My very unaudited portfolio performance in the fourth quarter of 2017, the three months ended December 31, 2017 is approximately +5.6%. The year-to-date performance for the year ended December 31, 2017 is approximately +31.2%.
At December 31, 2017 (change from Q3-2017):
24% common equities (+4%)
35% preferred share equities (+9%)
29% corporate debt (-1%)
13% cash and cash equivalents (-12%)
Percentages may not add to 100% due to rounding.
USD exposure: 46% (-2%)
Portfolio is valued in CAD (CAD/USD 0.7944);
Other values derived per account statements.
In terms of portfolio movement, this quarter was mostly inactive other than adding some cash to a preferred share position that is akin to “parking cash” in something reasonably stable while I wait for better market opportunities.
Specific line items in the portfolio include Genworth MI (TSX: MIC), gaining an appreciable amount during the quarter, and one otherwise undisclosed equity position that I wish I had taken more of a stake considering the excessive cash situation. Although I do not write about it very often, the position in Gran Colombia Gold debt (TSX: GCM.DB.V) has also increased during the quarter, and I expect after the issuance of the year-end financial statements that management will be conducting another debt repurchase at par value, resulting in additional cash that I will find difficult to re-deploy. My initial position was taken at roughly 60 cents.
Gran Colombia is a play on gold prices, but as the debt itself is secured by all assets of the company and has rights to 75% of excess cash flow, I suspect it will be safe. 2018 should be a very eventful year for the equity of the company as their junior debt (TSX: GCM.DB.U) will be maturing on August 11, 2018 – 81% of it will convert to shares and this will result in the issuance of 18.76 million shares (in addition to the 20.9 million currently outstanding). As the company expects $16 million in excess cash flow for 2017, this would be 36 cents per share on an adjusted basis and one can see the equity as relatively cheap.
All debentures in Gran Colombia Gold are currently convertible to 512.82 shares per USD$1000 par value (they are all denominated in US currency, while the shares are in CDN currency).
There is really little else to write about. The year-end portfolio is about as boring as watching paint dry.
My performance for the year can be attributed to the KCG transaction proceeding through, and also some non-trivial increases in the value of Genworth MI (if you can remember, mid-year it got hit by the Home Capital Group fallout). I will note this is the function of two decisions (both MIC and KCG) I made earlier in time (many, many years ago) to purchase. The real decision in the subsequent years was to remain patient by doing nothing.
In 2017, I only bought one stock for the year. This stock is up over 30% since I bought it. Everything else has been minor portfolio adjustments – the risk I have been taking is minimal.
The last time I had a quarterly loss was in September 2015, making this report the 9th quarter in a row with gains. Normally quarterly performance should be punctuated by losses here and there. This lack of see-sawedness should normally be an indicator of fraudulent reporting, but I assure you it is not.
I observe the S&P 500 and TSX are up about 20% for the year and my portfolio is up even further. I always remember the phrase “a rising tide lifts all boats”, but my job is to ensure that when the tide goes down, my boat is still at the same elevated position. My 2009 performance was only made possible by not being involved with the tsunami of 2008.
Predictions in 2018
These will come in a later post.
I know I sound like a broken record when saying this, but presently I do not believe my 2018 portfolio performance will match historical levels (my 12 year hurdle rate of 18% is quite high given what I see out there). Too much of the portfolio is fixed income with limited opportunities for capital appreciation. The only reason why it is in fixed income is because I have nowhere else to put the cash.
My weighted average maturity for my debt portfolio is 2.5 years. A large holding is Teekay unsecured debt (January 2020 – just over 2 years to maturity) and I will not be surprised to see it get called as they now have a re-financing window of opportunity. I am content to hold onto this until they decide to do so as the 8.5% coupon is better than I can receive elsewhere.
I’ve been continually scanning the Canadian debenture market and find entities that are simply too risky to invest – there is an overabundance of optimism that companies that have suspicious balance sheets will find a source of reinvestment. This might be true today, but credit can vanish as quickly as you can say “Cryptocurrency”.
The biggest way to lose money is to force it to work – while I can find some reasonable safe opportunities to earn 4% relatively “risk-free”, it comes at a cost of liquidity and the ability to pounce when the market reaches some sort of crisis. It has been a long time since we have seen a true crisis affecting prices in the marketplace – the inverse can be argued for, we have never seen a period of stability like this.
There are storm clouds on the horizon.
The passage of the 2017 US Tax Cuts was one of President Donald Trump’s signature campaign promises and the lowering of the US Corporate tax rate from 35% to 21% will have significant implications to US domestic investment. Coupled with an increase in short-term interest rates, it should have the effect of increasing the demand for US dollars. My outlook on the Canadian dollar is moderately bearish.
Rising interest rates will also mean that there will be less dollars chasing asset prices, which should put a lid on the overall market. When the US Federal Reserve will continue to raise interest rates, this will also give room for other central banks to do the same – Canada will likely follow.
Rising interest rates generally does not mean good news for gold, but gold has been surprisingly non-volatile in the past few years and seems to be an increasingly non-correlated hedge against all of this financial distortion we are seeing. I believe the decoupling of gold to traditional metrics is rational.
I continue to remain bearish on the Canadian oil and gas market. Canadian governments continue to remain hostile to oil and gas investment and differentials for mined product continue to be at record highs (as pipeline and train capacity issues continue to plague deliveries). It is very difficult for capital to flow into an industry where it faces arbitrary hurdles everywhere. This oil and gas money will continue to flow down south, all capital choices remaining equal. This will also involve the continuation of the exportation of expertise from Canada to the USA. As such, I do not see the equity side of Canadian oil and gas to receive too much of a positive reception in 2018. The tide may change in 2019 and onwards (world demand for crude oil still continues to rise), however, but we will see then.
The rampant speculation of cryptocurrencies will undoubtedly resolve in 2018. Companies have been trying to raise money like mad and strike while the iron is hot. Eventually this craze will die down and investors will start to demand a return on investment. Likewise, the full economic reality of marijuana production in Canada will probably prove to be a bust once provincial governments implement legislation to govern the sale of it – I think one of the surprises will be projections of profitability being far less than expected for all players involved except for the government – confusing sales and profitability is a huge difference here.
Where to I see avenues for extraordinary returns?
Ironically, cash might be one of them.
I wish I had more to write, but with a market that is flush with speculative gains, I am finding it very difficult to find genuine opportunities. It’ll probably be easier to take the pickings from the wreckage than contribute to the mania.
Portfolio - Q4-2017 - Historical PerformancePerformance and TSX Composite is measured in CAD$; S&P 500 is measured in US$. Total returns indices are with dividends reinvested at time of receipt.
|Year||Divestor Portfolio||S&P 500 (Price Return)||S&P 500 |
|TSX Comp. (Price Return)||TSX Comp.
|12 Years (CAGR):||+18.3%||+6.6%||+8.8%||+3.1%||+6.0%|