The first decade of the 21st century saw Canadian equity markets significantly outperform the US and Global markets. Some of this outperformance was due to the appreciation of the Canadian dollar versus the US dollar and the Euro but the Canadian market delivered outstanding returns over the decade while the US market actually declined over this period. Some of the reasons for this outperformance include the bull market for commodities like oil, gold and basic materials. The rapid expansion of the Chinese economy was great for our commodity stocks. Our financial system also was found to be a lot more conservative and stable than other countries when the global financial crisis hit in 2008. If you would have looked in the rear view mirror in the year 2000 and looked at historical performance, the last place that you would have thought about investing was in Canada as our market had significantly underperformed US and global markets for the previous 3, 5 and 10 year time frames.
When we look in the rear view mirror at the performance of different asset classes today, the top performing assets were bonds and Canadian equities over the past decade. We think that going forward there are many more opportunities outside of Canada both on the fixed income side and in the equity markets. The equity markets in Canada consist of a 75% concentration in financials, materials and energy. Our markets have very little exposure to consumer discretion, healthcare and technology sectors which are much better represented in global portfolios. There are many ways to invest globally and here are a couple of my top ideas.
IA Clarington Sarbit US Equity fund
Larry Sarbit has been offering investors a uniquely active solution for accessing the US markets for the past 25 years. He targets a group of 15 to 25 businesses that are currently out of favour and have some other important characteristics. The business should have significant barriers to entry, have a product or service that will stay in favour, generate significant cash flow and purchased at a price that offers a substantial margin of safety.
Capital International Emerging Markets Total Opportunities
Seeks to take advantage of the dynamism in emerging markets by investing in all types of securities with the objective of seeking long term capital growth and preservation of capital with lower volatility of returns than emerging markets equities. The fund will typically be 50% invested in both emerging markets fixed income and emerging market equities. Capital International is one of the largest investment firms in the world with clients benefitting from their extensive research capabilities.
Pimco Monthly Income Fund
Pimco is the largest fixed income manager in the world and Canadian investors can now take advantage of their expertise in this 100% fixed income fund. Pimco uses it’s extensive research to shop the world for fixed income opportunities no matter where they exist. The portfolio is hedged back to the Canadian dollar so there is no foreign currency exposure. The fund pays out a monthly distribution that is approximately 4.0% annualized.
Canadian Dividend Investments
In today’s current low interest environment, many investors are looking at dividend portfolios to generate income and grow their portfolios. Dividend investing also has the added advantage of being substantially more tax efficient than interest income. There are basically 2 ways of receiving dividend income in Canada. Common shares can often offer investors a dividend which is typically paid quarterly. Investors can benefit from dividend increases and capital appreciation of the shares but can suffer if dividends are reduced or prices decline. Companies that routinely grow their dividends have outperformed the general markets buy a substantial amount over time so it pays to buy companies that have a history of increasing their dividends. Preferred shares have a fixed rate of dividends and have preference over common shares in the capital structure of the company. Preferred shares tend to trade like fixed income as they usually cannot get a dividend increase or participate in the success of a company. A few Canadian dividend investments that I like are
CCL Equity Income and Growth
Managed by Connor, Clark and Lunn this portfolio is comprised of dividend paying common shares. The portfolio looks substantially different that the TSX index with much less commodity exposure ( they tend not to be great dividend payers). The portfolio currently yields 4.2% and their selection focus is very much on companies that have historically grown the dividend. They like to buy companies that have attractive sustainable dividends with growth potential.
BMO Guardian Monthly Dividend
This fund invests approximately 75% in preferred shares and 25% in dividend paying common shares. It is a very conservative fund and I commonly refer to it as my “little old lady fund”. It pays out a monthly distribution that is taxed 100% as dividend income that equals aprox. 4.5% at today’s prices. This is a great fund for conservative investors looking for some income or a place to make reasonable returns in this very low interest rate environment.
BMO S&P TSX Ladder Preferred Share Index ETF
The portfolio is structured holding rate-reset preferred shares in a staggered manner, equally weighted by calendar years – similar to a bond ladder. Each year a portion of the portfolio will be reset to reflect the current trend in interest rates. A laddered exposure spreads the issues evenly across different terms, eliminating the risk of having a large portion of a portfolio called and a disproportionate amount to reinvest. This ETF offers a tax efficient distribution and a very low management fee.
As always, consult your investment or insurance advisor prior to investing or buying insurance. This column is provided for information only and is not a solicitation to buy or sell securities.
Vice President and Wealth Advisor
Professional Financial Planner
BMO Nesbitt Burns Saskatoon
Jim has been an advisor for 15years and specializes in working with high net worth families in the areas of wealth management and estate planning.