This is the first month of a real portfolio update since November 2012. I have effectively ignored my portfolio for the past 16 months. That said, how did we fare?
Here we have the monthly performance for the past 12 months. Reviewing the results, for the past 12 months I have beat my benchmark for 9 out of 12; so 75% of the time. Not bad. More importantly, my Sharpe Ratio has been positive, which means that, on a risk adjusted basis, I am making gains, also important!
How about the trailing twelve months?
You’ll notice that there are no results for May 2013-November 2013; this is because I haven’t entered enough historical pricing information for the portfolio, so I don’t have any results for those periods. For my May 2014 update, I should have a full TTM graph available. However, for months where I have data, I have beat the benchmark handily.
Finally, the asset allocation..
As suspected, I am heavily weighted in equities, and my fixed income exposure is definitely below the acceptable range: equity is over by 28.5% and fixed income us under by 19.0%. I am making a concerted effort to fix that in the coming months by reallocating cash towards fixed income.
Some notes on all of this..
While I have effectively ignored my portfolio, I did make some calls based on research for my courses (Value Investing saw me purchasing Logsitec (Class B) and Rock-Tenn Paper Corp. Logistec is up 39.3% since I purchased it in the fall of 2013; Rock-Tenn hasn’t been doing so well but I am patient). I’ve also taken some money off the table to pay for my wedding and unwind some debt.
I’ve also revisited my benchmarking. Before I compared myself against five benchmarks: three Couch Potatoes, XIC, and XIU. This was silly, and it was merely a numbers game. The results going forward will be based off of a new benchmark composed of 20% Canadian Equity, 20% US Equity, 20% International Equity, and 40% Canadian Fixed Income. If I were a truly passive investor, this is what I would be investing in. If I come up on new portfolios that may interest me (e.g. Fundamental Indexing) then I’ll switch things up, but I am taking a more realistic approach: what would I invest in now if I was passive? This means that, if I switched later to Fundamental Indexing I would not retroactively compare my returns. This will give me a better snapshot of how my real performance ranks against what I might have done if I was purely an ETF investor.
Finally, I have been giving some thoughts to how to measure performance vis-a-vis making actual trades. I do some funky math right now to generate returns on a monthly basis when taking trades into consideration, but I am going to see if I can rework my workbooks to use a Modified Dietz approach, and then link those together for the TTM. Hopefully I can squeeze that in for the May or June update.
School is done! Which means that I’ll finally have time to dedicate to investing again.
Over the past 18 months I have not been paying attention to my portfolio at all, and as such I haven’t had a chance to revisit the actual performance of the portfolio. Traditionally I have invested in value stocks: good companies with cheap prices, and taking a precursory look at my holdings things have gone well. For example High Liner Foods currently trades at $44.30, compared to my ACB of $15.73. Another strong player has been CCL Industries, which I picked up for $36.66, and currently trades for $107.42. Not all of my picks have been faring as well however: Calian Technologies currently trades at $18.76 from my ACB of $20.29.
But I digress; a detailed analysis of my holdings will come shortly when I sit down to take a look at what I’ve got in my books.
However, before I can revisit my books I’d like to revisit my Investment Policy Statement. I realized that I had a notional idea of what type of balance I would like to have (e.g. 1/3 Canadian Equities, 1/3 Bonds, 1/3 US Equities), but I have been pretty lax in maintaining the balance.
Another issue I had, was in balancing allocations between brokerages and account types. The total complement of all of my securities was held across several brokerages (BMO Nesbitt Burns, BMO InvestorLine, ScotiaMcLeod, Questrade, and some certificated shares where I held the physical stock certificates in my own name), and spanned different categories (margin, RRSP, TFSA). I found that I was spending too much time trying to manage the 3-way split across brokerages and account types. Over the past few months, I’ve cut out my investment adviser (they actually moved from BMO Nesbitt Burns to ScotiaMcLeod, and then back to BMO Nesbitt Burns — which was an administrative nightmare), and moved all investments over to BMO InvestorLine, other than those shares I hold in certificated form. Moreover, I’ve taken a different approach to viewing my portfolio: I now track everything at total fund level vs. individual brokerage house level. This makes the exact allocation across account types (e.g. if I keep a security in my margin, or my RRSP, or my TFSA account) irrelevant, since I now take one snapshot of all holdings.
Taking all of that into account, I am going back to basics and revisiting my investment policy statement (IPS), and come up with a new target asset allocation, as well as some constraints. My target asset allocation is show below.
|Asset Class||Minimum Allocation||Target Allocation||Maximum Allocation||Notes|
|Cash||-5%||5%||10%||We allow -5% for margin exposure, but once we break the 10% mark we should be finding something to invest in; while cash is an “option with no expiry date”, after a certain point it does not make sense to keep it as cash because it is not generating income. At the very least, it should be dumped into an HISA or money market vehicle|
|Equities||35%||50%||60%||Traditional public equities.|
|Real Estate||10%||20%||25%||Real Estate is a long-term goal, but in lieu of bricks and mortar investments (e.g. property), I will fulfill this with REITs for now. In the long-term I plan on keeping my condo as an income property, at which point the condo would fall into this category.|
|Alternatives||0%||0%||5%||Alternative investments would be things such as collectables (stamps, comics, art).|
|Private Equity||0%||0%||5%||I wanted to ensure I had a line item for this, in the event any private equity opportunities come up; e.g. if a friend had a startup and needed investors.|
|Region||Minimum Allocation||Target Allocation||Maximum Allocation||Notes|
From the above, I’ve tried to capture every conceivable investment opportunity. No doubt, the majority of my investing will be in public markets, which is why alternatives and private equity have a target of 0%, but I have the option of having up to 5% in each. I treat REITs and fixed income as income streams, which is hwy they take up a good chunk of the portfolio as well. I am looking at total returns which includes any cash flows, which is one reason I am not concerned with the equity being capped at 60%. Finally, the above mix allows me some latitude in finding securities. E.g. I can purchase a US REIT ETF to (1) give me US exposure, and (2) give me REIT exposure. In this way, a single security can satisfy multiple criteria.
I’ve also tried to diversify geographically; for the most part I am very concentrated in the Canadian market. While this is great because it eliminates exposure to currency risk, it also limits the total universe of available investment opportunities.
The goal of this asset mix is to stabilize my returns over time, provide cushion for market shocks, and to provide a steady stream of income. Between condo payments, car payments, and paying off school, the total amount of income I have available for investing has dropped considerably. Because of that, I am dedicating a larger portion of the total asset mix to income vis-a-vis Fixed Income and REITs.
With regards to investment style, I am going to go back to my roots and focus on value investing. Realistically I have not really deviated from that, but with the number of tech IPOs in the past twelve months, I wasn’t sure if I was missing anything. Luckily, it looks like I haven’t! Initially I was kicking myself at not investing into firms such as Twitter of Facebook, but those firms have been taking a beating lately. Given the focus on value investing, the underlying rationale for any investment decision will be:
- Good firms with strong historical performance. Those firms with strong management, who have exhibited a good history of producing returns for its shareholders.
- Firms with a solid dividend history. My own portfolio is geared towards income streams, and as such most, if not all, of the firms I invest in must pay a dividend. This restriction also precludes me from investing in growth companies, since those companies usually divert the majority of their income back into the firm to grow it faster, compared with dividend firms who have stabilized (e.g. not in the “growth&;quot phase any longer) and return cash to shareholders.
- Firms that are cheap. The foundation of “cheap” will be based off of P/E and P/BV multiples. I have built some good models for valuing firms, and I will use those as well, but for the most part I will rely on P/E and P/BV multiples. The reason for this is that multiples provide a snapshot of historical and current performance, whereas valuation models provide a snapshot of estimates and assumptions of the future, which are inherently subject to biases and misinformation.
- In lieu of equities or fixed income, I will use ETFs where available to park cash and keep the balance. E.g. if I cannot buy bonds, I’ll invest in a bond ETF such as XBB or HYG. Similarly for geographic exposure; to gain US equity exposure, I will purchase VOO or something similar.
So, where do I sit now?
|Asset Class||Target||Weight||Variance from Limit|
|Region||Weight||Variance from Limit|
So… Based on my current IPS I am pretty much screwed for the month of March; none of my asset classes or geographic regions are within tolerance. However, I did execute some trades in April, and when BMO InvestorLine posts my statements I’ll revisit and see how we are doing.
It’s been about five months since my last post, and likewise, about five months since I last looked at any of my investments. Thankfully, my investment strategy is focused on long-term holdings, and as such does not require me to constantly monitor the markets on a day by day basis.
That said, I have made on investment recently in the Class B shares of Dorel Industries, and the analysis will be posted shortly. For the next month this blog may also see some non-investing articles, as I may post some material for one of my classes at the Rotman School of Management. However, even though they are not directly related they will still be relevant to analyzing companies and how they operate vis-à-vis providing value to investors.
Until then, happy investing!
In my previous post I discussed how my the only REIT currently in my portfolio (other than the iShares XRE ETF) is Artis REIT, but because that is my only holding, I am exposed to a certain level of geographic risk. To help mitigate that risk, I need to make some additions to my portfolio which spread the REIT holdings throughout the rest of the country. The easiest way to do this is to plot all of the properties for all of the REITs I am interested in. Because Artis is a "diversified" REIT, I went and solicited a list of all properties for each of the diversified REITs identified in my previous post.
The exercise was a little tedious, but I’ve managed to build a database of all of the properties for the major diversified REITs which trade on the TSX. To create the map plot, I headed over to the geocommons, a great site I found for creating maps based on user provided data. After all of that, here is the result:
The screen grab above does not really give the plot justice, but you can head over to view the interactive map at geocommons.
Now that I’ve got the properties all plotted out, I have to sit down and figure out which REIT(s) would be a good addition to the portfolio, with the following objectives in mind:
- Geographic diversification (i.e., properties not concentrated in only one part of the country)
- Strong FFO1
- A strong history of increasing distributions over time
Over the Christmas break from classes I’ll be doing a deeper dive into some REITs, once I determine which ones best satisfy the first criteria above.
1 Free Cashflow From Operations; the cash leftover to distribute.
My discount brokerage issued my November statement today, which means it is time to see how I stacked up against the benchmarks. Holdings for this period are BCE Inc, Calian Techologies, CCL Industries, Davis & Henderson, High Liner Foods, iShares DEX Universe Bond Index, iShares S&P/TSX Capped Composite, and Manulife. The below focuses only on my Canadian margin portfolio; since moving to a new investment model I have yet to go back and evaluate performance for the US margin or TFSA portfolios.
|Nov-12||Margin CAD||XIC||XIU||Global Couch Potato||Complete Couch Potato||Complete Couch Potato|
Since I dumped Bombardier in October, and picked up some CCL and CTY on leverage, the portfolio has been doing very well. The big winner is still High Liner Foods (HLF.TO) which is up over 85% since I first purchased it a few years back. Overall, I’m pretty happy that I am beating every index I track against (XIC, XIU, and the three Potato portfolios), even taking into account the interest I am paying on margin. Unless something disastrous happens in December, this year is shaping up to be much better than 2011.
It has been a busy month, but some ideas have been fermenting the on the back burner during that time, and one of them is REITs. REITs, or Real Estate Investment Trusts, offer a great vehicle for regular income, and often offer high yields relative to regular equities. A REIT is several things at once, as indicated by its name:
- It is an investment trust. As a trust, income from REITs is often categorized as interest income1, and as such is treated different for income tax purposes. However, one key advantage to interest income is that when you use it in a TFSA, none of that interest is taxable.
- As a trust structure, ownership of the REIT is accomplished through trust units, which differs from equity shares of a typical dividend paying firm.
- REITs invest in some type of real estate, as indicated by its name.
Artis REIT was my first REIT investment, and in terms of an income stream has treated me incredibly well. While the distribution payout has been flat — the actual distribution has been a consistent $0.06/month for the 2+ years that I have owned it — given the yield that it has provided, I cannot complain. However, one key challenge with holding only one REIT is that you are subject to the properties that the REIT itself invests in. Here is a map, which I pulled from Artis’ own website, which shows its current property distribution:
As you can see from the above, Artis is heavily concentrated in Central Canada. Not that this is a bad thing, but remember that one of the key qualities of a good portfolio is diversification. One of the easiest ways to diversify a REIT portfolio would be to simply invest in a REIT ETF, such as the S&P/TSX Capped REIT Index Fund, XRE.TO, or Bank of Montreal’s Equal Weight REITs Index ETF, ZRE.TO. One minor challenge with this is that you are still victim to the ETF’s investing strategy. However, the bigger challenge is that the relative yields between an ETF and a hand-picked portfolio of REITs is pretty wide. For example, the latest distribution yield (as of December 6, 2012) on XRE.TO was 4.58%. However, if you were to hand-pick an equal-weighted portfolio of four REITs, AX.UN, BTB.UN, CUF.UN, and HR.UN, you could achieve an effective yield of 6.92%!2.
With that thought in mind, I have been doing research lately on the different REITs available in Canada. My goal is to create a small (sub-)portfolio of REITs that will allow me to beat the yields of the major ETFs, while allowing me to customize the focus of the (sub-)portfolio, and diversify away any geographic concentration risk. There are few articles which are specific to Canadian REITs, but here are some useful links to start with:
- Avrex Money
- Series on Canadian REITs at Seeking Alpha
- Deloitte’s 8th Edition REIT Guide
- The Loonie Bin
For my own research, I headed over to my discount brokerage and ran a quick screen on all Income Trusts which are traded on the TSX. From there, I stripped out any trusts that were not REITs, and came up with the following list:
|AAR.UN-T||Pure Industrial Real Estate||Industrial||link|
|AP.UN-T||Allied Properties REIT||Office||link|
|AX.UN-T||Artis REIT||Diversified I (Office/Industrial/Retail)||link|
|BOX.UN-T||Brookfield Canada Office Prop.||Office||link|
|BTB.UN-T||BTB REIT||Diversified I (Office/Industrial/Retail)||link|
|CRR.UN-T||Crombie REIT||Diversified II (Office/Retail)||link|
|CSH.UN-T||Chartwell Seniors Housing REIT||Retirement/Nursing/Healthcare||link|
|CUF.UN-T||Cominar REIT||Diversified I (Office/Industrial/Retail)||link|
|DI.UN-T||Dundee International REIT||Commercial||link|
|DIR.UN-T||Dundee Industrial REIT||Industrial||link|
|HLP.UN-T||HealthLease Properties REIT||Retirement/Nursing/Healthcare||link|
|HLR.UN-T||Holloway Lodging REIT||Hospitality||link|
|HNT-T||Huntingdon Capital||Diversified I (Office/Industrial/Retail)||link|
|HR.UN-T||H&R Real Estate Invest. Trust||Diversified I (Office/Industrial/Retail)||link|
|IDR.UN-T||REIT INDEXPLUS Income Fund||Fund||link|
|MRG.UN-T||Morguard North American REIT||Residential||link|
|MRT.UN-T||Morguard Real Estate Inv Trust||Commercial||link|
|MSN.UN-T||Morguard Sunstone Real Estate||Fund||link|
|NPR.UN-T||Northern Property REIT||Residential||link|
|NRF.UN-T||North American REIT||Fund||link|
|NWH.UN-T||Northwest Healthcare Prop REIT||Retirement/Nursing/Healthcare||link|
|PMZ.UN-T||Primaris Retail REIT||Retail||link|
|RCO.UN-T||Middlefield Can-Global REIT||Fund||link|
|REF.UN-T||Cdn. Real Estate Investment||Diversified I (Office/Industrial/Retail)||link|
|REI.UN-T||RioCan Real Estate Investment||Diversified II (Office/Retail)||link|
|RIT.UN-T||First Asset Canadian REIT IF||Fund||link|
|RIU.UN-T||Canadian REIT Income Fund||Fund||link|
|RMM.UN-T||Retrocom Mid-Market REIT||Retail||link|
|RRB.UN-T||Connor Clark & Lunn Real Ret||Fund||link|
|TGF.UN-T||Timbercreek Global Real Estate||Fund||link|
|USM.UN-T||US Agency Mortgage-Backed REIT||Fund||link|
For the sectors, I borrowed (and slightly expanded) the list found in the Seeking Alpha article listed above. The list above focuses purely on the TSX, and ignores REITs which can be found on the TSX Venture Exchange, some of which were pointed out in a post I put up on the Canadian Money Forum3
Because I already own Artis REIT, I am looking for other REITs to balance the geographic distribution in the Diversified I sector space. The above is just the first cut at the research, and in later blog posts I will document my selection methodology and progress.
1 As with a dividend paying corporation, occasionally this income may be in the form of Return of Capital.
2 For the 6.92% yield, I used the incredibly scientific method of randomly selected the four highest yield fully diversified REITs.
3 Not that there is anything wrong with the TSX Venture Exchange, however it is not an area that I have ever really looked into.
A tad overpriced, and wonky financials due to conversion to/from an income trust, and changes to IFRS. Revisit in 2013.
Overview of the Business
Bird Construction (“Bird” or “the firm”) is involved in general construction services in Canada, nation-wide, with a focus on St. John’s, Halifax, Saint John, Wabush, Montreal, Toronto, Winnipeg, Calgary, Edmonton, and Vancouver. The bulk of the work performed by the firm is carried out on behalf of the firm by sub-contractors, and Bird mitigates the risks of working with subcontractors through a number of tools and processes:
- Paper (e.g. bonds, notes, obligations) are facilitated through one of the major Canadian banks
- Depending on the magnitude of the work, work performed by subcontractors requires promissory notes or similar vehicles to guaranty the work. Bird also closely monitors the performance of subcontractors to ensure that the work is being completed in an accurate and timely manner
While the net income for a given period is a fair indicator of the work that Bird has performed, being a construction contracting company, they have a significant number of contracts which secure future work, and future cash flow. Going through the financial statements, this work is referred to as “backlog”, and serves as a decent proxy for forward looking revenue (but not necessarily net income).
Bird is a relatively simple business to understand: they book deals (contracts) for work, farm out the work to subcontractors, and keep any payment after the subcontractors have been paid off. Bird focuses on the industrial, commercial, and institutional market sectors, and as per their corporate strategy, outsources any design work that they cannot accomplish to a degree that they feel would best benefit the customer. This is reassuring in a firm since it demonstrates their ability to focus on their core competencies, while still leveraging outsourcing relationships to have other projects designed on their behalf. At the end of the day, the actual construction is farmed out to subcontractors, so the design of the work is agnostic to the work actually being performed.
All discussion relates to the period of 2002-2011.
|Strong financial condition||Current Ratio||1.30||1.50||NO|
|Earnings Stability||Number of most recent years of positive EPS||10.00||3.00||YES|
|Earnings Stability||Number of consecutive years of negative EPS||0||1||YES|
|Dividend Growth||Compound Annual Dividend Growth||20.77%||2.00%||YES|
|Share Price Growth||Compound Annual Share Price Growth||14.51%||3.00%||YES|
|Moderate P/E Ratio||P/E||16.01||15.00||NO|
|Moderate P/BV Ratio||P/BV||2.92||1.50|
|Moderate P/E×P/BV Ratio||P/E × P/BV||46.71||22.50|
The share price of Bird has had compound year over year growth of 14.5%, which represents a good return on capital over the period. There was a significant drop in 2006, which occurred around February after Bird converted from a corporation to an income trust. This income trust structure stayed in place until 2011, when the firm changed back to a corporation on January 1, 2011. As with many other firms, the firm also suffered a huge drop in value between 2008 and 2009 due to the financial crisis.
As discussed, Bird made a conversion to an income trust in 2006. This makes comparable numbers for dividends (during the corporate format pre-2006 and post-2010) and distributions (2006-2010) a little tricky. The conversion to an income trust in 2006 resulted in a drop in dividends (which technically became distributions). However, even during the income trust format, the firm continued to increase its distributions after the conversion; during the five-year period as an income trust, the distributions had compounded annual growth of 13.4%. This is not as strong as the 46.5% compound growth which occurred during the 2002-2005 period, but it is still impressive. For the period observed, dividend (distribution) growth was 20.77% compounded annually. In short, independent of the firm structure (dividend paying corporation vs. interest paying income trust), Bird has shown a consistent pattern of increasing the cash paid out to shareholders (i.e. unit holders 2006-2011). A point of concern however is the dividend payout ratio vis-à-vis the firm EPS. The payout ratio has remained high throughout the period observed, surpassing 100% in 2005. For the 2011 year (the first year as a dividend paying corporation) the payout ratio was 94%. Comparing dividends to free cash flow is another cause for concern, as observed by the 2011 payout ratio, which surpassed 300.0%.
Given the discussion above, based on P/E alone, the firm is attractively priced. Except for 2005, it has the market value of the firm relative to its underlying EPS has remained solid, breaking the 15.0 multiple for the first time in six years in 2011.
The current ratio is partially an area of concern, but more research as to the expectations of the industry is required before making a final call. Bird has kept its current ratio consistently at 1.20 or above, except in 2007. A conservative value investor normally targets a current ratio of at least 1.50. However, given Bird’s performance while maintaining its current ratio in the current range, may warrant a reevaluation of that particular metric when deciding if the firm is a worthwhile addition to an investor’s portfolio.
Note: For the 2008 and 2009 periods, the EPS seems flat. In the analysis I performed, I have been comparing net income as defined as comprehensive income and income from continuing operations. However, in 2009 Bird closed off its operations in Seattle Washington, which resulted in a loss of $3.9MM from discontinued operations. To provide a fair comparison, the net income used for 2009 was $60,795M, compared to the $56,913M listed in the 2009 financial statements; the 2010 annual report has a description of the discontinued operations.
With that said, EPS has been on the upswing, but took a hit in the 2010 fiscal year. This was to be expected; since projects are booked in advance, there was a hit on the backlog of projects in the 2009 year (2009 backlog ($901MM) was 18% less than the 2008 backlog ($1,105MM)), which affected the 2010 net total revenue.
One final note on the fundamental analysis. Reviewing Bird’s financial statements is a great exercise in investigating the ins and outs of changes to operations and accounting policies. The conversion in 2006 to an income trust, and the subsequent conversion back to a corporation in 2011, made it a little tougher to compare a firm whose corporate structure has remained constant over the period being reviewed. In addition to this, Bird converted to IFRS reporting in 2011 due to regulatory requirements in Canada. This resulted in a hit on the valuation of some items on the balance sheet and the income statement.
Based on the 2011 results, Bird is a solid firm, however it is overpriced. P/E is 16, P/BV is almost 3.0, and P/E × P/BV is 46.8. Ignoring the overpriced quality of the firm, while the business itself is easy enough to understand, I do have some other concerns:
- The dividend payout ratio as measured against EPS was 94.0% in 2011, and the dividend payout ratio as measured against free cash flow was over 300.0% in 2011. Exceeding free cash flow is a major read flag in my view, and doubly so when it exceeds 100% by a factor of three.
- While the country made it through he worst of the financial crisis years ago, due to the nature of Birds business it may be some time before the effects of the financial crisis are no longer affecting Bird’s bottom line.
There are some plusses for the company which I like:
- The ability of Bird’s management to maintain a constantly growing dividend is impressive, especially given the turmoil of the past few years. Their closing of operations in 2009 also speaks to their oversight in discontinuing operations which are not profitable or aligned with their corporate strategy.
- As of today (October 28, 2012), the dividend yield is an impressive 4.50%. With year over year growth of 20.8%, Bird would be a worthwhile addition to a dividend portfolio.
- Due to the nature of the business, they are part middle-person and part designer/builder. Their corporate strategy gives them the breadth to take on a wide variety of projects, and when the firm does not have the depth to undertake those projects on the design side, they are willing to subcontract that work out.
That said, I will definitely be revisiting Bird after the 2012 financial results have been published. The company, at least on paper, looks pretty solid. And except for some concerns due to the recent (i.e., past two years) financial conditions of the economy – but not necessarily the firm itself – I would be willing to jump in now.