Rationalizing my Portfolio

I wrote recently that I have parted ways with my Financial Adviser.  This has prompted me to reassess my portfolio.  As long ago as May 2012 I saw that my portfolio was not performing as well as a simple portfolio of indexed ETFs, which I refer to as the TI Index.  Since then I have persevered with investing in individual stocks, but the overall performance has been marginal: my portfolio was beating the TSX by 3%, but lagging the TI Index by 7% (see chart below).

Screen Shot 2013-02-21 at 12.24.53 PM

So the logical conclusion is to actually adopt the TI Index, or something like it.  The TI Index is:

  • 30% weighting in SPY: An S&P 500 ETF, denominated in US$
  • 25% weighting in XBB.TO: A broad bond fund
  • 35% weighting in XIU.TO: A TSX ETF
  • 10% weighting in PHY-U.TO: A gold trust

I propose something similar, but more diverse:

  • 20% weighting in Canadian equity ETF
  • 20% weighting in US equity ETF
  • 20% weighting in Global equity ETF
  • 25% weighting in bonds
  • 5% weighting in gold
  • 10% in speculative investments

I have included an allocation of 10% for speculation.  I have discussed my approach to speculation before: I am comfortable with a controlled amount of speculation.  This will be used to buy a broad range of equities that are either:

  • Small Cap (e.g., smaller Canadian firms such as StanTec or WiLan);
  • Special Situations (e.g., troubled stocks such as BP or SNC-Lavalin); or
  • High Growth (hot stocks such as Whole Foods or Lululemon).

Implementing this portfolio will require a lot of buying and selling, which I will attempt to conclude before the end of the month.  Happily one side effect of parting with my Financial Adviser is that my investments are now with TD Waterhouse’s Direct Investing services, which charges only $10 per trade; rather than TD Waterhouse Institutional Services, which charged $25 or $29 per trade.


Parting Ways with my Financial Advisor

I have been with my Financial Advisor for ten years.  Over this period he has provided some good advice on uncommon tasks, such as setting up trusts.  However, my level of knowledge about picking stocks, bonds and ETFs has grown over the years and our relationship had become primarily one of order taking.  On a couple of occasions these orders had been incorrectly executed (see BMO and Canadian Oil Sands trades), which is not acceptable.  It is difficult to justify paying 1% of my total portfolio value every year for such advice so I have decided to self-manage.  It was a difficult decision, but a necessary one.

Lowering risk on Canadian Banks

Bank of Montreal (BMO.TO) has had a very good run lately.  I purchased the stock on 4th September 2012 at $57; it closed today at $64.53 (up 13.2% in less than five months).  There have been rumblings about the health of Canadian banks and today Moddy’s donwgraded six Canadian banks.  It’s time to take some profits so I asked my Financial Adviser to sell 25% of my position.

  • Sell BMO.TO @ $64.50

There was a problem though.  My Financial Adviser sold 100% of my position!  This has happened before.

What we have here is a failure to communicate

I wrote recently about my failure to stick to my own Investment Process by failing to take profits on Canadian Oil Sands (COS.TO) when the price rose.  Well, I had an opportunity to redress this failure when the price rose again yesterday. I had most recently bought COS at $18.25.  I was able to sell yesterday at $20.27 (an 11% increase).

  • SELL COS @ $20.27

There was another problem though.  I instructed my Financial Adviser to sell around 30% of my holdings (my strategy is to trade around a core position, the core being the 70% that I did not plan to sell).  My Financial Adviser sold the entire position (oops!).  I take some responsibility for the communication breakdown because I did not emphasize the fact that I wanted to sell only a portion of my holdings.  However, I did communicate the number of shares to be sold in an e-mail and again in a follow-up conversation.  Mistakes happen, but not the same mistake twice.  We will not repeat this.

So, should I undo the error right away and jump back into COS?  Maybe not.  Before I assume that I need to rebuild my core position I need to do a little fundamental analysis to ensure this is the best energy stock for me.  Perhaps this error provides an opportunity.  Plus, I was always a little leery of the former income trusts, like COS and Enerplus (ERF.TO).  Maybe I should look at Husky (HSE.TO) or Suncor (SU.TO).


Over the weekend I took a look at all the major Canadian oil companies and Canadian Oil Sands is still the best value in terms of IRR and dividend yield.  I felt that the stock was likely to take a dip after last week’s run up so I asked my Financial Adviser to place a buy order at $19.70.  The price did indeed fall on Monday and I was able to buy back my core position for $0.57 less than I sold it for.  A profit (or, more accurately, an avoided loss) of almost 3%!

  • BUY COS.TO @ $19.70

For added luck, the stock rose again after my trade was executed, closing at $20.57, for a further profit of over 4%.  If we had never sold the core position we would have made only 1.5% today.

It Was the Best of Years, It Was the Worst of Years

I have now been documenting my investing decisions and results for 12 months.  It’s time for a little analysis.  So, how did I do?

Overall my investments are down 7.6% in the past 12 months.  On the face of it this is bad.  However, it’s be an awful financial year and the best way to assess my performance against a comparative index.

One comparative index is the TSX (^GSPTSX), which is down 16.6%.  So I beat the TSX by 9%.  But this is not a fair comparison for two reasons: I have not included the dividends from the TSX stocks in my comparison, which are probably around 3%; and the TSX contains only one asset class (stocks), so it is not a reasonable comparison.

Another comparative index is my TI Index, which I established for the purposes of measurement and comparison.  The TI Index is down only 5.4%. It outperformed my portfolio by 2.2% and the TSX by 11.2%!

One more point for comparison is a five star rated mutual fund or ETF, such as the iShares Balanced Income Fund (CBD.TO).  It is down 2.2% for the year but it also paid a 3.2% dividend, for a total return of 1%.  This is better than my portfolio by 8.6% and better than the TSX by 17.6%!

This begs the question, why not just invest in a balanced ETF?  I don’t have a very good answer for this – I suspect that I enjoy active investing.  But is this enjoyment worth losing 8.6% of my portfolio every year?


Raising Cash – Sell in May and Go Away

In the past two years the market has performed well in the first three months of the year, and poorly in the summer. This is referred to as sell in May and go away. I discussed this in May 2011, but did not act upon it. In the first 3 months of 2012 we have seen the TSX rise by 3.8% and the DOW by 7.6%. These are heathy gains.

In both 2010 and 2011 the market turned down in mid to late April. I want to reduce my exposure now by selling stocks and raising cash. So, which stocks should I sell?

I began my assessment with two basic principles (based upon my investment policy):

  • Fundamentals: I assessed earnings and earning growth (based upon analyst estimates for 2012-2014), dividend yield and coverage, PE Ratio, PEG Ratio and the Gordon Return.
  • Diversification: I don’t want to hold too many stocks in one sector, e.g. Finance (Banking and Insurance), Energy (Oil and Pipeline), Telco, etc.


Assessment of Energy Stocks:

  • Enerplus looks good. Dividend yield is strong at 9.6% (with coverage of 141%). HOLD
  • Canadian Oil Sands looks OK, but earnings growth is quite low (less than 6%) and the dividend is smaller than Enerplus’ dividend. HOLD
  • TransCanada has marginal earnings growth of around 7%, a high PE Ratio of 18.2, and a high PEG Ratio of 2.6. It looks overpriced. SELL

Assessment of Financial Stocks:

  • PowerCorp has great growth of around 12%, a decent dividend of 4.4% and a PEG under 0.9. It looks good. HOLD
  • Sun Life has low earnings growth of 5%, and a PEG of 1.8. Power is better in every measure. SELL
  • Royal Bank has a low dividend (under 4%, but with excellent coverage over 200% – needs to pay out more), marginal growth around 7%, and a high PEG of 1.6. SELL

Assessment of Telcos:

  • Telus has decent growth of over 9% and the other fundamentals are good (PEG is a bit high). HOLD
  • BCE has low growth of under 4% and a PEG of 3.3, which is highest in the portfolio. SELL

Other Stocks:

  • Shaw is another low growth (5%) and high PEG (2.38) stock, like BCE. It will lose revenue as people switch from cable TV to internet TV (e.g., Netflix, AppleTV, other internet TV services) but should compensate with its cable-based high-speed internet services and telephone. HOLD
  • TransAlta is the only stock with a dividend coverage of under 100% (it’s 95%) but it has decent earnings growth of 9%. Price is down recently, making it good value at this point. HOLD
  • Apple is scary due to high price increase, but fundamentals are good: 14% growth, PEG under 1, and a dividend announced. HOLD but watch for price to fall back into long-term channel.

Other assets:

  • Gold is around 5.7% of the portfolio. This is fine. HOLD

After discussion with my financial advisor I decided to sell TransCanada Pipeline, Royal Bank, Sun Life and BCE.

  • Sell SLF.TO @ $23.78
  • Sell RY.TO @ $58.13
  • Sell BCE.TO @ $40.00
  • Sell TRP.TO @ $43.00

Note: Three of these four sell orders were processed on 29th March. The TRP order did not process until 2nd April (it was a limit order). So, TRP appears in the March month-end holdings.

I also decided to increase my holdings of TransAlta. The business is very stable and the dividend yield is over 6%, making this a better place to park my cash than in cash. This purchase also happened after the month end.

  • Buy TA.TO @ $18.45

The net result of these trades is that my asset allocation will be:

  • 25% cash
  • 30% bonds
  • 6% gold
  • 39% stocks


Writing one month later, on 27th April 2012, this trade has seen mixed results. Since selling on 29th March the TSX (^GSPTSE) has gone down 1.5%, so my call was good.

But the stocks I sold are up 0.2% on average, so my call was bad?  Let’s wait to see how things go over the summer before we make a final judgement.

Ticker Sell price Current price Change
TRP.TO $43 $43.19 0.44%
SLF.TO $23.78 $24.36 2.44%
BCE.TO $40 $39.93 -0.18%
RY.TO $58.13 $57.03 -1.89%
Average 0.20%

I also bought more TransAlta (TA.TO) stock, which is down 12% during the month. This was a bad call!  Very candidly, I did not want to buy more TransAlta but was persuaded to do so by my financial adviser.  I need to listen to my intuition more, and push back.


Writing today, 28th May, the decision to raise cash is looking better and better.  North American markets continue lower on European Debt worries.  The stocks I sold are now down an average of 6.34%, led by financials.

Ticker Sell price Current price Change
TRP.TO $43 42.01 -2.30%
SLF.TO $23.78 21.15 -11.06%
BCE.TO $40 40.5 1.25%
RY.TO $58.13 50.43 -13.25%
Average -6.34%


Writing today, 10th July, this decision is still looking good.  The stocks are still down an average of 2.22% and I think there could be more trouble ahead (August was horrible last year).

Ticker Sell price Current price Change
TRP.TO $43 43.34 0.79%
SLF.TO $23.78 22.14 -6.90%
BCE.TO $40 42.64 6.60%
RY.TO $58.13 52.69 -9.36%

Going for Growth (or is it speculation?)

It’s RRSP time again. I picked up Telus (T.TO) and BCE (BCE.TO) last month and now I have a little more cash to contribute before the deadline.

My Beating the TSX portfolio is now well rounded out after the recent Telus and BCE purchases, but I am not comfortable with Bank of Montreal (BMO.TO). After speaking with my financial adviser I have decided to swap it out for Royal Bank (RY.TO).

  • SELL BMO.TO @ $58.10
  • BUY RY.TO @ $53.41

So, what to do with the new cash? I have for a long time wanted to hold a more speculative or growth-oriented stock. Apple (AAPL) is the darling of the markets and might be over-bought, but fundamental analysis shows that its value is as good if not better than conservative names like IBM.

There are two upcoming catalysts that could move the stock a lot higher: 1) new products such as the iPad3, the iPhone5 and a new generation of the Apple TV product; and 2) a possible dividend or an acquisition that would put Apple’s $100B in cash to work. To be clear, this stock is does not conform to my investment policy, which requires that all holdings pay a dividend. Given its fundamentals, Apple is not a speculative stock. However, given it’s high growth rate in the past few years we must wonder if it offers good capital protection and we must confess that it is more speculative than our other holdings. Our mentor Benjamin Graham had this to say about speculation:

“If you want to try your luck at it, put aside a portion – the smaller the better – of you capital in a separate fund for this purpose.” – Benjamin Graham

So, with Benjamin’s cautious blessing, we proceed.

  • BUY AAPL @ US$521.05

Apple now makes up 4.5% of my portfolio, which breaks down like this:

  • Beating the TSX Stocks 47.9% (ten high-dividend Canadian stocks)
  • Bonds Fund 28.5%
  • US Equities Fund 12.6%
  • Gold 6.0%
  • Speculative Stock 4.5%
  • Cash 0.4%

This looks like a good and balanced portfolio.


One month after these trades they both look good. Royal Bank has advanced over 8% in a month, while BMO has advanced only 1%: a 7% advantage in only a month.


Apple closed today, 14th March 2012, at US$589.58: an advance of 13% in a month.  Nice!  This level of improvement calls for caution as analysts feel that Apple’s stock is advancing parabolically.