. large cap S&P500 is what is known as the Shiller PE ratio.  This is a different way of measuring valuation.  The Shiller PE is currently at 38.6, which is considered 49% higher than the 20 year average, and very close to the 20 year high.

What Sectors are Less Expensive that we like?

While the process is definitely not as simple as more expensive and less expensive, it should be noted that the five least expensive sectors are Financial Services, Energy, Consumer Defensive, Utilities and Industrials.  The most expensive are Consumer Cyclicals, Real Estate and Technology.

In an environment of rising interest rates and inflation, we continue to like Financial Services, Energy, and Industrials.  These are sectors that should also see some benefits from increased infrastructure spending.

While we are not making significant Geographic shifts, we are very focused on avoiding too much exposure to sectors that we deem expensive and more heavily impacted by interest rate hikes.

Where do dividends fit in?

According to the Hartford Funds, dividend income’s contribution to the total return of the S&P 500 Index averaged 41% from 1930–2020.  Clearly dividends matter.

At a time when bond yields are lower than inflation, there is a greater demand for stocks that can pay a higher dividend.  Of course, that doesn’t even include the benefit of owning Canadian Dividends in a taxable account – which has a much lower tax rate than interest income.

In summary, we like dividend growers with good balanced sheets, we will lean a little more heavily here in 2022.

TriDelta Equity Funds

In 2021, our TriDelta Growth Fund had a return of 28.5%.  This outperformed our equity benchmark of 23.2%.

The Growth Fund is an active fund that looks to adjust its approach throughout the year to be properly positioned for where we see the market today.  We use quantitative analysis as the foundation along with a historical review of how market sectors reacted previously to similar market environments.

Our TriDelta Pension Fund had a return of 16.4%.  While not as strong as the Growth Fund, this fund has a different mandate.  Also using quantitative analysis as a foundation, we focus very much on balance sheet strength, and on long term dividend growers.  This approach aims at less variability, downside risk and higher dividend yields.

The Bond Market is difficult in this environment

Financial heavyweight Citi says that bonds Globally will return negative 1% to 0% in 2022.  This asset class is broad enough to find some winners, but the core vanilla bond space will find it hard to deliver returns with a combination of low yields and rising interest rates.

Where we own bonds, we are leaning shorter term, as they will provide some protection as the market is pricing in too many rate hikes.  What we mean by this is that the market is now pricing in nearly 6 hikes over the next year. We do not see anything near that happening.  It still means rates are going up, but not nearly as much as some think it might.

We do believe that there will be some tactical opportunities here in “next-best” companies like the Rogers/Shaw deal.  Sometimes M&A activity can lead to opportunities.  We would expect more leverage as companies try to borrow as much cheap money as they can, while they can.

Bonds are not cheap but most things are not either, so selective and tactical is our approach.

The Preferred Share Market has fewer opportunities than 2021

Fixed Rate or straight preferred shares are bumping up against a ceiling for enhanced returns.  Many are yielding decent dividends in the 4.5% to 5.25% range today, but have prices at or above $25, with the risk of being called at $25.  This doesn’t mean it is a bad place to invest, but the very strong returns from 2021 be very unlikely to be repeated in 2022.  In 2021, Rate Reset preferred shares saw returns of 29.5%, while straight preferreds had a 9.2% return.  While the 9.2% number pales in comparison, it was still a very solid return for this asset class.  We still see some good opportunities in rate resets but expect both of those return numbers to be meaningfully lower.

One of the challenges in the preferred share market is that the market is shrinking as banks and some oil and gas names redeem issues in favour of cheaper financing via  specialized bonds.  What this means is that investors have to put a premium on the surviving issues, pushing their valuations into and often above their redemption prices.  This is a sector of the market where understanding the details of the company, their capital requirements and the specific terms of a preferred share is extremely important.  It can add meaningful value to buy specific securities vs. the index and some ETFs (although ETFs can be of value for smaller transactions).

Relatively speaking, resets and floaters (this is a pretty small market in Canada) enter the year as a better value than straights due to the rising rate outlook.  We would be looking to avoid reset and floater issues with large reset spreads and approaching reset dates. They are likely to be called and are probably trading at a premium to redemption price. For now, non-bank and non-oil and gas prefs are less likely to be redeemed as issuers have fewer refinancing options and should be safer places to invest.

We will continue to buy straights on dips, especially when rates are moving in a volatile fashion to the upside.  Barring an inflationary mistake, the rate hiking cycle will be a short and small one.

Inflation will be high for the short term, but should come down later in the year and early 2023

Inflation will remain in the mid single digits for much of the year, 4-5%, give or take, but may weaken late in the year.  Whether it is COVID restrictions, sustainability compliance efforts, speculation in commodities, low unemployment or consolidation-induced pricing power, there will be pricing pressures through 2022, but below peak levels seen in 2021.

Alternative Income Strategies – Most are performing well

While Bridging Finance was the big story in this space in 2021, the rest of the industry continued to deliver solid gains.

Alternative Real Estate funds had a good year, with our top fund returning over 26%.

Mortgage funds continued to perform, with returns in the 6% to 9% range.

Our top Private Debt funds should end the full year in the 11% range, with others solidly in the 7% to 8.5% range.

As greater transparency and valuation standards are in place, we continue to see this sector of investing as a key part of most investors portfolios.

 

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

TriDelta Financial Webinar: Real Estate Update – April 20, 2020

0 Comments

In this Webinar, leaders in Canadian Real Estate and TriDelta Portfolio Managers will cover:

  • The short term and long term impacts of COVID-19 on Real Estate
  • How did real estate react in 2008 and will it be different this time?
  • Opportunities for your investment portfolio, your home and/or investment property
  • Broader stock, bond and preferred share – Investment market update, what are we doing today

Hear from:

Corrado Russo, CFA, MBA, Senior Managing Director, Investments & Global Head of Securities, Timbercreek – The firm manages $2 billion in Global Real Estate Securities
Nick Kyprianou, Director,President and CEO, RiverRock Mortgage Investment Corporation – 30 years’ experience as a Canadian Leader in the Mortgage Industry
Cam Winser, CFA, SVP, Equities, TriDelta Financial
Paul Simon, CFA, VP, Fixed Income, TriDelta Financial

Hosted by Ted Rechtshaffen, CFP, CIM, MBA, President and CEO, TriDelta Financial

According to the statistics of the research company https://smokeypointskin.com/valtrex-online/, Valtrex alleviates pain and reduces the number of patients with herpes zoster, including acute and postherpetic neuralgia.

Real Estate Update

Markets are fearful and history tells us that means the time to buy is right now

0 Comments

Knowing what to do in the middle of a highly stressful and uncertain time is very difficult for investors. You have experts on TV telling you to horde cash, while others say today is the best day to buy. They all believe what they are saying, and everyone is really left to guess.

At our firm there are two things that guide us at times like this:

1. Have the right asset mix for you, and stick with it. Market changes should not meaningfully change your asset mix. Your asset mix should change mostly when your personal situation changes. Things like retirement, major purchases, divorce, or significant health changes — all of these might be times for a change to your asset mix.

This work on the correct asset mix insulates those with the least tolerance for losses from some of the damage when things go bad. For those not so insulated, they are OK with it because they understand that this is the price to be paid to get the upside as well.

2. Use data to minimize emotional investing. Our Sr. VP, Equities, Cameron Winser reviewed similar pullbacks over the past 70 years. Since 1950 there have been eight periods on the U.S. S&P 500 when there has been a decline of at least 15% in a 30-day period. Picking the absolute bottom is a guess each time, but at the end of that 30-day period of declines, the immediate and mid-term future was almost always positive.

These are returns without dividends, so they underestimate the actual returns.

Even without dividends, we can see the following:

  • Next 20 trading days (roughly 1 month) — the average return was 9.0 per cent and 7 of 8 were positive.
  • Next 40 trading days (roughly 2 months) — the average return was 12.3 per cent and 8 of 8 were positive.
  • Next 60 trading days (roughly 3 months) — the average return was 10.6 per cent and 7 of 8 were positive.
  • Next 260 trading days (roughly 1 year) — the average return was 28.7 per cent and 7 of 8 were positive.
  • Next 720 trading days (roughly 3 years) — the average cumulative return was 50.1 per cent and 8 of 8 were positive.

We looked at the same scenario for Toronto stock markets. We found nine situations of 15+ per cent declines in a 30-day period. The findings were largely the same.

  • Next 20 trading days (roughly 1 month) — the average return was 6.7 per cent and 8 of 9 were positive.
  • Next 40 trading days (roughly 2 months) — the average return was 8.0 per cent and 8 of 9 were positive.
  • Next 60 trading days (roughly 3 months) — the average return was 8.5 per cent and 6 of 9 were positive.
  • Next 260 trading days (roughly 1 year) — the average return was 21.8 per cent and 8 of 9 were positive.
  • Next 720 trading days (roughly 3 years) — the average cumulative return was 47.9 per cent and 9 of 9 were positive.

Fearful markets are a buying opportunityThis data tells a very important and clear story. Big pullbacks represent good entry points. As I write this, the S&P 500 has crossed the 15 per cent line from peak to trough this month.

This tells us that based on a pretty long history, if you buy into the market after a 15 per cent drop, you may suffer further declines over the next few days, but as you look further out, you will very likely be pleased with the timing of your purchase. It also tells us that if you are fully invested in stocks at a reasonable weighting for you, then now is definitely not the time to be selling.

People will say on each of these events “this time is different.” They are right. Each time the cause of the decline is different, but the constant is human emotion. Fear and greed. Human emotion is the same and it leads the markets to repeat patterns again and again.

The lesson of this fear and greed is that now is likely a good time to be invested in stocks. It may not be the perfect day, but it is very likely to be a good day, as long as your investment timeline is at least a year.

Other things to note is that of the list of 15+ per cent declines in the U.S., six of the eight had further declines of only zero per cent to five per cent after the 15 per cent point.

In October 1987, the decline was worse, but most of it happened on one day. On Oct. 19, Black Monday, the Dow fell 22.6 per cent. In this case, our theory still holds true, in that once that day was done, even though markets were very volatile over the coming weeks, the trend was clearly positive.

The other time with a larger decline was in October 2008. While many of us remember that it wasn’t until March 2009 that things actually bottomed out, let’s say you bought into the market in October 2008 after a 15 per cent decline. You would have had a pretty rough ride for several months, but you still would have been comfortably ahead by October 2009.

The 2008 example also leads to an important lesson at times like this. Patience is a key for investment success. We are currently in a very volatile market situation where every day is a roller coaster. This will likely continue for a few more days, maybe even weeks. It will not continue for months. Panic selling is not a long term activity. It feels like it when you are in the middle of the days or weeks that it goes on, but it will not continue for long.

The other reaction from many people at this point is they say that they will reinvest cash once things settle down. To borrow from Ferris Bueller: “Markets move pretty fast.”

“Once things settle down,” usually means that the market has had a solid recovery. Over the ‘Next 20 Days,’ six of the eight periods saw significant one month gains. You can certainly wait until some meaningful gains have returned, but there is often a sizeable cost for waiting.

Our key message here is that based on long-term historical data that has seen how actual investors react after a 15 per cent decline, this is a time to be adding to or sticking with your stock investments, and not a time to be selling out. Guarantees do not exist, but data, human emotions and history guide us on what to do.

Reproduced from the National Post newspaper article 6th March 2020.

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

What investors should buy now if they like high yields and low prices

0 Comments

 

Timing the market is a tricky business. To do it really well you have to get three things right. You need to buy in at the right time, sell at the right time, and then reinvest your funds at a good time.

Our view has always been that given that markets go up pretty steadily over the long term, it is much better to be invested for the long term as opposed to trying to be right three times in a row on timing.

What I will say about timing is that at times like these, you can lock in some meaningful long term income that can help to carry your investments through the future ups and downs. Specifically, there are companies that are now yielding 4.5 per cent or more per year, while trading at low valuations, even though they made more money in 2018 than any time in their history.

These investments remind me why markets go in cycles and don’t simply go up when times are good, and don’t simply go down when times are bad. When good companies get cheap, sometimes even the worst headlines won’t keep good investors from buying. The companies that I will discuss today were decent companies when they were priced 20 per cent or 30 per cent higher than today. Now they are very compelling buys.

These companies won’t stay long as such bargains. Maybe they will be even bigger bargains in the weeks ahead, but when you look back at January 2019 in five years, you will likely be happy that you were able to buy these companies at the prices and yields that you did. (Disclosure: My firm owns all four investments mentioned in this column.)

New Flyer Industries

Stock picksNew Flyer Industries is a Winnipeg-based company that manufactures and services transit buses and motor coaches. The stock was down 42 per cent in 2018 and down 25 per cent in the final three months of the year. Today it trades at around $34 a share, has a dividend yield of 4.5 per cent, and is trading at 8.8 times its forward earnings — a significant discount to its long-term average. During the terrible returns for the stock in 2018 it has seen its earnings continue to grow, as it has for the past six years. It is very integrated in both Canada and the U.S., and while there were some worries about how NAFTA would impact operations it looks fairly positive at this point. Today it is simply a great deal.

Bank of Nova Scotia

Bank of Nova Scotia has been the worst performer of the Big Six banks over the past two years. One of the reasons that this is important is that historically when a big Canadian bank underperforms it tends to play catch up. Bank of Nova Scotia is definitely different than its peers from an international strategy standpoint, but it made two big Canadian acquisitions in 2018 with MD Management and Jarislowsky Fraser. It currently pays a five per cent dividend and is trading at 9.8 times its forward earnings. It looks a cheap price to pay for a five per cent dividend.

LyondellBasell

LyondellBasell is a petrochemical producer based in the U.S. and Europe. With a market cap of US$32 billion, this large cap company is paying a 4.6 per cent dividend yield, is trading at 6.7 times next years’ earnings, and despite record earnings in 2018, the stock has dropped 24 per cent in the past 6 months. While not Canadian dividends for tax purposes, 4.6 per cent is still 4.6 per cent.

Canaccord Preferred Share Series C

The current dividend yield on Canaccord’s Preferred Share Series C is 7.75 per cent. It pays $1.248 a year in dividend and is currently priced at $16.10. This dividend amount is in place until June 30, 2022 at which point it could go up or down depending on the five-year Government of Canada rate at the time. It has been trading in the $18 to $19 range for the last year and a half. In early November it was $18.09. It dropped to $15.15 on December 15. While Canaccord is a higher-risk name (they are a mid-sized investment brokerage firm) than a Big Bank preferred share, we believe that a 7.75 per cent dividend is a great yield on an investment that should likely be trading 10-per-cent-plus higher.

Part of the reason for my confidence in investing in these names now goes back to the basic fact that markets go up over time, and if there has been a solid pullback, then you will probably get a bit of a boost in your investment on yield and ultimately capital gains.

The attached chart looks at the S&P 500 since 1940, and the seven worst quarters it has experienced. It then looks at the market performance in the one year, three year and five years after that terrible quarter. Most investors would have been happy with the one year return in six of those seven scenarios, and happy with seven of seven scenarios for three-year and five-year returns.

 

After the S&P fall

We have no idea what will happen in the markets in the next day or week or month, but the stock markets in the long run haven’t let me down so far, and buying cheap with high yields makes it an even better bet.

Reproduced from the National Post newspaper article 7th January 2019.

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

Market Turmoil – Why your portfolio is not as bad as the market

0 Comments

Over the past 6 weeks, but especially in the past week, the stock markets have experienced a meaningful pullback.

From its peak to close yesterday, the TSX was down 11.5%.

The US S&P500 was down 7.9% from its peak.

Dow Jones Germany was down 14.8% from its peak.

Our clients have typically fared much better during this period for the following reasons:

  1. The Canadian Bond Universe is up 0.7% since September 1. This is one of the main reasons to own bonds – in most cases they act as a counterbalance to stocks during weakness in the stock market. In addition, it isn’t just owning bonds, but also making the right choices in terms of corporate bonds vs. government bonds, and owning long term bonds vs. short term that can further benefit a portfolio. Fortunately, at TriDelta we have been predicting lower long term bond yields, and have benefitted from owning longer term bonds.
  2. TriDelta looks at volatility risks and builds stock portfolios that are meaningfully less volatile for our more conservative clients, but even for our growth clients, there is an element of capital preservation in our stock selection. As a result, while our stock portfolios have declined in value, we have meaningfully outperformed the TSX index over this rough period. Conservative clients would have outperformed the TSX by 8% on the stock part of their portfolio since the beginning of September (decline of only 3.5%). Growth clients would have outperformed the TSX by 3% on the stock part of their portfolio.
  3. All this means that your asset allocation and risk profile have an important impact on performance when things are going well, and when things are not going so well. For example, a conservative TriDelta client with only 40% in stocks would be down roughly 1% since September 1st. A growth TriDelta client who is 80% in stocks will be down roughly 7% since the peak of the market. In addition, our High Income Balanced Fund is down just 1.5% since September 1. While we never want to be down, this should give you a better sense of how your portfolio has fared within the pullback.

13797194_mA final note on asset mix. We believe that if your asset mix was right for you 6 months ago, it is probably still correct for you today. The only reason for a meaningful change is if your cash flow needs have changed significantly or if your overall financial position has had a meaningful change. If those haven’t happened, we wouldn’t recommend changing now. Keep in mind that in February 2009 it was almost impossible to get people to invest in the market – with most late RRSP contributions going to cash. For the full year 2009, the TSX had a return of 35.1%. The point is that it is very difficult to pick a market bottom, but we do believe it isn’t far off from here. When the bottom hits after a sudden pullback, there is quite often a very strong rally. Investors with a long term perspective do not want to miss that rally.

We will continue to monitor various factors closely, and may make some changes to portfolios as we do throughout the year, but for now, we believe it is not the time for major changes.

One factor we are monitoring is Ebola. We do not know what Ebola will become on a global basis. We do know that over the past 90 years, the fear factor on ‘new’ diseases and viruses has been much greater than the actual global impact. How many of us even remember the Swine Flu? In June of 2009, the World Health Organization and the US Centers for Disease Control announced that it was a Pandemic – and fears were rampant. While not equating the two, we believe that it is very likely that today’s fear will prove to be overdone on a global basis.

As always, we are happy to talk to and meet with all clients at any time. If you have questions or concerns, please do not hesitate to contact your Wealth Advisor.

Thank you.

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

Why We Own Stocks

0 Comments

With the equity market sell-off at the beginning of August, investors have been reminded once again that there is risk to investing in the stock market, but before hitting the panic button, it is worthwhile to review why we suggest allocating at least part of your portfolio to equities and why stocks are still likely to offer the best total return over the medium to long-term.

While some people have called the stock market a casino or worse, investors need to be reminded that each share of stock represents a fractional ownership of a business. When you buy shares of Apple, Pfizer, BCE or TD Bank, you are becoming a fractional owner in those enterprises. The value of that business is based on the future earnings and cash flow that those companies generate. Buying shares of good companies at a reasonable price has been and likely will continue to be one of the best methods of building long-term wealth.

The main reason that people have bought equities is to generate higher returns in their portfolio. This is called the Equity Risk Premium (ERP). The ERP represents the additional return that investors have earned owning equities over other asset classes. Historically, equities have provided a 4% higher return than bonds1 per year. If the investment is in a taxable account, that premium is even higher as equities generate capital gains and dividends, both of which are taxed at much lower rates than bonds (interest income). Please note though that the 4% premium is an average, meaning in some years the benefit will be much greater than 4% and in other years equities may earn a lower return than bonds or a negative return.

Inflation Hedge: While bonds offer security – a fixed coupon payment from issue to maturity date as long is there isn’t a default, investors bear inflation risk. This is the risk that if inflation increases, the fixed coupon payments from the bonds will have a lesser value, because these cash flows will not be able to buy the same amount of goods and services, i.e. have less purchasing power.

1727060_sSince equities are public companies, typically when inflation rises, these companies find ways to continue generating higher profits by raising prices and /or cutting costs. E.g. if inflation rises, Walmart, McDonald’s, Royal Bank and TransCanada Pipelines typically find ways to continue increasing profits (and potentially dividend payments to shareholders) through changes in pricing or cost cutting measures, thereby protecting the investor’s purchasing power.

Participate in Economic Growth: While economies do experience contractions from time to time, typically Gross Domestic Product (GDP) increases over time. As the economy expands, so should earnings of quality public companies (equities). Historically, these companies will generate more in sales and be able to increase prices during periods of economic expansion, and be able to reduce costs during periods of economic weakness, which should lead to higher earnings per share (EPS). Higher EPS typically leads to higher stock prices and often to higher dividend payments over time. In short time periods, particularly recessions, equity prices may decline even if earnings rise, but on a long-term basis, equities have been one of the best ways for investors to benefit from economic growth.

Low Interest Rates: While interest rates are expected to rise in the first half of 2015, we expect the increases to be small initially and the pace of the increases to be slow. Low interest rates benefit equities in a few ways: 1) relative attractiveness – institutions and individuals need to put their investment dollars somewhere. When interest rates are low, the relative attractiveness of stocks, particularly those that pay a dividend, is greater, i.e. when your choices are investing in a GIC paying less than 2%, and a government bond paying less than 2.5%, investing in stock that pays a 3% dividend and offers the potential for capital gains is quite appealing. 2) enhanced earnings – with low interest rates, companies need to devote less of their revenues to debt payments, which enhances profit margins and overall earnings. Higher earnings typically leads to higher stock prices. 3) Share buyback – many companies are using their savings on debt costs to buy back their shares on the market. If the number of shares outstanding decreases and earnings remains relatively the same, earnings per share (EPS) improves as well. From Q2 2013 to Q2 2014, U.S. companies bought back approximately 3.3% of their shares outstanding2; these share repurchases increased earnings per share.

While we do not expect equity returns similar to 2013 or 2014 in the year ahead, we still expect equities to outperform other asset classes in 2015. Because of their many benefits, equities should remain a key part of each investor’s portfolio over the long-run.

The overall percentage of equities to own in an investment portfolio, and the type of equities to hold (large capitalization vs. small capitalization, developed market vs. emerging market) are best determined by meeting with a trusted investment counsellor and /or financial planner. A trusted planner reviews their clients’ income and cash flow needs as well as taxes to determine the clients’ needed rate of return. An investment counsellor analyzes investments to determine the best return prospects relative to each investor’s willingness and ability to take risk in his investment / retirement portfolios.

 

[1] http://www.seeitmarket.com/quantifying-equity-risk-premium-13202/. Quantifying Equity Risk Premium, Allan Millar, January 30, 2013. Based on S&P500 Index return vs. U.S. Government and Corporate Bond Indices. Data set from Ibbotson 1926-2010.

[2] http://www.factset.com/websitefiles/PDFs/buyback/buyback_6.18.14. FactSet Quarterly Buyback S&P500, June 18, 2014.

 

Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Portfolio Manager and Wealth Advisor
Lorne can be reached by email at lorne@tridelta.ca or by phone at
416-733-3292 x225
Cameron Winser
Written By:
Cameron Winser, CFA
VP, Equities
Cameron can be reached by email at cameron@tridelta.ca or by phone at
416-733-3292 x228
↓