July 2015 SWM Letter

Dear friends .... we're learning that Canada is likely 6 months into a mild recession, but signs point to better growth in this second half of 2015.  Our energy industry lost over 50% of its value in the past year.  As oil dropped by half, many stocks dropped 75% - 80%.  Metals are down too, with producers at a fraction of what they were worth a year ago.  And while energy and metals dropped, banking too has suffered!   Reason for this is simple:  as banks loan money out to industry, any pain in the economy soon becomes the banks’ pain.  So bank stocks are 15% or 20% lower than where they’d be in a stronger economy.  With that news, plus Greece and China in the mix, you’d wouldn’t be blamed for burying your statements under a cushion when they come in the mail.  But don’t do that!  You’ll find your accounts are far stronger than the news has been suggesting …and overall we continue focusing on core mandates that reduce risk while sustaining values as much as possible.

In the past few days I’ve had a great opportunity to review our clients’ results.   What we’re seeing in the 2nd quarter is that values have fallen about 2%.   Year-to-date however we’ve had six months that netted near 2% growth even though wider markets were flat or negative.  And if you compare from a year ago, our values have GAINED 3% to 5% even though Canada’s market fell 4%.  We can confirm this for each client personally but the overall view is that our results have outpaced the TSX by 6% to 8% in the past year.  That doesn’t guarantee what tomorrow will bring, but you know we continue to aim at lower risk while investing for strong income and growth.

What has been a major success?

Global Infrastructure has been a major success over the past year.  These values have grown near 16% since a year ago.  The fact this area has paused in 2015 means it can also resume growing …and to see more on this theme visit infrastructure.

Global Real Estate is also a key area of success over the past year.  But there are two ways of looking at this.  Some real estate funds own stock market investments which have risen near 15% over the year, so this is definitely in the winners’ circle.  We also have two real estate funds which own specific properties, conservatively managed and with single-digit results over this period.   Looking ahead, the aggressive fund could pause, while the conservative fund tends to plod onwards and upwards.  If both types of fund can average 7-9% growth over longer periods, then you likely feel safe in either of these approaches.  Point is, global real estate income provides growth and income, at significantly less risk than what anyone is seeing in the news.  (See real estate)

Global Fixed Income has been modestly successful.   With interest rates this low, what can we expect!  And if one could just guess whether rates will next rise ¼ point or fall ¼ point!    Rising rates require one strategy.  Falling rates need the opposite strategy.  Guessing is a fool’s game.  We have to be positioned to reduce risk whatever happens (see link) and ensure some growth along the way ... especially for clients drawing monthly income.   Even seeing 2% to 4% in fixed-income investments over the past year would be a success.  10-year bonds today are < 2%.  Even 30-year bonds pay <3%.  Europeans by the way are living with negative rates – paying to invest and get back less than they invested.  This is a rare and peculiar feature of today’s fixed-income markets.

What about Dividends?

Here’s where we see a total divergence between Canadian versus Global Dividends.  Global dividend returns arise from all sectors of the economy, and especially areas that are poorly represented in Canada.  These have provided exceptional value over the past year, even 7% to 16%.

However Canadian dividends are primarily from banking, energy, and materials, with industrials and other sectors in smaller measure.  Energy producers often pay among the highest dividends in Canada, but with oil down from $110/barrel to $52/barrel you know the earnings are down drastically and dividends have been cut.   So unlike global dividends, Canadian funds have fallen +/- 5%.

We weren’t really using a crystal ball, increasing our access to global dividends over recent years.  But we knew it made sense – and it has proven well – to expand beyond Canada’s three main sectors to a more diversified and global approach.   A crystal ball would have said, go 100% global.  But with common sense and strategic insight, we’ve benefited by increasing our global dividend mandate over the past number of years.

Will Canadian Dividends recover? In a picture, we know they will recover strongly as always.  Canada is a cyclical economy.  Oil is global.  Metals reflect consumption in China and elsewhere.  When higher growth resumes, these commodities will put Canada again nearer the crest of the wave.  All our dividend managers realize we’re counting on a strong, steady, and increasing flow of dividend income to support our future.  Here in a picture, both for Global and Canadian Dividends, is what you want to see.  Our focus is to the left among dividend payers and growers.  This graph says all we really need to know about the difference between dividend payers/growers compared to those who cut or omit dividends.

Pic _ Dividend Growers RBC_GAM

This was true also after the tech-meltdown of March-2000 to March-2003.  The only year our dividend approach failed was 2002, down 1-to-5%.  The recovery that arose afterwards was strong and speedy, richly rewarding as we owned this key mandate in dividends.

Views going forward  . . .

I’d love to say we have an absolutely clear view of the future.  That would assume a crystal ball, which of course is missing.  The U.S. Federal Reserve and the International Monetary Fund are in constant and daily discussions about whether to raise or drop interest rates, whether growth is falling or turning upward, and how to measure these things.  Each day’s news is opposite to the day before.

Greece at < 2% of the European economy is about 0.3% of the world economy yet has punched far beyond its weight in worrying the news media (partly due to possible contagion to Portugal, Spain, Italy, Ireland).  For a clear and brief overview of Greece listen to Michael King of Ivy Business School:   What the IMF Already Knows about Greece.

China as the world’s #2 economy stirs the news with stocks losing 35% in just a few weeks (memories of 2007)…but don’t mistake their stock markets for the Chinese economy, which isn’t guided so much by earnings as by political command.

Bloomberg news suggests there's nowhere to hide for safety as equity and bond markets crumble simultaneously (link).  That could describe a given week or two, but is too short-sighted as we realize the world and major economies will be rising and churning out profits as we move ahead in 2015-2016.

Calmer heads will prevail.  IMF now says the global economy will grow 3.3% this year instead of 3.5% (and 3.8% in 2016).  IMF puts Canadian growth this year at 1.5% (despite shrinking in the first-half) and US growth at 2.5%.

Forecasts over the next twelve months widely agree on resilient and confident returns.  All of our management teams concur.  It cannot be guaranteed but I feel the consensus is well deserved at this time.  Recent projections for the next year suggest the US market could rise 7%, Canada and Europe 12%, Emerging and Frontier Markets 15%.  Currencies and interest-rates may help or hinder along the way but our core mandates (LIM) will continue to guide and safeguard our journey along the way.

Grateful to be serving your financial security for LIFE!


Brian Weatherdon, MA. CFP. CLU. CPCA. CRC. MDRT.  905-637-3500 x 223
627 Guelph Line, Burlington, Ontario. L7R 3M7.   1-877-937-3500 FREE x 223
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** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. For information on near 10,000 investment funds and other financial structures please feel free to contact me directly. Returns shown are from Morningstar and other major financial news media. Research is sourced from leading sources including GLC, RBC, CIBC, Franklin Templeton, Mackenzie, and a wide range of highly reputed firms. Opinions reflected in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to serve alongside your legal and accounting advisors with whom we can best protect your financial security and advance your goals. We are grateful always to receive your comments and questions.


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