Sector Reviews

October 2005

The Devil is in the details! While the TSX Composite has ripped a healthy 17.9% total return for the year ending October 31st, the heavy lifting has been done by certain industry sectors, most notably energy, utilities and telecommunications. Meanwhile, the world markets returned 14%, with strong returns in almost every sector.

The energy sector now has had back-to-back big years in Canada. By comparison, among last year’s other big winners (Materials, Financials, Consumer Discretionary and Technology), technology and materials performed poorly. This year’s other big winners (Utilities and Communications) performed dismally last year and the health sector now has had back-to-back poor years.

By international comparison, the Canadian sectors of energy, communications and utilities have soundly outperformed the world, while materials, health and technology have performed very poorly. The returns on Canadian industrials and financials were about at par with the World’s comparable sectors.

The lesson is that sectoral portfolio management needs to acknowledge the strengths and weaknesses of the different global markets. For instance, Canadian investors have to invest outside of our country to gain decent exposure to sectors like technology and health.

March 1, 2005

 
THE SECTOR STORY IN 2004

The broad world market, as measured by the S&P 1200 Index* (in US dollars), was up 9.3% year-to-date to November 30th, with one month remaining in 2004 to bring in the year’s final performance. Below, a review of the Index’s individual sector returns year-to-date shows that the Energy sector was the outstanding winner, followed by Utilities. The Information Technology sector, that led all sectors last year, returned essentially zero since the beginning of 2004. Health Care retreated and, so far, has had a negative return for 2004.

*The S&P Global 1200 is a composite index, comprised of seven regional and country headline indices, many of which are the accepted leaders in their local markets – S&P 500, S&P Europe 350, S&P/TOPIX 150 (Japan), S&P/TSX 60 (Canada), S&P/ASX 50 (Australia), S&P Asia 50 and S&P Latin America 40.

Canada’s TSX Composite Index is up 9.6% year-to-date. Our Energy Sector, with a significant 18.7% weight in the TSX Composite Index, echoed the global sector’s performance with a year-to-date change of 28.0%. Financials were next with a 11.8% gain, and this sector represents a grand 32.5% of the Index. Continuing positive returns for these two sectors in 2005 should bode well for our overall market as these two sectors represent just over half of the TSX Composite Index.

iSHARES FTSE/XINHUA CHINA 25 INDEX FUND

The much anticipated iShares FTS/Xinhua China 25 Index Fund (symbol: FXI) has finally been launched. This ‘exchange-traded fund’ (ETF) holds shares in 25 of the largest and most-liquid Chinese companies and is denominated in US dollars. It is the first mainland China ETF available to us. Its expense ratio is 0.74% as compared to mutual fund vehicles that have significantly higher fees.

Investing in China is appealing not only for its continuing high growth prospects but also for a potential increase in the value of its currency. It is believed that the Chinese currency, the ‘renminbi’, is undervalued by at least 20%. Chinese Premier Wen Jiabao recently announced that the move toward a more flexible exchange rate for the renminbi would be a long-term project. Despite international pressure, China is not going to be rushed into a currency change as it recognizes it needs time to develop its banking and financial systems.

THE CURRENCY STORY IN 2004

From a ‘global’ investing perspective, the volatile currency markets since the beginning of 2004 have led to differing returns depending on which country’s soil you live on. Assuming that you wish to convert to your own country’s currency, the following ‘total returns’ are what you would have obtained if you invested in the major indexes from January 1 to November 30, 2004:

*Bold returns represent the home country

From a Canadian perspective, given that our Canadian dollar has appreciated against the US dollar, Euro and Yen year-to-date, our foreign returns converted back into Canadian dollars were lowered respectively. Foreign investors made ample returns by investing in Canada, augmented by currency gains. Conversely, foreign investors had disappointing results from their US currency holdings.

February 7, 2002

Re: A GLOBAL SECTOR APPROACH TO BUYING STOCKS

Now that you have managed to make an RRSP contribution with your hard-earned after-tax dollars, the next challenging task is to decide which stocks to buy for the planned equity portion of your portfolio.

Picking stocks is both an art and a science. The art part comes with experience and the synthesis of a ton of information that only the human mind can intuitively put together. The science part is more approachable and one can begin with “sector” analysis. You start by dividing the stocks that are currently in your portfolio into the various industrial global sectors. The sectors that you can use are those that form the Global Industry Classification Standard, the GICS. The GICS was developed by Standard & Poor’s and Morgan Stanley Capital International to provide for a consistent set of industry classes that can be used by investors worldwide. You simply total the market value of your stocks in each of the sectors and see what percentage each sector represents of your total equity portfolio. Let’s say you have found that your stocks are weighted as follows: 10% Energy, 5% Materials, 8% Industrials, 0% Consumer Discretionary, 6% Consumer Staples, 0% Health Care, 40% Financials, 4% Information Technology, 15% Telecommunication Services and 12% Utilities. Right away, you can see that you hold no investments in the Consumer Discretionary and Health Care sectors and you should consider investing in these sectors to provide for more diversification in your stock mix. The next step would be to see which companies fall within these sectors, and then narrow your search using company fundamentals such as price/earnings ratios, price/earnings to growth ratios, return on equity and debt to equity ratios.

Various internet sites can provide all of these fundamental ratios and returns. Sometimes individual investors lose sight of just how much they have invested in any one sector. This can be seen in the example portfolio in that the Financial sector is over-weighted (40%), calling for the sale of a portion of financial stocks. The sector approach can provide for a disciplined approach to selling off stocks when a sector becomes over-weighted. For example, a sell signal in the Information Technology sector would have been set off when those technology stocks were at their dizzy highs.

Soon, the Toronto Stock Exchange will be using these various sectors for their newly revised index, allowing investors to compare relative performances of the sectors on a global basis.

Investing is now evolving to a global sector approach.

Sept 13, 2001

Re: Sector analysis for clients

We have been initiating more formalized sector analyses for Trivest clients who have direct holdings of stocks in their portfolios. Our sector groupings are similar to the new TSE groupings and are as follows: resource, utilities, industrial/transportation, consumer, communications, finance, health, and technology. We look at your current diversification by seeing what percentage of your portfolio is in the various sectors, establish a percentage target for each of the sectors, and then analyze what is necessary in terms of buys and sells of individual stock holdings in order to achieve the sector target. This is a disciplined approach and when a sector becomes over-weighted (ie, having too high a percentage in a particular sector), the strategy would highlight the need to sell part of your holdings of stocks in this sector, and redistribute the funds to different sectors…..

“selling high”

Spring 2001

PORTFOLIO DIVERSIFICATION
The key to reducing your portfolio’s level of risk

The term “volatility” refers to investment risk, or how much the value of your investments fluctuates up and down over time. Through sufficient portfolio diversification, you can reduce the amount of investment risk and avoid wide swings in your portfolio’s value. So, how do you achieve sufficient diversification? Well, most investors are aware of reducing risk by holding different “asset classes” – fixed income (including bonds, mortgages, preferred shares and fixed income mutual funds), and equities (common shares and equity mutual funds).

The following graph charts the 15 year trend lines from 1986-2000 for three kinds of portfolios. The top line represents a 100% equity portfolio diversified with 60% Canadian equity and 40% international equity. The bottom line represents a 100% fixed income portfolio, invested in short-term bonds. The middle line represents a balanced portfolio with 50% invested in short-term bonds and 50% in a diversified equity portfolio. You will see the significant upward and downward trends of the two fully-weighted portfolios. You will also see the steadiness (reduced volatility) of the balanced portfolio, trending only approx 1% over the fifteen years, while still yielding double digit returns.

SECTOR DIVERSIFICATION
However, portfolio risk can be reduced not only by investing in different asset classes but also through investing in the different industrial sectors. Currently, the Toronto Stock Exchange has 14 industrial sectors. It has been recognized that these sector groupings do not reflect the changes in the structure of Canadian businesses. For example, technology companies are grouped in with utilities. So, the TSE is going to revise its industrial sector groupings and the new groupings will be: energy, materials, industrials, consumer discretionary, consumer staples, health care, financials, information technology, telecommunications services and utilities. This will also allow investors to compare the performance of any given Canadian sector with its counterpart in another area of the world, as world markets are moving to “global industry classification”. In fact, more global investors are now allocating their equity portfolios by sector rather than by geography.
Exchange traded funds” (ETFs) are similar to mutual funds but trade like stocks on the American exchanges. There are a number of ETFs that are based on the sector indices and new ETFs are expected to be launched shortly on the Toronto Stock Exchange for the energy, technology, precious metals and financial sectors. The major advantage to ETFs is their relatively low Management Expense Ratios compared with mutual funds. A disadvantage is that ETFs are not actively managed, in other words, individual stocks cannot be added or deleted from the mix in an attempt to outperform the index. Remember: an ETF will not outperform the index since it is the index!