PIM: Diversified Income Portfolio
Paul Borisoff - Nov 06, 2018
PIM: Diversified Income Portfolio – November 5th, 2018
The Diversified Income Portfolio* was down 3.0% in October – leaving the portfolio down 1.1% year-to-date – and up 0.3% over the last year. In comparison, our benchmark was down 2.3% in October - leaving it now down 3.3% in 2018 – and down 2.6% over the last twelve-months.
* These returns are reported as a composite, time-weighted, rate-of-return (gross of fees, net of transaction charges) for all accounts in this mandate. Long-Term Returns/Benchmark Numbers will be reported in our Quarterly Updates.
There was virtually no place for investors to hide in the October market massacre. The U.S. stock market (S&P500 Index) dropped 6.9% in the month led by the sell-off of previous market leaders (Amazon, Facebook, Netflix, etc.) which left NASDAQ down 9.2%. International stocks (EAFE Index) were down 8.0%, and the Canadian stock market (S&P/TSX Composite Index) was down 6.5% in October – with all broad sectors falling.
High-dividend stocks, which have already been under pressure for the last year, were not left unscathed in October. The S&P/TSX Composite High-Dividend Total Return Index (40% of our benchmark) was knocked 4.9% lower– leaving it now down 6.9% in 2018 – and down 5.7% over the last twelve months.
not hit as hard as stocks in October, the Canadian bond market (FTSE/TMX Canada Universe Bond Index) also dropped in the month – and was down 0.6%. In 2018 the Canadian Bond Market is now down 1.0% - and in the last twelve months it is down 0.6%.
For a broader perspective on how difficult general market conditions have been JP Morgan’s Head of Cross-Asset Fundamental Strategy recently observed that only on two prior occasions – the 1970’s and the global financial crisis – have so many asset classes had negative returns in a one-year period (reported in Zerohedge on October 27th). Cited as possible explanations for this broad weakness is concern that the global economy and U.S. earnings may have reached peak levels earlier this year and that the Fed is committing its habitual policy of over tightening – with fear that they will send the economy into a recession. Uncertainty around market implications of the U.S. mid-term election on November 6th is also a concern to investors – as is concern that China’s growth is rate slowing – and related concerns over Trump’s ongoing trade battle with the country. Note, JP Morgan’s strategist cited above believes that the market is over reacting though, and that the next possible recession will not be until 2020 – not dissimilar to what Canaccord Genuity’s market strategist Tony Dwyer has been espousing.
Market strategist David Rosenberg, Chief Economist and Strategist at Gluskin Sheff & Associates, was critical of the Bank of Canada’s ‘hawkish’ tone after their last rate hike in October “If there are typos in this missive, it’s because I am still shaking my head” – and makes the case that the Canadian economy is not strong enough to warrant multiple additional rate hikes in the foreseeable future – Globe and Mail, October 24th (attached). In a similar vein market commentator Martin Pelletier’s article “Bank of Canada’s rosy outlook doesn't add up” on October 30th (Financial Post - attached) makes similar arguments and points out opportunities that have developed in Canadian dividend paying companies – many which sold-off 15-30% from their 52-week highs recently.
With most dividend paying “value” stocks having already underperformed for the last few years -- and now recently sent to new one-year or multi-year lows - we are seeing some “extreme” bargains appear in the market. On our end we have made a few changes in the portfolio recently as outlined below – and plan to make a few others over the next few weeks to take advantage of what we think are very good opportunities.
Note, many of our convertible debenture positions also traded lower in recent weeks on the extreme market stress. We expect to see some very strong returns over the next few months though as these positions “snap-back” from what we believe are temporarily depressed levels – as in all other periods since inception (March 4th, 2008). Maturity dates are also approaching.
Recent Portfolio Changes – and Highlights:
We made a few changes in October which increased the portfolio’s cash position to 10.5% at month-end - from 8.3%:
We reduced the portfolio’s position in Parkland Industries from ~4.5% to ~3.0% at $46.14 per share – which locked-in a 72% gain on this portion of the position – and booked losses on our 1.3% position in AltaGas at $21.31 per share (cost base $27.93) and our 0.8% position in the Chemtrade Logistics Income Fund at $14.18 per unit (cost base $18.01) – which we saw limited upside on through the end of 2018 with tax loss selling season. While we were not surprised to see Parkland weaken with the mess in October – closing at $44.21, we were happy to avoid the further destruction on AltaGas which closed the month at $16.55. Chemtrade closed the month at $12.50 – with no new negative developments that we are aware of.
On the “buy” side we increased our position in Chorus Aviation to 3.0% from 2.0% at $7.00 per share (6.9% yield). We believed the company’s share price was driven lower last month on the general market weakness – and not negative corporate developments. The current consensus twelve-month price target is $10.64 per share (Bloomberg) – and this position closed at $6.91.
We also increased our position in Canwel Building Material Group to 2.3% of the portfolio from 1.3% at $5.22 per share (10.7% yield). The current consensus twelve-month price target is $6.96 per share (Bloomberg) – with a month-end close of $4.84.
Finally, we increased our FuelCell Energy (FCEL) Preferred B position to ~3.9% from ~3.5% last month at USD $249 per share (closed the month at $255) in front of what we believe are multiple pending material positive catalysts as outlined recently. Note, on November 1st FCEL announced that they had signed 20-year power purchase agreements for the 22.2 MW of fuel cell projects recently awarded to the company in Connecticut. The Preferred B’s were issued in 2004 and are current on all annual dividend payments of $50 per year (next quarterly dividend expected on November 15th). These preferred shares also have a liquidation preference of $64 million ($1,000 per share) over common shareholders, which can be triggered if an entity acquires 50% or more of the company.
At quarter-end the portfolio’s cash position was sitting at ~10.5% and our convertible debenture exposure was approximately 34.1%. Total Cash and Fixed Income exposure including our four 3rd party specialty fixed income manager positions was ~71.2% at month-end.
We continue to strongly believe that the portfolio’s composition and flexibility offers a substantially improved risk/reward trade-off compared to an “income portfolio” relying only on government bonds and pure stock market exposure to drive returns and income.
If you have any question or concerns, or would like to discuss your portfolio in detail, please do not hesitate to contact me.
Paul J. Borisoff
Senior Vice President
Portfolio Manager, Senior Investment Advisor