Andrew Pink, portfolio manager, LDIC Inc.

Focus: North American large caps, preferred shares and fixed income

MARKET OUTLOOK

Markets have once again drifted into a period of heightened volatility. Investor concerns related to the China-U.S. trade war, as well as an inverted yield curve in both Canada and the U.S., have signalled a near-term recession. Slowing consumer confidence and spending is weighing on GDP, while Brexit and central bank monetary involvement add to the investment anxiety. In paradox to these concerns, economic fundamentals in North America remain strong; employment rates are near all-time highs, interest rates are low and trending lower, and inflation is contained. With respect to the biggest concern, we expect Trump will string along discussions with China until closer to the U.S. elections in November 2020. Investors will want to be invested in the market when a deal is finally negotiated. While we wait for a resolution, we think investors should focus on segments of the market that can do well in a sustained low interest rate environment. Sectors including REITs, consumer staples, health care, utilities and telecom top the list. We also think there are opportunities in technology, discretionary and a select group of industrials.

TOP PICKS

Algonquin Power & Utilities (AQN:CT)
Algonquin Power & Utilities Corp. is a regulated utility that generates, transmits and distributes renewable power throughout North America. Algonquin has an impressive leadership team and a compelling growth platform, guiding to a U$7.5-billion capital plan and +11 per cent EPS CAGR over the next five years. The company initiated a unique partnership in 2018 with Abengoa to help finance and profit from a large development pipeline in Europe. Closer to home, Algonquin has had recent success securing a large wind power JV in Texas, has met development hurdles in other important power contracts, and was granted key regulatory approvals within its public utilities business, all contributing to a premium valuation compared to its Canadian peers. We believe the superior earning growth trajectory should sustain and potentially widen the premium spread over time.

Brookfield Property Partners (BPY-U:CT)
Brookfield Property Partners is a diversified commercial properties REIT, investing and operating in North America, Europe, Australia and Brazil. The company has a portfolio mix of office, retail, multi-family and industrial assets. Brookfield benefits from a dynamic global management team and diversified asset base, and is able to generate consistent long-term returns of +12-15 per cent within a very stable asset class.  The company pays an annual dividend of seven per cent and has grown the dividend 9.6 per cent annually over the last five years. This month marks the one-year anniversary of Brookfield’s $15-billion acquisition of GGP, the second-largest U.S. shopping mall owner. While this brick-and-mortar retailing acquisition was clearly non-consensus, Brookfield has divested the lower-quality assets and has plans for high-value redevelopment into mixed-use segments including multi-family residential, office and some industrial space. We think BPY represents great value in the REIT space, currently trading at a 35-per-cent discount to its net asset value.    

Pembina Pipeline (PPL:CT)
Pembina Pipeline Corp. is a Canadian midstream energy company involved in the storage, transmission and marketing of petroleum products. The company generates strong and predictable cash flow from contracts with its energy-producer counterparts. The company pays a monthly dividend with an annual yield in excess of five per cent, and has grown this dividend at a rate of 7.5 per cent per year over the last three years. Pembina has recently agreed to acquire the assets belonging to Kinder Morgan Canada and the U.S. portion of the Cochin pipeline for approximately $4.35 billion. While the headline EBITDA multiple represents a modest premium to Pembina’s current valuation, we think the potential bottom-line synergies, along with its very compelling asset compliment, represents a significant opportunity for the company to further strengthen its earnings power and free cash flow generation.
 

PAST PICKS: OCT. 23, 2018

Chorus Aviation (CHR:CT)

• Then: $6.75
• Now: $7.36
• Return: 9%
• Total return: 15%

Enerplus (ERF:CT)
We recently sold Enerplus. The energy sector has been plagued by prospects for slower global growth. We have retained a small energy-producer weighting in the senior integrated space (Cenovus and EOG Resources).

• Then: $13.08
• Now: $8.05
• Return: -38%
• Total return: -38%

Parkland Fuel (PKI:CT)

• Then: $43.85
• Now: $40.67
• Return: -7%
• Total return: -5%

Total return average: -9%
 

FUND PROFILE: LDIC COMPOSITE INCOME MODEL

Performance as of July 31, 2019:

• 1 month: 1.8% fund, 0.3% index
• 1 year: 8.1% fund, 3.9% index
• 3 years: 6.2% fund, 5.8% index
• 10 years: 10.3% fund, 6.6% index

Index: 70% TSX, 30% Dex Universe Bond Index
Returns are based on reinvested dividends,net of fees and annualized

TOP HOLDINGS AND WEIGHTINGS

1. Parkland Fuel: 4.9%
2. InterRent REIT: 4.6%
3. WPT Industrial REIT: 4.0%
4. Nexus REIT: 3.8%
5. Chorus Aviation: 3.7%

WEBSITE: ldic.ca