Jul 30, 2018

Mike Philbrick's Top Picks: July 30, 2018

BNN Bloomberg

Mike Philbrick , Mike Philbrick

Mike Philbrick, president of ReSolve Asset Management
Focus: ETFs

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MARKET OUTLOOK

At ReSolve, portfolios are constructed to employ a number of different layers of diversification. First, we allocate to a diverse universe of asset-classes that thrive in different economic and inflationary regimes. Second, these asset-classes are also diversified from a geographic standpoint, so that we can harvest growth (and positive returns) from all corners of the globe. Finally, we deploy capital towards different, uncorrelated investments strategies to maximize the chance that we have a positive return stream at all times.

True diversification will become particularly important, given that today’s traditional and popular areas of investment offer potentially extended valuations and very low starting yields due to years of quantitative easing and central bank intervention.

Since my last appearance, one of the core benefits of diversification was on display, as the news on tariffs and trade wars garnered more traction in the minds of investors. There’s a misconception that trade is a zero-sum game, that what I take from another country simply goes to my country’s bottom line. But the true benefit of free trade is the improvement of efficiency via specialization.

How do you defend your portfolio in this environment? You own both sides of the trade war as well as the other markets that may benefit in ways you couldn’t have anticipated: You diversify.

The second large driver behind stocks recently has been the avalanche of stock buybacks. This is particularly relevant in the information and technology sector, where we’re seeing buybacks at record levels. Through July 27, information technology companies announced an additional $52 billion in buybacks, bringing the 2018 year-to-date total announcements to $295 billion for the sector, Apple at $100 billion, Qualcomm at $30 billion Cisco at $25 billion, just to name a few. As a point of reference, the Wiltshire 5000 had 6,600 companies in it in the year 2000; today, we sit at 3,300 companies. There are unintended consequences to this type of behaviour and, at some point, managing risk in portfolios will become very important as the average portfolio continues to concentrate around the same companies.

TOP PICKS

ISHARES MSCI CHINA A ETF (CNYA.N)

China’s domestic “A” share stock market is the second-largest stock market in the world by market capitalization, and the Chinese economy is the second-largest economy in the world. Yet, China’s “A” share market represents only 0.73 per cent of the MSCI Emerging Markets Index. This index is scheduled to begin increasing this allocation this month for the next 10 years to an anticipated 16.9 per cent by 2028. Basically, every global portfolio and thus portfolio manager in the world could be chasing China’s domestic stock market for the next 20 years. Finally, this stock market has an exceptionally low correlation to North American stocks, providing significant diversification.

HORIZONS ENHANCED INCOME INTERNATIONAL EQUITY ETF (HEJ.TO)

This is an equal-weight portfolio of the largest, most liquid International stocks using a dynamic call-writing approach which seeks to maximize the balance between upside capture and risk management in the portfolio. The average Canadian has very little exposure to international stocks. These investors should be seeking truly uncorrelated assets and strategies building a robust portfolio in order to reduce risk and increase return, thereby increasing the likelihood of investment success. Adding a covered writing protocol to asset class allocation has the potential to add some risk management in addition to the diversification benefits of international stocks.

ISHARES US REAL ESTATE ETF (IYR.N)

The real estate sector has seen attractive performance in recent months, outperforming the S&P 500 by over 1 per cent since May (the third best performing S&P 500 sector). Flows have also been supportive, with REIT ETFs gathering almost $1.5 billion since the beginning of June. With investors showing increased appetite for risk aversion through Q2, REITs rebounded well and were one of the top performing sectors over the quarter.