Brian Madden's Top Picks: October 18, 2017

Brian Madden, senior vice president and portfolio manager at Goodreid Investment Counsel
FOCUS: Canadian equities
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MARKET OUTLOOK

After a spring and summer of lacklustre and rather directionless trading, the S&P/TSX Composite sprang to life immediately after Labour Day and has gained 6 per cent since then. This serves to illustrate the virtues of both patience and diversification in investing. It is often said that stocks don’t go up in a straight line, and we certainly have seen that this year with Canadian stocks. U.S. stocks, conversely, and somewhat unusually, have traced a non-stop climb higher, with the S&P 500 rising every month this year for a cumulative gain of 14.5 per cent.

The recent surge in Canadian equities goes some ways towards stock prices catching up to economic fundamentals, and it occurs amidst strength in commodity prices, including oil and most of the industrial metals. Job creation in Canada remains extremely robust, with even the commodity-sensitive western provinces now starting to turn the corner. 

Two of the most prevalent medium-term risks on the minds of both domestic and global investors in Canadian stocks remain the ongoing renegotiations of the NAFTA treaty and the risks of overheated housing markets in Toronto and Vancouver bringing about a recession, as regulators move to cool recent blockbuster price appreciation. With respect to the former, Canada’s largest auto parts company, Magna International, is the poster child for NAFTA renegotiation risk, and it rose 11 per cent during the latest quarter, as investors may be increasingly apt to view the bark (tweet?) of President Trump as being worse than his bite, certainly when it comes to trade. With respect to the latter, the third quarter results posted by the big six Canadian banks were uniformly outstanding, with earnings up an average of 9.5 per cent year over year. As the proverbial canaries in the coal mine for housing risk, there are no indications of impending credit issues. So, while we’re not necessarily out of the woods yet, the evidence is increasingly stacking up in favour of a soft landing in Canadian housing markets.

Traditional fixed income investments, like bonds, have been under more pressure this past quarter, as rapid economic growth necessitated higher interest rates. The FTSE TMX Canada Short Term Bond index saw a negative return of 0.6 per cent, its second consecutive quarter of decline. We know many investors question the validity of bonds in their portfolios at times like these, with interest rates near historic lows and rising. We too are mindful of the impact of low but rising interest rates on a bond portfolio. Knowing that the eventuality of rising interest rates would erode returns on fixed income investments, we set out some time ago to mitigate this risk in several ways:

1. By generating higher current income than is generally available in government bonds with the selective purchases of highly rated, financially strong corporate issuers
2. By focusing bond portfolios on short duration issues, with maturities generally in the 2-5 year range to minimize vulnerability to rising interest rates
3. Via strategic portfolio allocations to highly rated preferred shares, a non-traditional and tax-efficient income vehicle which also generates more current income than government bonds

Bonds are currently acting as a sobering and dampening influence in balanced portfolios, but rising interest rates today sow the seeds for higher income prospects upon reinvestment of maturing bonds in the future. Perhaps most importantly, and easily forgotten now that we are nine years into one of the strongest U.S. equity bull markets in history, is the fact that bonds often “zig” when stocks “zag," and thus provide ballast to properly balanced portfolios in more challenging economic environments.

A well-constructed portfolio (a term which, of course, means different things to different investors) is so much more than the sum of its parts. A well-constructed portfolio is like a championship hockey team: it finds ways to win more often than not, under all manner of challenges and circumstances. Sometimes the flash and flair of power forwards steal the show, other times stalwart defenceman stymie the opposition, and other times still, sensational feats of goaltending steal a win. A portfolio, comprised of the right strategic mix of carefully chosen Canadian and U.S. equities and fixed income securities won’t “win” every single quarter, and certainly won’t win in every asset class each quarter, but over time is a powerful, prudent and proven way to safeguard and responsibly grow wealth.

TOP PICKS

ENBRIDGE (ENB.TO)
Latest purchase: October, 2017 at $52.38.

BANK OF NOVA SCOTIA (BNS.TO)
Latest purchase: October, 2017 at $80.25

CGI GROUP (GIBa.TO)
Latest purchase: October, 2017 at $64.52.
 

PAST PICKS:  DECEMBER 7, 2016

ALIMENTATION COUCHE-TARD (ATDb.TO)

• Then: $61.59
• Now: $59.11
• Return: -4.02%
• Total return: -3.59%

MANULIFE FINANCIAL (MFC.TO)

• Then: $23.69
• Now: $25.86
• Return: 9.16%
• Total return: 11.94%

MAGNA INTERNATIONAL (MG.TO)

• Then: $60.83
• Now: $68.59
• Return: 12.75%
• Total return: 14.85%

TOTAL RETURN AVERAGE: 7.73% 
 

FUND PROFILE
Goodreid North American Balanced:
Goodreid’s balanced approach allows investors to participate in the potential growth of equity holdings while mitigating risk through ownership of quality fixed income instruments.

Performance as of: September 30, 2017

1 Year: 12.4% fund, 5.2% index
3 Year: 7.3% fund, 3.9% index
5 Year: 10.5% fund, 6.8% index

*Index: Globe Canadian Equity Balanced Peer Index Average
**these figures included reinvested income and are net of fees 

TOP HOLDINGS AND WEIGHTINGS

1. Canadian equities: 27%
2. U.S. equities: 38%
3. Canadian fixed income: 27%
4. Cash: 8%

WEBSITE: www.goodreid.com