t r u st • v i s i o n • i n ve st m e n t i n t e g r i t y
o d lum b r ow n l i m i t e d
ob report
> Taking Stock and Breaking Free From Bonds
january 2013
inside this issue
Taking Stock and Breaking Free
From Bonds > Page 1
Odlum Brown Model Portfolio
if you are reading this newsletter,
perceptions about the Mayan calendar were
distorted and the world did not end on December
21, 2012. Speaking of misperceptions, one could
have the impression that stocks fared poorly last
year, given the negative media coverage on the
market action. However, stocks performed
reasonably well in 2012. As highlighted in the
table below, most of the world’s major stock
markets produced positive returns, with only
China and Brazil ending the year in the red.
> Page 2
2012
stock market returns 1
The performance of emerging markets was
mixed. Indian stocks rallied 20 per cent in 2012
after falling 34 per cent in 2011, while Chinese
and Brazilian stocks added to their losses.
Investors are starting to learn that faster economic
growth does not always translate into better
stock market performance. In fact, the faster
growing BRIC countries – Brazil, Russia, India
and China – have produced cumulative losses of
12-32 per cent over the last two years. As we
have stressed before, individual security valuations and business fundamentals trump economic
growth as a driver of stock prices.
( including dividends, and in $ cdn terms )
Odlum Brown’s 19th Annual
Germany
Hong Kong
India
France
OB Model Portfolio
Korea
U.K.
U.S. – S&P 500
Russia
Italy
Canada
Japan
China
Brazil
Address > Page 4
Odlum Brown Limited
Suite 1100 – 250 Howe Street
Vancouver BC Canada V6C 3S9
Tel 604 669 1600
Fax 604 681 8310
Toll Free 1 888 886 3586
[email protected]
odlumbrown.com
Kelowna 250 861 5700
Victoria 250 952 7777
Chilliwack 604 858 2455
Courtenay 250 703 0637
Campbell River 250 286 3151
Member-Canadian Investor Protection Fund
1
27%
24%
20%
18%
15%
13%
12%
11%
9%
8%
6%
5%
-2%
-9%
Year-to-date total returns as of December 14, 2012.
The solid performance of European stocks is
probably the biggest surprise, given that Europe
was commonly cited as the biggest risk at the
beginning of the year. German stocks led the
major markets with a total return of 27 per cent
for the year through to December 14, 2012,
measured in Canadian dollar terms. French stocks
were not far behind with a return of 18 per cent.
Even Italian stocks produced a gain of eight
per cent.
Canadians remain apprehensive regarding the
U.S. economy and stock market; yet once again,
U.S. stocks performed relatively well. Despite the
hysteria regarding the U.S. fiscal cliff, the broadly
based S&P 500 Index posted a total return of 11
per cent last year – almost double the six per
cent gain in the Canadian equity benchmark.
Despite decent equity market returns, Canadians
continue to dump equity mutual funds in favour
of bond funds. For the year through to the end of
October, the Investment Funds Institute of Canada
reported net bond fund sales of $16 billion, almost
triple the sales in the period a year earlier. Conversely, investors redeemed close to $12 billion of
equity funds in the first 10 months of 2012.
It’s normal for investors to prefer bonds to stocks
during a recession. But once the economy
regains its footing and equities bounce off the
bottom, investors typically gravitate back to
equities. That has not happened this cycle.
The increased appeal of bonds is understandable,
but not logical. It is human nature to prefer asset
classes with solid performance; bonds have
indeed done well in recent years because interest rates have trended lower. However, at lower
interest rates the risk versus return equation for
bonds becomes increasingly less favourable.
A bond’s total return in any given year is part
current yield and part capital gain or loss. When
interest rates decline, a bond’s current yield is
augmented with a capital gain. Conversely, when
interest rates rise, bond prices fall. If interest
rates increase enough, the capital loss will exceed
the current yield, producing an overall loss.
While we do not know if or when interest rates
will rise, there is a mathematical rationale for
liking bonds less when interest rates are very
low – further capital gains are less likely and the
risk of capital loss is greater. continued on next page
2 / ob re po rt
continued from page 1
> Taking Stock and Breaking Free From Bonds
2012 total return by sector1
(measured in canadian dollars)
Sector
Health Care
25%
15%-
Consumer Staples 21%
10%-
Consumer
Discretionary
20%
18%-
Financials
16%
21%-
Industrials
14%
11%-
Telecom
11%
16%-
Utilities
2%
-2%-
Info Tech
1%
9%-
Energy
-2%
1%-
Materials
-6%
8%-
6%
11%-
Index
1 Based on S&P/TSX Index and S&P 500 Index; as of
December 14, 2012.
The DEX Universe All Bond Index returned 3.4
per cent in 2012. How the Index performs in
2013 will depend on the state of the economy
and the direction of interest rates.
“Muddle-through” has been the term we have
used to describe our expectation for the global
economy in the post-financial-crisis world and we
see no reason to change our tune. There is no
doubt that government austerity will weigh on
economic growth in the year ahead. Nonetheless,
increased monetary stimulus from most of the
world’s central banks is an important offset that
should have a positive influence on economic
conditions. Moreover, we are increasingly optimistic regarding the sustainability of the U.S.
recovery, largely because the important housing
sector is in the early stages of revival.
Individual investors are apprehensive regarding
the economic outlook for 2013, explaining their
general preference for bonds over stocks. From
an equity investor’s perspective, the glum mood
is good news, as pessimism and attractive
valuations go hand-in-hand. When investors
expect the worst, the odds of positive surprises
and good returns are better. The solid performance
of European stocks in 2012 reinforces this point.
Equity valuations are very compelling relative
to bonds, with the spread between the earnings
yield for the S&P 500 Index and the yield on
government bonds near a record extreme.
Moreover, many companies pay dividends that
exceed the yields available from government
bonds and it is reasonable to expect good
businesses to increase dividends over time.
Bonds remain an important and integral
component of well-balanced portfolios; they
will provide important downside protection if
we are wrong about the economic outlook.
Still, bonds have risks that we believe are not
appreciated. If the monetary authorities are
successful reflating the world economy, as we
expect, stocks will prove to be the better choice.
Regardless, at the margin, clients should be
selling bonds and buying stocks. Speak with
your advisor to ensure your asset allocation
strategy matches your risk tolerance and investment objectives.
murray leith, cfa
vice president and director,
investment research
> Odlum Brown Model Portfolio
c o m p o u n d a n n ua l r e t u r n s 1
( including reinvested dividends, as of december 15, 2012)
Odlum Brown Model Portfolio
S&P/TSX Total Return Index
S&P 500 Total Return ($CDN)
1
since
inception2
ytd
1 year
3 year
5 year
10 year
15 year
14.8%
18.5%
10.0%
4.8%
11.3%
12.9%
14.8%
5.8%
10.2%
5.0%
0.8%
9.0%
6.5%
8.6%
11.4%
13.3%
8.1%
0.9%
2.1%
1.9%
6.5%
Except for year-to-date. 2 December 15, 1994.
the odlum brown model portfolio
had a good year in 2012, generating a year-to-date
total return of nearly 15 per cent with two weeks
to go before year-end. Our significant foreign
exposure, principally large U.S. multinational firms,
and a preference for high quality businesses in less
cyclical sectors contributed to the good showing.
Many clients have not embraced foreign stocks
to the same extent as we have in our Model,
but most have done well given their general preference for yield oriented equities over cyclical
resource stocks. The poor performance of stocks
in the large Energy and Materials sectors overshadowed the fact that six of the 10 S&P/TSX
industry sectors produced double-digit total
returns in 2012. Nonetheless, with yield-oriented
Canadian equities starting to get somewhat
pricey, we encourage investors to seek better
value outside the country.
We feel good about the Model’s security holdings,
diversification, and foreign exposure. Despite the
troubles in the world, we still believe that it is
possible for the Model to achieve annual growth
averaging eight to 10 per cent over the long-term.
Our optimism is driven by our expectation that the
economic recovery will continue, albeit at a modest
pace, and by the fact that high quality companies
are priced attractively, especially relative to bonds.
ob re po rt / 3
The Odlum Brown Model
o d lum b r ow n m o d e l p o rt f o l i o
Portfolio was established on
S&P/TSX
Weight
FINANCIALS
30.5%
Brookfield Asset Management Inc. (BAM.A)1
Toronto-Dominion Bank (TD)
JPMorgan Chase & Co. (JPM)*
Onex Corp. (OCX)
The Howard Hughes Corp. (HHC)*
Intact Financial Corp. (IFC)
Manulife Financial Corp. (MFC)
Bank of New York Mellon (BK)*
Berkshire Hathaway Inc. (BRK.B)*2
Bank of Montreal (BMO)
Bank of Nova Scotia (BNS)
MATERIALS
Potash Corporation (POT)
Barrick Gold Corp. (ABX)
Dec. 15/12
Price
$35.25
$81.09
$42.81
$41.70
$73.00
$63.29
$12.95
$24.72
$89.15
$60.12
$56.84
Shares
3,700
1,600
3,000
2,700
1,300
1,200
5,500
2,400
600
750
750
Cost
$89,816
$71,826
$112,931
$49,293
$63,704
$43,380
$104,447
$59,099
$49,545
$43,613
$15,713
Market
Value
ENERGY
26.8%
Royal Dutch Shell PLC ADR (RDS.B)*3
Trinidad Drilling Ltd. (TDG)
Cenovus Energy Inc. (CVE)
Peyto Exploration & Development Corp. (PEY)
TransCanada Corp. (TRP)
Bonavista Energy Corp. (BNP)
Encana Corp. (ECA)
$70.92
$7.10
$32.25
$22.95
$45.51
$14.56
$19.96
2,200
1,900
1,500
12,800
2,800
3,300
1,400
2,800
2,000
Total
Return
Potential
$130,425
$129,744
$126,694
$112,590
$93,617
$75,948
$71,225
$58,526
$52,767
$45,090
$42,630
1.6%
3.8%
2.8%
0.3%
0.0%
2.5%
4.0%
2.1%
0.0%
4.8%
4.0%
$44.00
$92.00
$55.00
$48.00
$110.00
$72.00
$16.00
$32.00
$120.00
$65.00
$57.00
26%
17%
31%
15%
51%
16%
28%
32%
35%
13%
4%
$88,968
$64,448
5.1%
3.0%
2.2%
2.1%
2.3%
$62.00
$45.00
55%
35%
$104,942
$90,880
$90,300
$75,735
$63,714
$40,768
$39,920
16.9%
3.5%
3.0%
3.0%
2.5%
2.1%
1.4%
1.3%
4.8%
2.9%
2.7%
3.1%
3.8%
10.2%
4.0%
$90.00
$12.00
$47.00
$27.00
$47.00
$21.00
$24.00
32%
72%
48%
21%
7%
54%
24%
1.7%
2.5%
3.5%
1.4%
3.1%
2.3%
$95.00
$105.00
$25.00
$105.00
$90.00
$24.00
8%
16%
19%
8%
27%
17%
$90,544
$90,915
$90,034
$100,685
$95,717
$57,090
$21,550
$57,232
$66,178
Target
Price
31.4%
4.4%
4.3%
4.2%
3.8%
3.1%
2.5%
2.4%
2.0%
1.8%
1.5%
1.4%
20.4%
$40.44
$33.92
Portfolio Dividend
Weight
Yield
INDUSTRIALS
5.7%
Canadian National Railway Co. (CNR)
3M Co. (MMM)*
General Electric Co. (GE)*
Canadian Pacific Railway Limited (CP)
United Parcel Service Inc. (UPS)*
Ritchie Bros. Auctioneers Inc. (RBA)
$89.54
$92.28
$21.62
$98.73
$72.85
$21.00
800
650
2,600
500
650
2,000
$42,264
$56,003
$50,404
$35,955
$50,735
$41,880
$71,632
$59,171
$55,452
$49,365
$46,713
$42,000
10.8%
2.4%
2.0%
1.9%
1.7%
1.6%
1.4%
CONSUMER DISCRETIONARY
Starbucks Corp. (SBUX)*
Lowe’s Companies Inc. (LOW)*
General Motors (GM)*
4.3%
$53.36
$34.46
$24.61
1,800
2,500
2,400
$55,540
$58,391
$60,237
$94,750
$84,986
$58,266
8.0%
3.2%
2.8%
1.9%
1.5%
1.8%
0.0%
$67.00
$40.00
$40.00
27%
18%
63%
INFO TECH
Syntel Inc. (SYNT)*
Cisco Systems Inc. (CSCO)*
Apple (AAPL)*
Google (GOOG)*
1.3%
$53.72
$19.86
$509.79
$701.96
1,850
3,400
120
75
$45,902
$53,270
$39,079
$38,148
$98,039
$66,611
$60,349
$51,936
9.3%
3.3%
2.2%
2.0%
1.7%
0.0%
2.8%
2.1%
0.0%
$78.00
$23.00
$850.00
$900.00
45%
19%
69%
28%
CONSUMER STAPLES
Diageo PLC ADR (DEO)*
The Coca-Cola Company (KO)*
Colgate-Palmolive Co. (CL)*
2.8%
$117.85
$37.66
$105.84
700
2,000
550
$48,931
$49,982
$45,094
$81,380
$74,302
$57,425
7.1%
2.7%
2.5%
1.9%
2.9%
2.7%
2.3%
$120.00
$44.00
$118.00
5%
20%
14%
TELECOM SERVICES
BCE Inc. (BCE)
4.9%
$42.62
2,000
$69,350
$85,240
2.8%
2.8%
5.3%
$44.00
9%
UTILITIES
Fortis Inc. (FTS)
1.9%
$33.81
2,500
$58,375
$84,525
2.8%
2.8%
3.7%
$35.00
7%
HEALTH CARE
Stryker Corp. (SYK)*
Novartis AG ADR (NVS)*
1.5%
$55.78
$63.19
1,400
1,050
$75,744
$57,696
$77,037
$65,453
4.8%
2.6%
2.2%
1.9%
3.9%
$65.00
$64.00
18%
5%
$2,406,292 $2,963,563
$27,847
$2,991,410
99.1%
0.9%
100%
SUB TOTAL
SHORT-TERM INVESTMENTS
PORTFOLIO TOTAL
* = Prices in U.S. dollars U.S. Exchange ($US/$CDN) $1.0137 Foreign Weight 49.2%
1
Class A shares elect one-half of the company’s Board of Directors.
share of Class B common stock has the rights of 1/1,500th of a share of Class A common stock except that a Class B share has 1/10,000th of
the voting rights of a Class A share.
3 Class A shares have a Dutch source for tax purposes, and the Class B shares have a UK source.
2A
December 15, 1994 with
a hypothetical investment of
$250,000. The Model provides a
basis with which to measure the
quality of our advice. It also
facilitates an understanding of
how we believe individual
security recommendations
could be used within the context of a client portfolio. Trades
are made using the closing
price on the day a change is
announced. Performance figures
do not include any allowance
for fees. Past performance is
not indicative of future
performance.
4 / ob re po rt
> Odlum Brown’s 19th Annual Address
Debra Hewson, President and Chief Executive Officer, invites you and your guests to Odlum Brown’s 19th Annual Address. Join us as
we commemorate the firm’s 90th anniversary. Presentations will take place throughout the province beginning February 18.
Debra Hewson, President
and Chief Executive Officer
Murray Leith, Vice President and
Director of Investment Research
Hank Cunningham,
Fixed Income Strategist
chilliwack
victoria
west vancouver
Monday, February 18, 2PM
Coast Chilliwack Hotel
Rosedale Room
45920 First Avenue
RSVP by February 12 to Matt at
604-824-3376 or
[email protected]
Tuesday, February 19, 2PM
new location!
Hotel Grand Pacific
Vancouver Island Ballroom
463 Belleville Street
RSVP by February 12 to Monica at
250-952-7775 or [email protected]
Wednesday, February 20, 7PM
Kay Meek Centre
Main Stage Theatre
1700 Mathers Avenue
RSVP by February 13 to Maggie at
604-844-5474 or
[email protected]
courtenay
kelowna
vancouver
Thursday, February 21, 2PM
Crown Isle Resort
Ballroom, 399 Clubhouse Drive
RSVP by February 14 to Richard at
250-703-0637 or
[email protected]
Monday, February 25, 2PM
Coast Capri Hotel
Ballroom, 1171 Harvey Avenue
RSVP by February 18 to Nicole at
250-861-5700 or
[email protected]
Wednesday, February 27, 2PM
Fairmont Waterfront
Waterfront Ballroom, 900 Canada Place Way
RSVP by February 20 to Maggie at
604-844-5474 or
[email protected]
south surrey
Thursday, February 28, 7PM
Morgan Creek Golf Course
3500 Morgan Creek Way
RSVP by February 21 to Maggie at
604-844-5474 or [email protected]
Register online via the
Client Centre at odlumbrown.com
Reserve seating early as space is limited.
please read our odlum brown limited disclaimer & disclosure / it is important
Odlum Brown Limited is an independent, full-service investment firm focused on providing professional investment advice and objective research. We respect your right to be informed of relationships with the issuers or strategies referred to in this report
which might reasonably be expected to indicate potential conflicts of interest with respect to the securities or any investment strategies discussed or recommended in this report. We do not act as a market maker in any securities and do not provide investment banking or advisory services to, or hold significant positions in, the issuers covered by our research. Analysts and their associates may, from time to time, hold securities of issuers discussed or recommended in this report because they personally
have the conviction to follow their own research, but we have implemented internal policies that impose restrictions on when and how an Analyst may buy or sell securities they cover and any such interest will be disclosed in our report in accordance with
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