Overview
- Portfolio Update
- Market Update
- Company News
- Market Outlook
Portfolio and Market Performance
Year-to-Date Performance as of the close on February 28, 2023
- S&P/TSX Composite Index: 4.3%
- S&P 500 Index: 3.4%
- NASDAQ: 9.4%
- Conservative Equity Portfolio: 8.8%
On a longer-term basis, which is how equity investments are usually measured, the Conservative Equity Portfolio has returned 7.4% over three years, 8.5% over five years, and 11.3% since inception (October 2015).
The Diversified Income Portfolio, our balanced portfolio used for many of our clients’ registered accounts, returned 3.3% year to date and returned 7.9% over three years, 8.4% over five years, and 9% since inception (July 2017).
Year to date, our fixed income is performing well, with the PIMCO Monthly Income Fund returning 1.3% and Fidelity returning 1.8%.
Your returns will vary depending on the amount of fixed income you hold, cash flows in and out, and management fees.
Portfolio Update
During the month, we trimmed a few holdings to add three new names – iA Financial Corporation Inc. (TSE: IAG), Home Depot Inc. (NYSE: HD), and Canadian National Railway (TSE: CNR) – to the main portfolio.
IAG
IAG is a Quebec-based financial service company focusing on insurance and group healthcare plans. We’ve discovered through our ownership of Intact Financial Corporation (TSE: IFC) and UnitedHealth Group Inc. (NYSE: UNH) that these businesses are very profitable and stable.
Looking under the hood, sales have increased yearly for the last 10 years. Share count has declined over the previous six years while the dividend increased. Their balance sheet is attractive, with the lowest percentage of debt among all Canadian insurance companies, and S&P Global Ratings recently upgraded them to an “A” credit rating.
The company is growing EPS at roughly 8-10% per year, pays a 3% dividend yield, and we are buying the shares at nine times earnings (a P/E of 9).
We believe that the company should command a higher multiple based on the quality of its business. Simply valuing the company at 12 times next year’s earnings would bring a share price of $120 – not crazy, by our measure.
An interesting side note: IAG’s largest shareholder is Caisse de dépôt et placement du Québec, owning just over 10% of their shares. Also, shortly after we took on a position, there was a large buyer in the market. And because the shares are thinly traded, we had a big move on the stock. This was not something we could predict so we would say we got lucky. The same would have been true to the downside if there was a large seller of the shares over a short amount of time.
Home Depot
We’ve considered buying Home Depot many times over the years, but we always felt the shares were too expensive. The last time was in August 2020, at the beginning of the pandemic, when we realized that people home during lockdowns would want to start renovation projects. When we looked up the stock, it had gone from $240 per share before the pandemic to $150 in April but then bounced up to $280 in August. Apparently, we were not the only investors recognizing the opportunity – and we were too late. The stock was then trading at 26 times earnings, which was on the high end of its normal range (it generally trades between 22 and 24 times earnings). So, we passed on Home Depot, as there were plenty of good opportunities to invest in early in the pandemic.
The shares hit a high of $415 at the end of 2021 and have since fallen 30% and now trade at 18 times this year’s earnings, so we initiated a small position of 1% in our Conservative Equity Portfolio. Home Depot is a great business long-term. This year, however, sales should be flat, which in our opinion is a good buying opportunity.
CN Rail
We previously owned CNR for many years, then sold it to purchase Canadian Pacific Railway Ltd. (“CP”) when they bought Kansas City Southern. We felt that CP was better positioned for growth long term. Looking back, it was a mistake to sell CNR. CNR is a great company that has delivered solid results for us over the years. Why can’t we own both? We own multiple Canadian banks, after all. Rails are an oligopoly in Canada, so we chose to own both of them.
CNR is a terrific business. Over the next 10 years, they will probably double their earnings per share (“EPS”), double their dividend and buy back a large amount of stock. In terms of return, we expect 7% from EPS growth, 2% from dividends, and 2% from buybacks, so 10-12% per year earned for our portfolio.
Canadian Banks
Canadian banks announced earnings recently, most of which were as expected, with minor highlights. Capital markets seemed to be performing better than expected, while some institutions like the Royal Bank of Canada (TSE: RY) set aside more capital for loan loss provisions in case there were bad loans on the horizon. Overall bank earnings were largely in line with our expectations, and we actually like to see the cautious increase in loan loss provisions in case there is a rainy day.
Company News
Developments in AI
We are always trying to look forward with our investments, not backward. Many of you are aware we have been investing in energy infrastructure and electrification for years. However, another area has been semiconductors and artificial intelligence, which has had some interesting developments in the last few months.
There have been a lot of news stories about Chat GPT, an online AI platform created by OpenAI, whose active users count reached over 100 million in January. OpenAI was originally founded in 2015 as a non-profit by several tech firms who said they would freely collaborate and make patents and research available to the public – sort of an “open architecture” approach to further AI research.
In 2019, they converted to a for-profit model to help attract top-level talent after finding it’s not easy to get brilliant AI researchers to turn down lucrative contracts from the private sector. But, even with these changes, core team members publicly said they turned down three times as much money from other firms to join in on what they thought was the most leading work being done.
Today they have the most advanced chat-related AI systems publicly available for use and testing. It’s incredible.
Microsoft has recently been more involved in the company, investing about $10 billion and integrating the technology into their Bing search engine.
So why is this such a big deal? Imagine if you had a question and you had an assistant that could scour thousands of websites, read people’s comments and opinions on the topic, form an educated opinion, summarize it along with opposing views, and do it in a few seconds at no cost and with no financial interest in the answer.
With tax time coming up, imagine you didn’t even have to look at your tax slips. Instead, the AI would look through every tax slip and document you dropped in a selected folder on your computer, put all the information together for you to be sent to your accountant, tell you if you were missing any slips, and find out where they were coming from, and when they would arrive. It would also compare all the information versus the information you provided to your accountant over the last five years, and also read every email communication you had related to taxes over the same period and take it all into account. Then it could prepare a package for your accountant that you would merely review, along with a summary of anything that could be missing or discrepancies you should be aware of.
The applications are endless, but AI’s ability to simplify our lives and declutter our brains could shape the next decade.
People may not realize we own many of the biggest players in this space. It just so happens their current cash flow and profits are coming from related fields.
Not only do we invest in companies that are leaders in this space – Microsoft Corp. (NASDAQ: MSFT), Alphabet Inc. (aka Google) (NASDAQ: GOOGL), Amazon.com, Inc. (NASDAQ: AMZN), Apple Inc. (NASDAQ: AAPL), and Tesla Inc. (NASDAQ: TSLA) – but we also invest in what we like to call the picks and shovels of this industry – NVIDIA Corp. (NASDAQ: NVDA), Taiwan Semiconductor Mfg. Co. Ltd. (TPE: 2330), and Advanced Micro Devices, Inc. (NASDAQ: AMD). Microsoft and Google are the two largest companies on the software side, while Amazon and Apple apply a large amount of AI to their operations and functions. Tesla does too, both on the development side through their DOJO supercomputer and on the real-world application side with their self-driving function. NVIDIA is probably the go-to in chip designers for AI. TSMC manufactures those chips. AMD is also in the AI chip space. There is a lot of money to be made in this space over the next 10 years, and we believe we’ve identified some of the winners.
An interesting fact: Last year we noted that NVIDIA had a small hit to their global sales numbers due to the U.S. government banning the export of certain chips to China. The banned chips were the A100 and H100 chip platforms, which today are the most in-demand AI development chips in the world.
Berkshire Hathaway Annual Shareholder Letter
Berkshire Hathaway’s annual letter was released recently, and it was a good one. If you haven’t already done so, we highly recommend you read it, available on their website. Their letters are always full of useful information.
In particular, this year, Buffett writes that over his nearly 60-year career, he’s made many mistakes. Of the companies he currently owns, several are marginal in terms of economics, some are very good, and just a few have turned out to be exceptional. Furthermore, his truly bad moves were tempered by good luck. He says he’s made about a dozen truly great investment decisions over the last 60 years, roughly one every five years.
Buffett also plays the long game and never tries to time the market.
This sounded familiar to us. Most of our outperformance over the last decade can be boiled down to a few good decisions, with the remainder just being so-so. In many cases, there was a factor of luck, such as our decision to get out of the oil and gas sector eight years ago and take a more significant stake in growing sectors that had more certain long-term prospects, taking positions in Microsoft and Apple when they were very unpopular, and not selling some of our best companies when everyone else did.
Buffett also characterized their extensive portfolio of businesses as a few extraordinary companies with very excellent financial characteristics and a large group of companies that are marginal.
In our portfolio of companies, too, there are a few extraordinary companies with very great financial characteristics and a large group of companies that are marginal. Granted, the marginal businesses tend to provide a very safe, stable return on investment and consistent cash flow.
Buffett spoke out about share repurchases and said anyone calling them harmful was either economically illiterate or a silver-tongued demagogue. We are huge believers in share repurchases in our portfolio, as this actively increases our share in the businesses we own, which happened last year to a large degree.
Market Outlook
We believe the bear market is over and ended last year.
In bear markets, selloffs go down fast, then recover by half. Then they go down again and recover only half. When companies report bad earnings, the stock gets crushed and does not recover.
Today, we see the opposite: markets go up a lot, then correct by half. Then go up again and correct by half. If a company reports terrible numbers, the stock opens down but finishes up on the day. Negative news comes out, and the market shrugs it off.
This year, our prediction is that markets will be volatile, but in the end, they will go up despite what the mainstream media is predicting the economy to do. Of course, those who are not invested will hate this rally. We saw this in 2009 after the financial crisis – times were not peachy, yet markets went up despite all the negative news.
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Thanks, everyone, and as always, please reach out to us if we can be of service.
Simon & Michael
Simon Hale, CIM®, CSWP, FCSI®
Senior Wealth Advisor,
Portfolio Manager
Wellington-Altus Private Wealth
Michael Hale, CIM®
Senior Wealth Advisor,
Portfolio Manager
Wellington-Altus Private Wealth
Hale Investment Group
1250 René-Lévesque Blvd. West, Suite 4200
Montreal, QC H3B 4W8
Tel: 514 819-0045
Returns for the Conservative Equity Portfolio, Diversified Income Portfolio and Focused Total Return Portfolio represent the returns of model portfolios only and do not represent the returns of any client. Individual account performance may differ materially from the representative performance history, due to factors including but not limited to an account’s size, the length of time the strategy has been held, the timing and amount of deposits and withdrawals, the timing and amount of dividends and other income, trade execution timing and pricing, foreign exchange rates, and fees and other costs. This is not an official statement from Wellington-Altus Private Wealth (“WAPW”). WAPW cannot verify the accuracy of these performance numbers. Please refer to your official WAPW statement for your specific performance numbers.
