David Driscoll, president and CEO of Liberty International Investment Management
Focus: Global equities
Because of ultra-low interest rates and poor yields in other investment instruments, investors continue to pile into the equity market. Given that we’re now in year eight of this bull market, it’s prudent that investors think about their cash-on-hand and how much they should keep on the sidelines.
Portfolio protection against falling markets can be used with options. For those who don’t use options, they can use their cash similarly as a “synthetic short.” If an investor holds cash in their portfolio, this is deemed to be “short the market.”
For example, if an investor has 20 per cent cash and 80 per cent invested in stocks, their “net long” position is only 60 per cent (80 per cent long minus 20 per cent short). If the market falls 40 per cent, as in 2008, the portfolio with 20 per cent cash should only drop 24 per cent (60 per cent x 40 per cent), allowing the investor to get back to break-even faster than those fully invested (ETF investors are one example as those funds are always fully invested).
In the past year, the main Liberty strategy that has helped keep returns higher than the benchmark averages has been the use of this cash-on-hand. For example, some names in the Liberty portfolios were down in 2016 (Novo Nordisk, Fomento Economico de Mexicano and Gemalto NV) because of macro-economic or political issues. However, their earnings and free cash flow numbers continued to grow, creating an opportunity to buy more of their shares at lower prices (known as dollar-cost averaging). Today, the performance numbers for those three names are better than if we just bought once and held the whole way.
That’s the beauty of always holding some amount of cash. If the market corrects, we have cash available to take advantage of lower prices. And if the market continues higher, our clients will participate in any rally with their current equity exposure.
BECTON DICKINSON (BDX.N) – $182.70
It is a global medical products company known primarily for its needles and syringes. It recently acquired CR Bard Inc. (BCR US), which diversifies Becton’s product mix with catheters, vascular stents and biopsy devices. Both companies generate large and growing amounts of free cash flow, so the merger is a positive. Debt should be paid down within the next two years to return to stable levels, which will help future earnings growth.
LITTELFUSE INC. (LFUS.O) – $158.64
It makes and sells fuses and other circuit protection devices for use in the automotive, electronic and general industrial markets. The coming growth in the number of electric vehicles is expected to increase Littelfuse’s components per automobile by 35 per cent, giving it a good opportunity to continue to grow its business. Dividend growth has historically been in the mid-teens, about double the average of stocks worldwide.
DASSAULT SYSTÈMES (DASTY.PK)
It is a technology company that provides software applications services designed to support client companies’ innovation processes. Any inventor, entrepreneur, scientist or mainstream corporation can use Dassault’s software to design the most efficient, lowest-cost product. The evolution of their software now includes artificial intelligence. Siemens is one of their biggest clients in the area of automation.
PAST PICKS: JUNE 7, 2016
GEMALTO NV (GTOMY.PK)
- Then: $55.32
- Now: $54.65
- Return: -1.21%
- TR: -1.21%
FOMENTO ECONOMICO DE MEXICANO (FEMSA) (FMX.N)
- Then: $95.32
- Now: $91.44
- Return: -4.07%
- TR: -2.69%
NOVO NORDISK A/S (NVO.N)
- Then: $375.60
- Now: $272.40
- Return: -27.47%
- TR: -25.31%
TOTAL RETURN AVERAGE: -9.74%