David Driscoll, president and CEO of Liberty International Investment Management
Focus: Global stocks

MARKET OUTLOOK

Given the 2019 Fed cuts and ultra-low interest rates globally, the “risk-on” trade has been evident. This has helped raise investor net worth and happy days abound. That said, gains in the stock market aren’t linear and after such a strong stock market performance in 2019, it’s prudent to think more about portfolio structure than unrealized capital gains.

Here are a few things that investors should consider before the markets re-open in January:

• Make a plan and stick to it. Ensure that decisions are made mechanically, not emotionally.
• The key to successful investing is to avoid the big loss. If you have $1 million and your portfolio drops 40 per cent, your $600,000 has to grow 67 per cent just to get back to break-even.
• Re-balance individual holdings to avoid concentration risk. If you have a 30-stock portfolio, the average stock weighting should be 3.3 per cent. If one holding rises over 6 per cent, sell half and re-allocate the proceeds to those that make up less than 3 per cent. If they all have similar growth characteristics, chances are the smaller weightings may be the next ones to move higher.
• Invest in businesses, don’t trade stock prices. Trading actively reduces overall total returns. Instead of receiving the nickels and dimes from interest and dividends, that money goes to the broker, not to you.
• Don’t chase yield. When choosing dividend stocks, it’s important to consider the dividend growth rate, not the dividend yield. If the dividend isn’t growing, inflation is wiping out your future spending power. The average dividend growth rate of the 250,000 global stocks is about 7 per centt. That should be your reference point.
• Diversify globally. Studies have shown that long-term returns outside North America have been 1 to 2 per cent better when compounded over a 20-year time horizon.
• Diversify by industry. An elastic business is one that makes all its money in the good years and loses it all in the bad ones, netting out poor long-term returns for investors. These types of industries include steel, airlines, oil and gas and some industrials. Conversely, inelastic businesses make money whether or not the economy is strong (in an expansion phase) or weak (during recessionary periods). Inelastic businesses are industries such as consumer stocks, utilities, financials and healthcare companies.
• Diversify by size of company. We invest 50 per cent of our stocks in large-caps. Most of their profits go toward paying the dividend which provides our clients with income. The rest of the stocks are mid-cap and small-caps that pay a smaller, faster-growing dividend but that put more of their profits back into the business for future growth and capital appreciation and to help stay ahead of inflation. Combined, clients get a good blend of income and growth.

TOP PICKS

ROPER TECHNOLOGIES (ROP:UN)
Last purchased on Dec. 20 at US$352.63.

Roper is involved in a number of industries, including medical record software, RFID tags for toll roads, meter-reading software and network systems. The company only seeks targets with high cash return on investment that are leaders in niche markets with sustainable competitive advantages, high margin, high recurring revenues and that are asset-light with powerful cash flow characteristics.

JARDINE MATHESON HOLDINGS (JM SGX)
Last purchased Dec. 20 at US$55.22.

Jardine Matheson is a multi-national enterprise with a portfolio of businesses focused on the Asia-Pacific region, including financial services, supermarkets, consumer marketing, engineering and construction, automobile dealerships, property investment and hotels. With the drop in U.S. interest rates, money flows should begin to enter the emerging markets. If the U.S. dollar falls in 2020, Jardine should be a benefactor as their earnings are in emerging market currencies and converted to U.S. dollar. They also have a debt-to-equity ratio of 50 per cent, meaning that if the market corrects, they have plenty of powder dry to go on an acquisition binge.

DASSAULT SYSTEMES (DSY EPA)
Last purchased Dec. 20 at $146.95 euros.

Dassault provides CAD/CAM design engineering services. The 3D software helps companies design their product and find the cheapest and most efficient way to produce. Life sciences are now a new core industry, which should help the company reach its goals of doubling its earnings per share every five years. They are now selling to the entire value chain, from large businesses to small businesses and startups.

PAST PICKS: DEC. 7, 2018

HALMA (HLMA LON)

• Then: £1,307
• Now: £2,143
• Return: 64%
• Total return: 66%

FIRST CASH CAPITAL (FCFS:UN)

• Then: $81.23
• Now: $80.53
• Return: -1%
• Total return: -1%

METRO (MRU:CT)

• Then: $45.94
• Now: $53.94
• Return: 17%
• Total return: 19%

Total return average: 28%

WEBSITE: www.libertyiim.com