Overview
- Portfolio and Market Performance
- Portfolio Update
- Company News
- Market Outlook
Portfolio and Market Performance (in Canadian dollars)
Year-to-Date Performance as at the close on Apr. 28, 2023
- S&P/TSX Total Return: 7.6%
- S&P 500 Total Return: 9.2%
- NASDAQ: 16.8%
- Conservative Equity Portfolio: 13.5%
On a longer-term basis, which is how equity investments are usually measured, the Conservative Equity Portfolio has returned 9.4% over three years, 9.8% over five years, and 11.7% since inception (October 2015).
The Diversified Income Portfolio, which is our balanced portfolio used for many of our clients’ registered accounts, returned 7.8% year to date, 11.3% over three years, 9.7% over five years, and 9.5% since inception (July 2017).
The Focused Total Return Portfolio, which is our more concentrated equity strategy, returned 19.7% year to date, 12.8% over three years, and 16.4% since inception (April 2020).
Your own returns will vary depending on the amount of fixed income you hold, cash flows in and out, and management fees.
Portfolio Update
We trimmed 1% off Metro Inc. (TSE: MRU), bringing the stock’s weighting from 4.5% to 3.5% in the portfolio. With the proceeds, we increased our position in iA Financial Corporation Inc. (TSE: IAG).
We were trimming Metro around its all-time high stock price. The shares may be under pressure this year if the market continues to rally. We also think this was a great trade last year as inflation was driving up food prices.
We increased our position in IAG to 2% from 1%. We like their group benefits and health insurance business as well as the valuation and dividend. The shares have a 3% dividend yield and trade for only 9X earnings. The company is projected to grow earnings by 10% per year and we believe the shares should trade at a higher multiple. A multiple of 12-14X earnings is fairer, in our opinion, meaning the stock is 30-40% undervalued.
We also sold our entire position in Taiwan Semiconductor Manufacturing Co. Ltd. (TPE: 2330). We’ve owned TSMC for almost five years and did very well with our investment. We sold half of our position in 2021 after the shares more than doubled. Now, with all the political uncertainty in the world and tensions in the South China Sea, we decided to eliminate the position due to geopolitical risks. To be clear, we do not believe that the U.S. will allow China to invade Taiwan. However, after watching CNBC’s Becky Quick recently interview Warren Buffett, when asked about why he sold his position in TSMC, he said the geopolitical risk was something he did not like.
We decided to follow his decision. There are many great investment opportunities in our portfolio, but owning TSMC was making many people nervous.
With the proceeds, we added to our medical device ETF, iShares U.S. Medical Devices ETF (NYSEARCA: IHI).
Our thesis on medical devices is still intact. Ten years ago, we identified a trend that as more people grow wealthy in developing and emerging markets, they tend to live longer and spend more and more money on medical procedures and devices.
Last year the ETF was down 20%, but over the last 10 years, it has averaged over 16% per year. It’s very difficult to identify who are going to be the winners in this space, so we are hedging our risk by buying a basket of all the players.
With this trade we are also lowering the overall risk of the portfolio. Though we like the semiconductor space long term, it tends to add to the overall volatility of the portfolio. Medical devices will do the opposite. Note that we still have positions in Advanced Micro Devices, Inc. (NASDAQ: AMD) and NVIDIA Corporation (NASDAQ: NVDA), two of the leaders in chip design.
Company News
Johnson & Johnson
Johnson & Johnson (NYSE: JNJ) IPO’d its consumer products division under the new name Kenvue Inc. (NYSE: KVUE) and shares have started to trade.
JNJ will retain 92% of KVUE’s shares, selling the remaining 8% for $4 billion with the cash going to JNJ’s balance sheet. The held-back 92% of shares will be spun off to us as shareholders later this year.
KVUE’s brands are well known and numerous. A few of its better-known brands include Tylenol, BAND-AID, Listerine, and Neutrogena.
VISA Inc.
Visa Inc. (NYSE: V) is a company we have been watching closely this earnings season. We think it has its finger on the pulse of the retail consumer and is a good indicator of what’s going on in the economy.
Just to give a basic rundown on Visa’s business, for those that are not familiar, Visa does not own credit card debt or credit cards – that is owned by banks and credit card issuers. Visa simply provides the infrastructure for credit cards and charges a fee for every transaction. In doing so, they are not directly exposed to interest rates or consumer debt.
When Visa reported in late April, their numbers were better than expected, with higher revenue and earnings. In the conference call they said they saw a strong and healthy consumer but could see inflation coming down in their numbers.
What was of interest was volumes; volume is a factor of the total number of transactions and the value of those transactions. The number of transactions was strong and growing but the average transaction value declined last month, showing both a delay in bigger ticket purchases but also the price of goods coming down. In the latest quarter, payments volume increased 10% year-over-year, but the average transaction size was down 2% from March 1st to April 21st according to Visa CFO Vasant Prabhu.
On a side note, a significant portion of Visa’s earnings was due to travel. The amount of very profitable foreign transactions where they get to charge for currency conversion had grown significantly more than people had thought. Consumer spending habits have evolved from consumer goods during the pandemic to travel post pandemic, which bodes well for Visa’s business.
Apple Inc.
We started to invest in Apple 12 years ago after reading the book Icon. We finally understood where Steve Jobs was taking the company and were comfortable with their long-term outlook. Funny to say, at the time we thought we were late to the party and wished we had invested five years prior.
In the fourth quarter of 2022, Apple sold over 65 million iPhones globally along with many other products and services. Make no mistake, Apple is no longer a discretionary technology company but a consumer staples business.
No other company that I can think of is as well integrated in our lives as Apple. And their vertical business integration allows them to execute on an incredible level.
Global EV Outlook and Tesla Inc.
Last month, the International Energy Agency published their 2023 Global EV outlook. Great insights, facts and data. We will leave a link below if you are interested in reading the whole report.
Tesla also published their 2022 impact report which is a worthwhile read.
Some takeaways:
In the course of five years, from 2017 to 2022, electric vehicle (EV) sales jumped from around 1 million to more than 10 million. It previously took five years, from 2012 to 2017, for EV sales to grow from 100,000 to 1 million, underscoring the exponential nature of EV sales growth. The growth trajectory has surprised almost all the legacy automobile manufacturers who are struggling to make the transition. By the end of the decade, the global auto industry is going to look a lot different.
There were many developments in the EV space this past week.
- Ford announced EV margins of -102%. They are losing over $50,000 per EV they sell.
- GM cancels production of their Chevy Bolt after losing billions on recalls.
- VW can’t figure out software and fires their entire software team.
- Toyota caught cheating safety tests on four vehicles.
- Lucid having difficulty selling their high-priced vehicles and may go bankrupt in the future.
- Tesla breaks ground at its new Lithium processing facility in Corpus Christi. Largest lithium processing facility in North America.
Tesla’s earnings highlights:
Tesla Inc. (NASDAQ: TSLA) announced their earnings last week and the headline read, Tesla margins down 20%!
Tesla delivered 423,000 cars globally – that’s up 36% from last year. Profit margins were 19%.
Their average selling price was just over US$46,000, and their cost to produce was US$37,000. And those costs are coming down as they ramp up their largest factories in Texas and Berlin.
Tesla Model Y was the top selling car in the United States and Europe and the second top spot in China this quarter. The Model Y is on track to be the top selling car globally this year.
The more cars Tesla produces, the lower the cost to produce, and the lower the cost, the more cars they will sell.
Since 2018 they have reduced the cost to produce an EV by almost 50%, and they have outlined their plan to reduce the cost by another 50%.
First Republic Bank and JPMorgan Chase & Co.
We had another U.S. regional bank go into receivership as regulators closed First Republic Bank (OTCMKTS: FRCB) on May 1, at the same time it was announced that JPMorgan Chase & Co. (NYSE: JPM) was taking over the bank.
It’s a pretty sweet deal for JPMorgan; they pay pretty much nothing, and they take over US$173 billion in interest-paying loans, US$30 billion in securities, and US$92 billion in deposits. What’s more, they entered into a loss sharing agreement where, if you read the fine print on the loans they are taking over, the FDIC will take 80% of any losses incurred and JPMorgan only incur 20% of the downside.
This is a liquidity issue, not a case where the bank is under water. It’s not that loan assets are less than the deposits they owe. It’s interesting to note as well that JPMorgan said they would not be assuming preferred shares or corporate bond debt of First Republic, so they are getting wiped out. Overall, this looks like a very nice deal for JPMorgan.
Also, we think all these banking issues are helping to take liquidity out of the economy without us having to pay for it on our mortgages through higher interest rates, so we see it as a positive.
The U.S. Federal Reserve Board raised rates another quarter point on May 4 as expected and signaled a possible pause as they took out language saying there was an additional raise coming.
Market Outlook
Our market outlook remains positive. We see inflation declining at a steady pace, faster in Canada than in the U.S. We are also positive on markets and the economy as we look forward to future rate cuts by our central banks.
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All the best to you and yours as we enjoy the surprises of spring.
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.
