INVESTMENT RESEARCH OB YIELD PORTFOLIO QUARTERLY SUMMARY Cory O Krainetz April 11, 2017 The Odlum Brown Yield Portfolio was established on September 15, 2002 with a hypothetical investment of $500,000. The Portfolio provides a basis to measure the quality of our advice. It also facilitates an understanding of how we believe individual security recommendations can be used in the context of an income-oriented client portfolio. Trades are made using the closing price on the day a change is announced. These are gross figures before fees. Past performance is not indicative of future performance. Portfolio Objectives The primary objective of the OB Yield Portfolio is to provide a basket of equity investments for income-oriented investors. The Portfolio is built with a total return approach, but with an emphasis on income generation and preservation of capital. The performance is measured against the S&P/TSX Total Return Composite Index. While it is a poor benchmark for an income-focused portfolio due to its relatively low yield and heavy weighting towards cyclical resource stocks, a better alternative is not available in Canada. The Portfolio currently has an annualized yield of 3.8%, which compares favourably to a yield of 2.8% for the Composite Index. In addition, the Portfolio is designed to be more conservative than the benchmark. Holdings primarily consist of highquality, dividend-paying stocks. Results The OB Yield Portfolio gained 4.6% in the first quarter, which was higher than the 2.7% increase for the S&P/TSX Total Return Composite Index. The Portfolio benefitted as conservative dividend-paying stocks once again became more popular than cyclical resource stocks. Since inception, the Portfolio has outperformed the broader Canadian stock market. The compound annual return for the Portfolio is 12.7%, which is meaningfully higher than the Composite Index at 9.0%. 3 Month 1 Year 3 Year 5 Year 7 Year 10 Year Since Inception 2 Odlum Brown Yield Portfolio 4.6% 16.5% 10.8% 11.7% 11.6% 8.1% 12.7% S&P/TSX Total Return Composite Index 2.7% 19.2% 6.0% 7.7% 6.8% 4.9% 9.0% Difference 1.9% -2.8% 4.7% 4.0% 4.8% 3.2% 3.6% 1 Annualized except for the 3 month period 2 The Odlum Brown Yield Portfolio was incepted September 15, 2002 Compound Annual Returns 1 (for the period ended March 15, 2017) Suite 1100 250 Howe Street Vancouver, BC V6C 3S9 Main 604 669 1600 Toll Free 1 888 886 3586 VANCOUVER KELOWNA VICTORIA CHILLIWACK COURTENAY Member-Canadian Investor Protection Fund ODLUMBROWN.COM
A hallmark of the OB Yield Portfolio has been its relative outperformance during tough times. Since the Portfolio s inception in 2002, there have been 40 quarters with a positive market return and 18 quarters with a negative market return. The Portfolio s performance has been roughly in line with the Composite Index during up quarters, with an average increase of 6.2%, compared to 6.4% for the benchmark. However, during down quarters, the Portfolio fell by an average of only 3.4%, compared to an average decline of 6.1% for the Composite Index. We believe that losing less during inevitable market corrections is paramount to compounding wealth over the long term. The lower level of volatility should also appeal to more conservative investors. The OB Yield Portfolio has produced a total return of 463% since its inception, while the S&P/TSX Total Return Composite Index has generated a total return of 250% over the same time period. The Portfolio has proven to be a consistent performer for more than a decade and the value has never dipped below that of the benchmark. Odlum Brown Limited Page 2 of 6
Trading Activity We made two trades during the first quarter. We established a 3.9% holding in Canadian REIT and sold our entire position in Trinidad Drilling. We believe the trades have upgraded the quality of the Portfolio, while improving the yield. A summary is provided in the table below. Summary of Trades for January 6, 2017 Action Symbol Dividend Yield Initial Position Change Ending Position Initial Portfolio Weighting Ending Portfolio Weighting Share Price Trade Value in CAD Sell TDG 0 15,000 (15,000) 0 1.90% 0% $3.53 $52,950 Buy REF.UN 3.9% 0 2,000 2,000 0.0% 3.5% $47.29 ($94,580) Change in Cash Balance ($41,630) Initial Cash Weighting Ending Cash Weighting 2.0% 0.5% Investment Strategy The Canadian 10-year Government bond yield moved higher after hitting a record low of less than 1% in September 2016, but rates have moderated in recent months. The combination of volatile interest rates and a surprise Donald Trump victory in the U.S. election have contributed to wild swings in investor sentiment. Financials and cyclical resource stocks performed very well at the end of last year, but utilities, telecom, and real estate have been more popular in recent months. Regardless of the ebb and flow of equity markets, our strategy has remained consistent. We prefer to own high-quality, dividend-paying stocks that can grow, even in a challenging economic environment. Moreover, we think it is better to accept a lower dividend yield if the investment offers less downside risk and/or there is potential for regular dividend increases. The Government of Canada 10-Year Bond yield is currently 1.6%, which is still only a fraction of the 5.6% average over the last 30 years. We believe that interest rates could increase further, but will likely remain below average for an extended period given a tepid inflation outlook and excessive government debt burdens around the world. Moreover, a greater-thanexpected increase in interest rates would likely mean that economic conditions are improving and earnings growth is better than expected. Therefore, we think the stocks that we favour will continue to provide a satisfactory return in a wide range of scenarios. Odlum Brown Limited Page 3 of 6
The OB Yield Portfolio is well diversified and is skewed towards less cyclical areas of the market. The Portfolio s combined weighting in the Consumer Staples, Telecom, Utilities, and Healthcare sectors is 42.3%. In contrast, the Composite Index has just an 11.9% combined weighting. Conversely, we have maintained an underweight position in the more cyclical areas of the market. Our combined weighting in Energy and Materials is 17.6%, which compares to a weight of 33.5% for the Composite Index. The chart below highlights the large disparity between sector weights in the Portfolio and the benchmark. Odlum Brown Limited Page 4 of 6
ODLUM BROWN YIELD PORTFOLIO S&P/TSX 15-Mar-17 Market Portfolio Projected Target Total Return Estimated Weight Price Shares Value Weight Yield Price Estimate Income FINANCIALS 35.0% 22.1% Toronto-Dominion Bank (TD) $65.95 2,400 $158,268 5.6% 3.6% $73.00 14.3% $5,760 Bank of Montreal (BMO) $101.24 1,500 $151,860 5.4% 3.5% $106.00 8.2% $5,280 Royal Bank of Canada (RY) $96.66 1,450 $140,157 5.0% 3.6% $100.00 7.1% $5,046 Intact Financial (IFC) $94.04 900 $84,636 3.0% 2.7% $100.00 9.1% $2,304 *Oaktree Capital (OAK) $44.90 1,450 $87,566 3.1% 5.6% $60.00 39.2% $4,915 REAL ESTATE 3.0% 16.7% *Weyerhaeuser (WY) $33.88 2,500 $113,922 4.0% 3.7% $42.00 27.6% $4,170 Boardwalk REIT (BEI.UN) $45.90 2,000 $91,800 3.3% 4.9% N/A -95.1% $4,500 Canadian Real Estate Investment Trust (REF.UN) $48.57 2,000 $97,140 3.4% 3.8% $58.00 23.2% $3,660 Granite REIT (GRT.UN) $45.58 2,100 $95,718 3.4% 5.7% $50.00 15.4% $5,468 Allied Properties REIT (AP.UN) $36.25 2,000 $72,500 2.6% 4.2% $43.00 22.8% $3,060 MATERIALS 12.2% 3.6% PotashCorp (POT) $22.99 4,400 $101,156 3.6% 2.3% $35.00 54.6% $2,353 ENERGY 21.3% 14.0% *Chevron Corp. (CVX) $108.88 700 $102,511 3.6% 4.0% $145.00 37.1% $4,067 Gibson Energy (GEI) $19.84 5,000 $99,200 3.5% 6.7% $21.00 12.5% $6,600 Peyto Exploration and Development (PEY) $27.95 2,850 $79,658 2.8% 4.7% $45.00 65.7% $3,762 *Royal Dutch Shell (RDS.B) $55.25 900 $66,880 2.4% 6.8% $90.00 69.7% $4,551 Cenovus Energy (CVE) $16.68 2,750 $45,870 1.6% 1.2% $27.00 63.1% $550 INDUSTRIALS 8.9% 0.0% CONSUMER DISCRETIONARY 5.1% 0.0% INFO TECH 2.8% 0.0% CONSUMER STAPLES 3.7% 11.8% *Kraft Heinz (KHC) $91.84 1,000 $123,525 4.4% 2.6% $100.00 11.5% $3,228 *Procter & Gamble (PG) $91.40 1,000 $122,933 4.4% 2.9% $97.00 9.1% $3,602 *Unilever PLC - ADR (UL) $49.66 1,300 $86,831 3.1% 2.8% $51.00 5.5% $2,405 TELECOM SERVICES 3.0% 10.6% Rogers Communications (RCI.B) $55.77 3,300 $184,041 6.5% 3.4% $60.00 11.0% $6,336 BCE (BCE) $57.57 2,000 $115,140 4.1% 5.0% $66.00 19.6% $5,740 UTILITIES 4.7% 16.2% Fortis (FTS) $42.75 3,750 $160,313 5.7% 3.7% $46.00 11.3% $6,000 Hydro One (H) $23.50 4,600 $108,100 3.8% 3.6% $26.00 14.2% $3,864 Canadian Utilities (CU) $38.83 2,550 $99,017 3.5% 3.7% $42.50 13.1% $3,646 Brookfield Infrastructure Partners L.P. (BIP.UN) $48.66 1,800 $87,588 3.1% 4.7% $48.00 3.3% $4,103 HEALTH CARE 0.5% 3.7% *Johnson & Johnson (JNJ) $128.96 600 $104,071 3.7% 2.5% $135.00 7.2% $2,582 SUB TOTAL $2,780,399 98.7% SHORT TERM INVESTMENTS $36,634 1.3% 0.5% $176 PORTFOLIO TOTAL 100% $2,817,034 100% 3.8% $107,729 * Prices in U.S. dollars NMF = Not Meaningful UR = Under Review MP = Market Performer U.S. EXCHANGE (USD/CAD): $0.74 Foreign Content: 28.7%
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