Adjusting my BTSX portfolio

Each year in early February the Canadian Moneysaver publishes the Beating the TSX portfolio. I have written about this investing system before and it seems to be successful. 2016 was no different. The BTSX portfolio was up 25.4% versus 21.4% for the TSX. Both performed very well but I’ll take the extra 4% any day.

screen-shot-2017-02-04-at-11-04-13-am

This years portfolio is a little different so it’s time to do a couple of trades. Selling Potash (POT.TO) and Transcanada (TRP.TO) and buying Emera (EMA.TO) and Fortis (FTS.TO).

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Beating the TSX (again)

After a year of lacklustre performance by the TSX I have decided to re-apply the BTSX approach. My stocks for 2016 are:

  • Bank of Nova Scotia
  • BCE Inc.
  • Canadian Imperial Bank of Commerce
  • Enbridge Inc
  • National Bank of Canada
  • Potash Corporation of Saskatchewan Inc
  • Power Financial Corp
  • Shaw Communications Inc
  • TELUS Corporation
  • TransCanada Corporation

The BTSX system underperformed the TSX by 0.9% last year. The return for the BTSX portfolio was -8.5%. XIU returned -7.6% (both losses). Generally BTSX outperforms the TSX handily.

Annual Update

I have been tracking the detailed performance of my portfolio for 44 months now. This gives me almost four full years of data to analyze. Here is the performance of my portfolio.  I have decided not to wait until the 48 months for complete this year’s annual update as I suspect its time to make some changes.

I Mo 3 Mo 1 Year 2 Years 3 Years 44 Mo
Portfolio

-0.82%

1.80%

8.52%

15.94%

18.54%

10.39%

TI Index

0.62%

2.37%

9.45%

15.43%

20.06%

18.01%

DOW

-3.69%

-1.30%

9.34%

23.84%

35.87%

36.56%

TSX

0.28%

0.41%

7.15%

15.67%

17.84%

6.31%

During the past year my portfolio has gained 8.52%. This is better than the TSX, which gained 7.15%.  If we assume however that the average TSX component has a yield of 2.5% then the overall returns for the TSX are over 9.5%.  The DOW gained 9.34% (perhaps 11% with dividends) and the TI Index gained 7.15% (perhaps 9% with dividends).  My portfolio has under performed all of these comparators.

Looking at the 44 month timeframe the portfolio has gained 10.39%.  The TSX has gained 6.61% in the same period (perhaps 15% with 44 months of dividends).  The TI Index and the DOW have done even better.

We are therefore forced to conclude that my investments selections are worse than these comparators at every timeframe.

Accordingly I will move my portfolio from individual stocks to indexes.

Adjusting my portfolio

When I adjusted my investing approach back in May I selected high dividend stocks from the TSX.  It is a sensible policy to reassess and adjust the portfolio from time to time, such as every six months.

After reassessing my portfolio there is one stock that no longer meets my criteria: Loblaws (L.TO).  This is because the stock has advanced, which caused the yield to fall.

Where Loblaw has fallen in rank, Census has risen.

  • Sell Loblaw (L.TO) @ $59.00
  • Buy Census (CVE.TO) @ $27.85

Combining Intelligent Investing with Beating the TSX

As discussed in my recent post, my stocks have failed to outperform the TSX.  I think I can do better.  The basic pricinples of Benjamin Graham are sound, but I have not been able to apply them to build a diversified portfolio.  I want to use those principles – sound dividend and earnings growth – but apply them to build a broader portfolio.

AGU.TO Agrium Inc.
BBD.B Bombardier, Inc.
BCE.TO BCE Inc.
BMO.TO Bank of Montreal
BNS.TO The Bank of Nova Scotia
CM.TO Canadian Imperial Bank of Commerce
CSU.TO Constellation Software Inc.
ENB.TO Enbridge Inc
FTS Fortis Inc
HSE Husky Energy Inc.
L.TO Loblaw Companies Limited
MFC.TO Manulife Financial Corp.
NA National Bank of Canada
POT.TO Potash Corp./Saskatchewan Inc.
POW Power Corporation of Canada
RCI.B Rogers Communications Inc.
RY.TO Royal Bank of Canada
SJR.B Shaw Communications Inc
SLF.TO Sun Life Financial Inc.
SU.TO Suncor Energy Inc.
T.TO TELUS Corporation
TCK.B Teck Resources Ltd
TD.TO Toronto-Dominion Bank
TRP.TO TransCanada Corporation

The basic method is:

  • Start with the TSX 60
  • Remove former trusts
  • Remove any stock with dividend coverage below 125%
  • Take the top 23 stocks
  • I then deselected two of the banks to prevent over-concentration

Getting out of Apple and Intel, Adding Canadian Dividend Fund

As part of my broader portfolio rationalization it’s time to sell my individual stocks and move to index funds.  One of my larger individual stock holdings is Apple (AAPL).  It’s a little heartbreaking to sell anything at a loss, but it’s better to take a loss than a bigger loss.

Apple is currently trading at $445, which is 37% down from recent highs.  It’s very tempting to imagine that Apple will revert to its high if I hold the stock, but that is a mirage.  The basic question I must ask myself is this:

“Would I buy Apple today at $445?”

Or, put another way:

“Today, would I rather have $445 cash, or one share of Apple?”

The answer is that I would rather have the cash than the stock.  So, it’s time to sell.  Ditto for Intel (INTC).

So, how do I deploy these funds?  These stocks are in the account that I plan to use for my  TSX holdings, which will be 20% of my portfolio.  Rather than buying more of the iShares S&P/TSX 60 Index Fund (XIU.TO), I have decided to buy the iShares Dow Jones Canada Select Dividend Index (XDV.TO).  XDV is a three-star rated ETF with high liquidity that  holds thirty* high dividend Canadian equities (similar to the Beating the TSX portfolio).

  • Sell AAPL @ $445
  • Sell INTC @ $20.25
  • BUY XDV.TO @ $22.33

*The thirty stocks in XDV are:

Ticker Name %age
CM CANADIAN IMPERIAL BANK OF COMMERCE 6.76
BNE BONTERRA ENERGY CORP. 6.19
NA NATIONAL BANK OF CANADA 5.85
TD TORONTO-DOMINION BANK/THE 5.60
BMO BANK OF MONTREAL 5.28
T TELUS CORP. 4.65
RY ROYAL BANK OF CANADA 4.55
BNS BANK OF NOVA SCOTIA 4.25
BCE BCE INC 4.19
IGM IGM FINANCIAL INC. 4.10
AFN AG GROWTH INTERNATIONAL INC. 3.70
LB LAURENTIAN BANK OF CANADA 3.46
TRP TRANSCANADA CORPORATION 3.20
RCI.B ROGERS COMMUNICATIONS INC. CL B 2.99
MBT MANITOBA TELECOM SERVICES INC. 2.89
PWF POWER FINANCIAL CORP. 2.67
SLF SUN LIFE FINANCIAL INC 2.64
COS CANADIAN OIL SANDS LTD. 2.58
RUS RUSSEL METALS INC. 2.55
EMA EMERA INC. 2.52
GWO GREAT-WEST LIFECO INC. 2.47
TA TRANSALTA CORPORATION 2.25
HSE HUSKY ENERGY INC. 2.22
POW POWER CORP. OF CANADA 2.22
AGF.B A.G.F. MANAGEMENT LTD. CL B 2.16
FTS FORTIS INC. (CANADA) 2.16
SJR.B SHAW COMMUNICATIONS INC. CL B 1.87
CJR.B CORUS ENTERTAINMENT INC. CL B 1.77
RET.A REITMANS (CANADA) LTD. CL A 1.34
PGF PENGROWTH ENERGY CORP 0.75

POSTMORTEM

The trades described above are part of a broad portfolio rationalization that includes many trades.  I have performed a single postmortem to cover all of these trades.  The postmortem is here.

Beating the TSX in 2013

Back in March 2012 I performed an analysis of the Beating the TSX portfolio. I thought it might be time to take another look.  Here is the methodology:

  • Begin with the TSX60 stocks.
  • Remove any stocks with a dividend of less than 3%. This minimizes the number of stocks I need to analyze.
  • Remove any stocks that might have an unsustainable dividend. For this I remove any stock with a payout ratio above 1.2 (equivalent to a coverage of less than 83%). I also remove any former trusts.
  • Finally, select the ten stocks with the highest dividends.

The analysis looks like this:

Screen Shot 2013-02-07 at 7.52.59 PM

The resulting list is as follows.

  1. BCE Inc.
  2. Bank of Montreal
  3. Canadian Imperial Bank Of Commerce
  4. Power Corporation of Canada
  5. National Bank of Canada
  6. Shaw Communications Inc.
  7. Bank of Nova Scotia (The)
  8. Husky Energy Inc.
  9. Royal Bank of Canada
  10. TELUS Corporation

Interestingly, four of the companies on the earlier list have fallen off as they no longer have a sustainable payout ratio.  These decliners are:

  • Manulife Financial Corporation
  • Sun Life Financial Inc.
  • TransAlta Corporation
  • Thomson Reuters Corporation