A wise man proportions his belief to the evidence. – David Hume
While China’s Evergrande debacle may have spoiled the market’s months-long winning streak (as of the date of writing this note), we have much to be optimistic about going into year-end. Strength begets strength, and there is still lots to go around as markets hover near their highs.
Across sectors business is booming, enough so that labour demand is poised to lift wages after decades of standstill. However with rising wages comes rising long term interest rates, a trend that threatens to derail the dominance of today’s tech/growth-stock leadership. Remember from prior notes that as long term interest rates rise, all that future cashflow from tech stocks is worth less in today’s dollars.
But fear not, for replacing tech there is a new group of stocks emerging to lead the market – real estate, energy, commodities, and financials. We continue to point our portfolios into these sectors. This grand rotation out of tech stocks is the stealthy undercurrent flowing beneath the news headlines, and sets us up for fundamental strength ahead. It may surprise that many such companies are growing faster than tech, and that growth is where we want to be. The evidence of new market leadership is on our side and we remain optimistic.
Portfolio Manager Ben Kizemchuk covers the growing allocation to real estate in the American Growth Portfolio, how we’re prepared to deal with potential fallout from China’s troubled Evergrande, and one technique we use to reduce portfolio volatility.
Model Portfolio Highlights
In September we added to our real estate exposure and renewed a position in uranium, two sectors with higher growth potential. Real estate investment tends to work well when interest rates are below the level of inflation like today, while uranium is emerging as the most realistic avenue for cleaner power sources to meet climate goals.
American Growth Portfolio
In September we added a new position in American Tower REIT, a real estate investment trust that owns wireless and broadcast communications towers across the globe. AMT is a well-managed, highly predictable cashflowing business with a strong multi-decade uptrend. All those 5G broadcast antennas have to be mounted somewhere!
In September we made two changes to our holdings. First, we replaced our US “dividend growth” stocks with US “high dividend” stocks. Growth stocks fell out of favour enough in September to put pressure on our dividend growth stocks as well. In contrast, US high dividend stock achieved more stable performance, owing to tilt towards companies with cheaper valuations and higher yields. Second, we replaced our Canadian dividend stocks with a competing ETF, also with more of a value tilt and a higher dividend yield. With these changes, we improved the current yield of the Income Portfolio by a sizeable 0.40% per year.
Small Cap Portfolio
Uranium and energy, our two largest sector weights, continue to power the Small Cap Portfolio higher. We purchased a new position in Points International, the global leader in loyalty programs for airlines, hotels, and credit cards. Points is a natural beneficiary of the return to leisure and business travel.
Across all portfolios I look for mispriced opportunities, considering only those with a significant margin of safety and minimal risk of permanent capital loss. After identifying such opportunities, patience is the most important factor in realizing our expected long term return.
If you have any questions about your portfolio, financial planning or investments please be in touch. Click to book a meeting: https://calendly.com/bwk-wapw
Ben W. Kizemchuk
Portfolio Manager & Investment Advisor
Wellington-Altus Private Wealth
Ben Kizemchuk offers full service wealth management for high net worth Canadians including families, business owners, and successful professionals. Ben and his team provide investment advice, financial planning, tax minimization strategies, and retirement planning.