A Comment -- General Comments From an Expert (A Commentary)

Educational Segment. Concerns about the weekend’s G20 meeting. They are agreeing to continue spending and not worrying about who is going to pay for it. We need the growth pickup in the world, but the problem is the debt getting bigger. 150% of the world’s GDP has come from debt since the Lehman moment. You can’t stimulate by weakening your currency, but that is what they are doing. Infrastructure ETFs are very expensive right now.

Markets. Valuations in the US are rather high and that is caused by ‘free money’ and bonds that pay no money. He finds potential in the perpetual preferred market. You get premium yields and if rates don’t go up any time soon you don’t get hurt by them.

Markets. This has been a very unprecedented spring and summer, so far, with all the macro events. Now people have been bitten by the equity market, especially in Canada with 3 pretty significant down markets in the last 10 years. He is trying to generate a sustainable total return for his clients, by focusing on the return he gets in cash every year, which is a dividend. Whatever else the market gives for the rest over time, he is selecting good quality companies with sustainable businesses. He continues to average clients into those stalwart dividend paying names, banks, telecommunications, energy infrastructure and utilities. Utilities and telecommunications are the ones that are in the spotlight right now because of some pretty abnormal valuations, but when you compare their dividend yields to Canada 10 year, the spread remains abnormally high. He has been on the thesis for a long time that both demographics and interest rates are going to drive money into dividend paying stocks.

Car part makers? Car part manufacturers went on a pretty fantastic run over the past 3-4 years prior to last year, and then they checked back. This is the nature of this industry. He continues to watch these companies, but is waiting for a little bit worse economic time.

ETFs. Early on, praises were sung for low costs, tax efficiencies, etc. Now there is a recognition of a fundamental shift in the way portfolio management is going to be done in the future. It is moving from single high/low stock picking to multi-asset class investing, and recognizing that this is really a game changer for the portfolio manager industry. ETF providers have done this colonization of the asset classes. For example, previously access to gold bullion was very difficult and you had to pay storage costs, etc. Also, the offshore Chinese bond market is a really good example of something that nobody really knows about and is not represented very well in portfolios, but offers a lot of non-correlation as a different portfolio component. His process is to look at super trends, such as a 3-5 year view and looking to see what are going to be the drivers for portfolio returns. Then he looks at a less than 12-month view, which really relies on behavioural analysis including investor psychology and sentiment, and trying to position accordingly.

Effects of a Trump win on financial markets? Trump is promising tax cuts and infrastructure spending giving $10 trillion in renewed debt over the next few years. Initially that would be good for corporate profits. His policies relating to protectionism and closing of the world to the US, is very bullish for Asia longer-term.

A senior’s ETF portfolio? For his clients, particularly for a retiree, the goal is to avoid big mistakes in a portfolio. The 1^st line of defence is global diversification. When constructing a portfolio, think of core and satellite. The best way is to build a core of cheap peer beta, and be as widely globally diversified as possible. As a satellite component, he usually puts in country sector, different asset classes, that he thinks provides better risk return characteristics. The core functions as a minimum level of diversification.

Smart beta versus traditional market cap? Original ETFS were based on market capitalization, the underlying weights of the individual stocks, bonds, etc. Any departure from that creeps into the world of “Smart beta” where you can weight stocks by their dividends, revenue, etc. Because he is making the decisions on a global asset allocation basis, he wants the cheapest, purest beta that tracks a particular index, for example gold. You have to be aware of what is under the hood.

ETFs or Mutual Funds? These can coexist together harmoniously, and are not mutually exclusive. Typically, you get smaller size portfolios in mutual funds giving you some trading efficiencies. Also, mutual fund fees are going down, and the industry is definitely undergoing some significant shift.

UK £ if rates are cut &/or a faltering UK economy? This is a good currency to own longer-term. Macro fears have really trashed a lot of assets. Some of these currency shares offered in the US or Canada are good way to do it. He also likes UK equities. If he only liked the £ he would be long the FXB (FXB-N), but because he likes UK equities and the £, he is long the EWU (EWU-N).

Oil? He was looking at a chart that showed how far the stocks were ahead of the move in oil. Valuations are basically the highest they have been in 40 years relative to the industry. You are obviously paying for a lot more than $44 crude. Oil prices have rolled over from the $52, and the stocks have not come back that much. He has a hard time sticking money in the sector right now.

Markets. Toronto has been outperforming the US, and a lot of that is because of the improving economic outlook. In particular, you will see gold stocks doing really well, but also an improvement in some of the base metal stocks. Also, Teck Resources (TCK.B-T) (?) has done really, really well to date.

Gold. On December 29, he had suggested that a new quarterly, monthly and weekly Buy was unfolding on gold the metal. Because of the quarterly, that typically means it usually lasts longer and goes much farther. There is more to come. We are within about 6% in Cdn$ terms, of what the old Cdn$ high was. So when you see gold stocks reporting their Q2 results for the end of June, there will be significant surprises on the upside. A lot of gold stocks themselves, even based on the Q1 results, are now producing positive free cash flow. Thinks there is still a 2^nd and 3^rd up leg in the backdrop of an overall strong equity market over the next year, if not 2.

Energy. Gas. Prices have rebounded off of their lows, and have probably moved faster than they should in Canada. He hasn’t been positive on natural gas for some time. However, natural gas production in the US has rolled over. Extremely low, almost generationally low, rig counts right now. Also, we have a hot summer. We are seeing switching from dirtier coal plants to natural gas. Mexican exports are on the rise. There is a pretty good picture taking shape. On top of it, we came through an El Niño winter very warm, and that usually gets followed up by an Al Nina winter which is extremely cold. Stars seem to be aligning for natural gas. His concern has been on excessive capacity in Western Canada, and how they will actually get the gas out. Storage are still heading towards a full condition, which will probably happen towards August. There is risk that the basis differential, the pricing difference between Alberta and US benchmarks, could widen.

Oil. Thinks February 11 $26.05 was the low on oil prices and we are not going to see that again. Seasonally he thinks we are due for a bit of a pullback, and wouldn’t be surprised to see it go through $40. He was in Calgary recently and was starting to see green shoots of optimism about the commodity. There have been more transactions happening.

Markets. Markets have been moving up quite a bit in the last month or so, and he has decided to build a little cash. Trimming some of the names that he thinks has been a little more overvalued. He’ll redeploy it when the market comes off. Has about 9% cash right now, which typically is about 4%-5%. As the market continues to move up, he will probably continue taking some money off the table in the short term.