Quarterly portfolio Summary

Transcription

1 Quarterly portfolio Summary Sample Balanced Portfolio June 30, 2014 Target Current Investment Mix: % $ % Fixed Income: 63.11% $79, % Growth: 22.74% $28, % Cash/Cash Equivalents:* 14.15% $17, % Totals: % $126, % Estimated Annual Income: $4, Bond Maturities: $ Cash/Cash Equivalents: $17, $15, $ $7, $ $7, $7, $10, $7,500 Preferred Shares: $23, % of Portfolio: 18.23% Stock Market Sector Weightings: Oil/Gas: 0.00% Financial Services: 6.46% Mining & Metals: 0.00% Gold & Precious Metals: 0.00% Industrial Products: 0.00% Communications: 4.24% Pipelines: 4.29% Utilities: 1.83% Consumer Staples: 2.20% Consumer Discreationary: 0.00% Real Estate: 0.00% Forestry: 0.00% Technology: 0.00% Mutual Funds: 0.00% Exchange Traded Funds: 0.00% Inverse ETFs/Short Positions: -3.87% Effective Market Exposure: 15.14% (BMO, Power Financial, Great-West Lifeco) (BCE Inc., Shaw Communications) (Transcanada, Enbridge) (Transalta Corp.) (George Weston Ltd.) (S&P/TSX 60 Index Inverse ETF)

2 Sample Balanced Portfolio 30-Jun-2014 Credit Average Book Current Market Annual Est. Annual Quantity Investment's Description Rating Cost: Value: Price: Value: Yield (%): Income: $17,873 Cash Balance $1.00 $17, $1.00 $17, % $0.00 Bonds and GICs $7,500 HSBC Bank 3.70% GIC AAA $ $7, $ $7, % $ Annual Pay, Matures: 21-Jun-2015 $7,500 Coastal Community CU 2.25% GIC AAA $ $7, $ $7, % $ Annual Pay, Matures: 14-Nov-2016 $7,500 General Electric Capital Canada AA(+) $ $7, $ $8, % $ % Bond, Matures: 17-Jan-2017 $7,500 Bank of Nova Scotia AA $ $7, $ $7, % $ % Bond, Matures: 08-Jun-2017 $7,000 TMX Group Ltd. A $ $7, $ $7, % $ % Bond, Matures: 03-Oct-2018 (high) $7,500 Province of Nova Scotia A $99.91 $7, $ $8, % $ % Bond, Matures: 25-Nov-2019 (high) $10,000 Bell Canada A $97.87 $9, $ $10, % $ % Bond, Matures: 17-Jun-2020 (low) Bond and GIC Totals: $54, $56, % $1,958.96

3 Credit Average Book Current Market Annual Est. Annual Quantity Investment's Description Rating Cost: Value: Price: Value: Yield(%): Income: Preferred Shares: 210 IGM Financial Inc. Pfd-2 $24.10 $5, $26.16 $5, % $ % Preferred (IGM.PR.B) (high) 250 George Weston Ltd Pfd-3 $20.69 $5, $24.34 $6, % $ % Preferred (WN.PR.D) 230 The Toronto-Dominion Bank Pfd-2 $22.98 $5, $26.33 $6, % $ % Preferred (TD.PR.P) (high) 210 Power Corp. Pfd-2 $24.73 $5, $25.70 $5, % $ % Preferred (POW.PR.G) (high) Preferred Share Totals: $20, $23, % $1, Common Shares: Financial Sector: 6.418% 34 Bank of Montreal BMO $63.19 $2, $78.58 $2, % $ Power Financial Corp. PWF $29.30 $2, $33.21 $2, % $ Great-West Lifeco Inc. GWO $25.45 $2, $30.18 $2, % $ $6, $8,108.11

4 Average Book Current Market Annual Est. Annual Quantity Investment's Description Symbol Cost: Value: Price: Value: Yield(%): Income: Communications Sector: 4.213% 54 BCE Inc. BCE $31.36 $1, $48.40 $2, % $ Shaw Communications Inc. SJR.B $19.67 $1, $27.36 $2, % $ $3, $5, Pipeline Sector: 4.260% 53 Transcanada Corp. TRP $37.93 $2, $50.93 $2, % $ Enbridge Inc. ENB $24.93 $1, $50.63 $2, % $74.20 $3, $5, Utilities Sector: 1.822% 176 TransAlta Corp TA $19.67 $3, $13.08 $2, % $ Consumer Staples Sector: 2.180% 35 George Weston Ltd. WN $75.59 $2, $78.71 $2, % $58.10 Common Share Totals: $19, $23, % $931.75

5 Average Book Current Market Annual Est. Annual Quantity Investment's Description Symbol Cost: Value: Price: Value: Yield(%): Income: Inverse (ETFs): 3.847% 600 Horizons BetaPro Inverse ETF HIX $11.06 $6, $8.10 $4, % $0.00 S&P/TSX 60 Index ETF Totals: $6, $4, % $0.00 Stock Market Investments: $26, $28, $ Investment Portfolio Totals: $119, $126, % $4, Bond pricing = The 'Bid' price as at the close of the last trading day in the period. Data provided by Bondview. Stock market data = closing trade on the last trading day in the period. Data provided by QuoteMedia.

6 Sample Balanced Portfolio: Review Our IFM Sample Balanced Portfolio just completed its 4th year of operation on June 30, 2013, and so now seems like a good time to review its performance to date and discuss our next options in terms of where the market looks like it s headed on the basis of past market cycles. So, how did the portfolio perform? Here are the stats to date for our Sample Balanced Portfolio: The portfolio generated investment returns of o +5.60% in the 12-month period ending June 30, 2013 and o +6.04% annually since its inception. For the last 12-month period ending June 30, 2014, the portfolio s earnings were generated by $4, in interest and dividend income and $2, in capital gains The portfolio began the same 12-month period with a market value of $119, and it finished with a market value of $126, The portfolio s effective stock market exposure began at 17.50% (July 1, 2013) and ended at 15.14% (June 30, 2014) well under its target stock market exposure of 30.0%. The balanced portfolio s current market value ($126,342.59) finished the 12-month period slightly above the upper level of its benchmark ($126,247), but well above the lower benchmark level ($116,985). Recent changes: re-balancing the portfolio In June we re-balanced the portfolio by reducing the stock market investments to bring the current dollar amount allocated to each investment back to the original starting levels. This was done to crystalize and safeguard the profits earned to date. In total, the portfolio s allocation to stock market investments was reduced by 4.47% or $5, The $5, has been deposited to the account s cash balance pending reinvestment in fixed income investments. This decision to re-balance the portfolio was made as the market continues to push to new record levels and should not be interpreted as a Bearish comment on the current markets. Instead this re-balancing just means we re still sticking to the IFM game plan, and it seems to be working well as the numbers would suggest! So, given our still slightly topsy tervy world market, therefore, we will be sticking to our investment approach as, the portfolio remains under-allocated to the stock market. Our outlook

7 1) Economies: Not stellar! Unemployment remains stubbornly high. Earnings growth is ok. 2) Interest Rates: To remain low for an extended period. (Thus, interest rate sensitive investments (Utilities, Pipelines, Bonds, etc) should perform fine. 3) Late stage of current Bull stock market: See comments below. 4) Central Bank Liquidity: Remains a major influence for the foreseeable future. Japan, U.S. and European central banks continue to inject more liquidity. Although the U.S. has said they will stop buying more bonds in October Rates declined on the news. 5) A decline in Energy (Gas and oil): May become a dominant theme Iran/Iraq, U.S. Oil exports, continued decline in the Wests consumption, increasing use of alternatives (I.E. Solar, etc.), China s push toward Natural Gas, Fracking techniques gaining greater acceptance in Europe, China, Russia, etc. Lower oil prices would be a double-edged sword good for consumers bad for governments that fear deflation. What we re thinking This recent chart below of the S&P500 Index is a great comment on where stock markets are today in relation to their past. Look how far markets have come since their 2009 lows.

8 Source: Hussman Funds So, our decision to re-balance the portfolio and to further reduce its stock market exposure is because we believe that markets could turn downward anytime but in all honesty we have no clue where they are headed over the short-term. But we do know, however, that stock markets move in cycles both, up and down and as the markets push past their previous highs, it just makes sense to be cautious. One other observation we can make, as the chart demonstrates, is that stock markets are probably closer to making a top than they are to making a bottom. Note: For some investors, it may make sense to reduce their investment portfolio s stock market exposure below their Target Asset Allocation (for example, if you re close to your set retirement date, or you re a conservative investor). This conservative approach is the one we ve adopted for our sample investment portfolios. The famous 4 emotional phases of bull markets and where we are today

9 We all know stock markets move in cycles and although no two cycles are exactly the same, history has proven that each stock market cycle consistently elicits the same emotions from investors and those emotions. The chart below helps to crystalize the famous four stock market phases by investor emotions as described by one of the greatest investors of all time, Sir John Templeton. He observed that bull markets experience four phases during the bull market cycle: pessimism, skepticism, optimism, and euphoria. So, by Sir Templeton s definition, the current market would appear to be in the final phase (euphoria) of the bull market cycle. Other worrisome signs of an aging euphoric bull market, and what it means for our portfolio Often as a euphoric bull stock market cycle matures, there are a number of other areas that also reach new extremes. None of these items by themselves is a cause of a stock market peak, but they are what can be called symptoms of an aging bull market and they usually indicate that it s time to re-balance your portfolio. Here are a few of those signs we want to look out for: Investor sentiment reaches new bullish high: Investors have become incredibly bullish and along with their optimism, they ve become extremely complacent, believing naively that stock markets will continue to go higher and that they have no worries. This enthusiasm for the stock market is demonstrated by the most recent results for the Investors Intelligence Bulls & Bears Survey, where the ratio of bullish investors to bearish investors hit an extreme of 3.99, reaching levels not seen since 1986.

10 From the Bank of America s recent report, investors now have 61% of their savings invested in stock markets. A level last seen just before the last Bear Stock market. See chart below. The extreme bullishness and accompanying complacency of both individual investors and investment professionals is a bit worrisome. Usually, one of these groups of investors is a little worried and not as bullish as the other group, helping to moderate the overall enthusiasm in the stock markets. When both groups are bullish, however, and believe they have nothing to worry about, the stock markets often make a strong move higher toward their top. This is often a symptom of the euphoric phase of a bull stock market. Margin debt reaches new high: Almost all brokerage firms will lend money to investors to invest in the stock and bond markets. These brokerage firms will use an investor s current investments as collateral for the investment loans and these loans are called Margin Debt. Typically, as

11 investors become more confident that the stock markets are going to keep going higher, they tend to borrow more and more money to take advantage of rising stock market values. So, often one of the symptoms of a maturing bull stock market is when the amount of Margin Debt reaches new highs, surpassing previous amounts borrowed. For example, if you have $ invested in shares of a Canadian bank, your brokerage firm will lend you up to 70% or $70.00, using your current $ as collateral for the loan. So if the stock market goes up by 10%, your $ investment will increase in value by $17.00, 70% more than if you hadn t borrowed and only had $100 invested. So by borrowing and investing, investors can increase their returns because they have more money invested. When you borrow to invest, you are said to be using leverage. According to the New York Stock Exchange, the amount of Margin Debt outstanding reached a new high in February 2014, hitting $465 billion. That is 23% or $87 billion more than the previous peak of $378 billion reached in June Some commentators point to this new high as a positive sign, explaining that it demonstrates the high level of confidence investors have in the future growth for the stock market, and this is certainly true. But although it is a positive during a bull stock market, Margin Debt becomes an extreme negative when stock markets stop going up and begin to fall. Remember all of that borrowed money is secured by stock market investments, and as the value of that collateral declines, investors are forced to sell their investments, and repay portions of their loans to bring their loan collateral back to where the brokerage firms demand it be. For the investor in our example, if they have $170 invested ($100 is theirs and $70 is borrowed), if stock markets decline by 10%, their investment value drops to $ The brokerage firm will demand the investor sells some of their investment to bring the borrowed amount back to the required 50% margin level. So the investor would be required to sell $28.90 of investments (in a down market) to bring the Margin Debt back in line with the firm s requirements. So Margin Debt can actually become a problem for investors and markets in a declining stock market cycle. Declining Trading Volumes and Increasing Investment Leverage: One of the remarkable symptoms of this bull market cycle has been the marked decline in the daily trading volume on the various stock exchanges. For example, daily trading volume in the U.S. has steadily declined by 53% since This decrease can probably be attributed to three recent trends: Investor Confidence: The decline in trading activity can be viewed as a sign of investor bullishness and complacency. As investors become more confident and relaxed about their stock market investments, they often don t feel the need to make any changes they buy and sell less. But this is not what happened

12 in the last bull market cycle. The chart below demonstrates how trading volumes (the bottom portion of the chart) during this cycle have been steadily decreasing. The opposite of what happened in the previous bull market cycle, where trading volumes steadily increased. Makes you really wonder, So what s happening this time around? Increasing use of Options and Futures Contracts: The decline in daily trading volumes may also be partially explained by a fundamental shift by investors to increase their leverage to stock market investments by switching their buying efforts away from individual stocks and into buying options and futures markets, as witnessed by the increase trading in these markets. In this current bull market cycle, more and more investors (individual and professional) have been so confident in the upward momentum for stocks that they have moved beyond simply using Margin Debt as a way to gain stock market exposure, and have instead herded into trading options and futures contracts. The increased trading in options and futures contracts, witnessed during the current bull stock market cycle, has been nothing short of amazing jumping 9 fold since 2007.

13 The increasing popularity of Futures and Options trading would seem to indicate investors are no longer content to simply buy individual shares, hold and wait, but rather they are willingly taking on significantly more leverage than in the past. Investors switch their trading to Dark Pools: According to Reuters, approximately 40% of all trades in the U.S. take place in hidden exchanges called Dark Pools. This is a significant increase from the 16% of trades six years ago. It s estimated that there are 45 Dark Pools in operation, with the largest

14 thought to be operated by J.P. Morgan, Morgan Stanley and Credit Suisse, but no one seems to know for sure. Individual investors may not even know that their buy and sell orders are taking place in a Dark Pool. If this 40% figure were accurate, then this would explain the majority of the recent decline in trading volume. Company Share Buybacks: One of the major trends during the last two bull stock market cycles has been companies increasingly buying up their own shares. Investors have perceived these corporate purchases as a vote of confidence by management in the company s future profitability, and as a result, the shares of companies that buy up their own shares tend receive higher stock market valuations from investors. In the bull market cycle, the number of companies buying back their shares and dollar amount spent peaked in the first quarter of Some are now wondering if this bull stock market has also witnessed a peak in corporate share purchases. Mutual Fund Cash Balances reach new record high: High cash levels are theoretically a contrarian buy signal for stock investors, with cash balances less than 3.5% is considered a sell signal, but as you can see it was a counterindicator in 2007 stock market top. The proportion in cash peaked at the top of boom. Unlike previous stock market cycles, fund cash balances offered a false signal that the bull market was healthy and would continue it gave investors a false sense of comfort. Is it doing the same today?

15 Stock Market Valuations being hotly debated: Some say the stock markets are over valued and some argue they are not. With the markets getting long in the tooth (5 year bull market), we tend to believe the over-valued camp. Below are two charts that help to support the over-valued camp s argument. The first chart is from a recent Bank of America Report and it demonstrates that the majority of investment professionals believe markets are currently overvalue. Below is a chart and summary for the Shiller P/E Ratio. Prof. Robert Shiller of Yale University invented the Schiller P/E to measure the market's valuation. The Schiller P/E is a more reasonable market valuation indicator than the P/E ratio because it eliminates fluctuation of the ratio caused by the variation of profit margins during business cycles. Note the ratio is currently 56% above it s historical mean a level only previously seen in the lead up to the 2008, 2000 and 1929 stock markets.

16 A few additional observations: Here are couple of more alarming signs that have us wondering about this bull market cycle. Initial Public Offerings hit new high: In the second quarter of 2014, the number of companies that started trading their shares on public stock exchanges surged by 42%, reaching a level not seen since the 3 rd quarter of Junk bond sales hit a new high: In the second quarter of 2014, new sales of Junk Bonds hit a quarterly record of $148 billion. Additionally, over 40% of all new syndicated loans issued to companies were low-grade, leveraged (Junk) loans more than were issued in the whole period, and increasingly these loans were made without creditor protection in terms of covenants. This may be another sign that investors are overconfident, complacent and willingly taking on more and more risk again naively believing the risk does not exist. Corporate mergers and acquisitions reach new high: In 2013, companies began buying up their competitors at a record pace spending $1.1 trillion, just shy of the old peak of $1.3 trillion reached in Quite often, the last phase of a bull stock market is witness to a surge in mergers and acquisitions as companies try to bolster flagging revenues and profits by buying their competitors hoping to cut overlapping cost and maintaining existing revenue. Corporate executive(s?) often tell

17 investors that buying other companies and cutting costs is a sure formula for growing profits, although history does not support this idea. Private Equity Funds raise record amounts: Investors gave $431 billion to Private Equity Funds in 2013, the highest since the top of the last bull market cycle in And right now Private Equity Funds have so much cash on hand they just don t know what to do. For example, at the end of June they had over $1.14 trillion sitting (where?) doing nothing, looking for a place to invest. Conclusion: when the signs are all there, it s time to protect your portfolio OK, so when the signs are all pointing to that fact that we re in the midst of an aging, maturing bull stock market we have to pause and think about our portfolio s current asset allocation and just how much of our savings we want exposed to a stock market that certainly seems closer to a top, than it is to a bottom. And, so we acted by re-balancing our sample portfolio. At present the portfolio holds 14.15% or $17, as a cash balance. Over the next month or so, our plan will be to look for additional fixed income investments (bonds, Guaranteed Investment Certificates (GICs), and Preferred Shares) to buy and add to the current portfolio.