Service, Advice and Value for Your Dollar
The last few months have seen volatility remain in full effect. This has been enough to make any investor queasy. The lessons from my February blog post still stand (own large, high quality companies with low debt levels that are built to last a downturn when it comes).
This month I wanted to focus on what I have been talking to folks about the most – what to look for and expect from your Investment Advisor. I have found most people are looking for a combination of high-quality advice, premium service and value for their dollar. I made a very deliberate decision just over 7 months ago to move to RBC Dominion Securities so that I could work with a smaller, core group of clients in order to deliver on this combination.
From an advice perspective, I help clients build a custom-tailored portfolio, whether that involves using individual stocks and bonds, mutual funds, exchange-traded funds or managed accounts. I take the time to discover what is really important to each client in order to find approach to fit them.
On the service side I am committed to offering clients the opportunity to talk on a monthly basis and to make myself available to meet outside my office at a time and place that works for them (including evenings and weekends).
From a value for dollar perspective, I work closely with clients to find the most cost-effective approach to deliver solid, risk-adjusted returns coupled with access to our robust wealth management team, staffed with Certified Financial Planners, Tax Specialists and Lawyers to help build retirement and estate plans.
If you are not convinced you are getting the right combination of advice, service and value please feel free to call or email me directly at 416.231.6528 or jeff.ker@rbc.com.
Credit and Lending
I continue to be impressed by the resources available at RBC Dominion Securities. This month I wanted to highlight the topic of credit and lending. Through our partners at RBC we access to teams of specialized lenders in all areas, such as mortgages, personal lines of credit and business lending. RBC has experts in lending to small business owners, franchisees, and medical, dental and veterinary professionals building out their practices. In some cases RBC has mobile lenders that can meet you at home, the office or anywhere in between. I can also tap into our large branch network to find someone close to your home or office.
One area that has been popular lately is cross-border lending for clients looking to purchase a second home or condo in the US. Another is client’s children looking to buy their first home that need a pre-approval and a great rate.
I want to encourage you to reach out to me directly if you have any questions about credit and lending and how RBC might be able to help.
Investment Spotlight
BMO Tactical Global Equity ETF Fund
This month I wanted to introduce the concept of Tactical mutual funds and ETFs and introduce a fund I have been recommending to all of my clients for consideration. The type of tactical funds I am describing here have the ability to move between 100% equity and 100% cash allocations depending on the Portfolio Managers view of the state of the equity markets.
These approaches are meant to be a complement to a more traditional “buy-and-hold” approach and as such are great portfolio diversifiers.
What I like the most about these approaches is they are rules-based and take the emotion out of the investment decision. Any Tactical investment will have a process for determining two things:
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Whether or not to be invested in the market; and,
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When invested, what stocks and/or ETFs to buy.
Having been an adviser during two significant bear markets – 2000 - 2002 and 2008 – I like that these types of investments seek to answer the two biggest questions people had after these events happened:
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Why didn’t anyone see this coming?; and,
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Why didn’t anyone do something about it?
The answer to the first question is sell-offs are always a surprise. If they weren’t, then investors would already know the news and “price it in” in an orderly fashion. That’s why a lot of times when there is a sell-off (like in 2000 and 2001) it is felt the most by a certain high flying sector that was (in retrospect) overvalued. At that time it was technology companies. Up until the surprise news hits, people are buying high hoping to sell higher.
What we do about this is to focus on owning high quality companies at reasonable prices (see my February blog post – Volatility Returns!). We might not make as much on the way up, but we have something to “hang our hat on” when the market sells off. We own companies that are large, liquid and can survive the inevitable downturn. Unfortunately there will be companies that will not be so lucky. We don’t want to chase after those high fliers. We are happy to own good quality companies at reasonable prices.
The question of “why didn’t somebody do something about it?” is more nuanced. In retrospect, there was nothing you really needed to do about. Looking at the Markets over the last 10 years, even if you bought in on absolutely the worst day (the S&P500 peaked October 9, 2007), as long you held on then you would have rebounded fully by March 13, 2013 and would be up 93.61% now (including dividends). In short, hold on, don’t panic and you will be okay.
While that may be true, not everyone is willing to simply hold on because there are no guarantees the market will come back when it falls. This is where these tactical approaches come in. While they all have different indicators to decide when to “do something about it”, when the trend appears to be going negative they have the ability to reduce risk and move to Cash.
The Fund I have been actively recommending is called the BMO Tactical Global Equity ETF Fund: Sub-advised by SIA Wealth Management (SIAWM), the fund uses a rules-based approach to make an “Equity Action Call”. From their website, they describe the process as follows – “SIAWM uses technical indicators (trends and price movements) to determine the relative strength of equities vs. other asset classes such as commodities, currencies and Cash”. Click here for a link to the SIA website where they discuss their approach.
The bottom line: this fund can be invested up to 100% Equity or 100% Cash and can invest in Canada, the US and/or international equities, bonds, commodities and cash. It all depends on what areas of the market are showing the most strength in relation to others.
For example, the current top 5 holdings in this fund are: BMO China Equity, BMO Nasdaq100 Hedged to CAD, BMO S&P500, iShares Edge Multi-factor USA (CAD Hedged), and BMO MSCI USA High Quality.
This is quite different from the top 5 holdings from April 2017 (the date of the latest fund fact document from the BMO website): BMO US high dividend, iShares US dividend growers, First Asset MSCI USA low risk, BMO US Dividend and iShares Japan fundamental index.
What Worked since the last blog post (February)
Suncor, up 22.46%
Shares of Suncor continued to show strong performance since February.
The great news about Suncor is that it has managed to deliver a consistently solid return despite the troubles that effected many of their more highly leveraged/lower quality peers. In my February blog I compared Suncor to Crescent Point and Vermilion. Suncor has continued the trend of outperformance since then with much less volatility.
Suncor continues to provide a solid example of the type of high quality, low debt company that I am recommending for client accounts in times like these.
What did not Work since the last blog post (February)
3M, down 16.29%
Shares of 3M fell significantly since my last blog post. The company’s shares have been selling off over the last 4 months and sold off even more after the 1st Quarter earnings disappointed.
On a positive note, after the sell-off in early May we raised the shares to an Outperform rating and raised the price target to USD$238.00. The May 3rd report is entitled “Upgrading to Outperform: High Quality at Attractive Relative Valuation”.
From the report:
Our view: We are upgrading 3M from Sector Perform to Outperform as the stock’s four-month swoon has now broached its historical relative P/E support level, implying an attractive entry point for one of the sector’s highest quality of earnings names. 3M’s 1Q18 disappointment looks contained to familiar/shorter-duration pressures in auto, dental, and consumer electronics. Looking ahead, we anticipate a smooth CEO handoff in July.
This is an example of a stock that remains a high conviction recommendation despite recent underperformance. Even though the stock is down, it is not out. If anything changes going forward all of my clients will be advised.