Portfolio Year In Review – 2014

Source: thepassiveincomeearner.com

Source: thepassiveincomeearner.com


Another new year brings another review of last year’s portfolio – I’ve been particularly delayed as I’m gathering more data points and looking at performance a little more closely this year.   Similar to last year’s disclaimers, here are the ones for this year:

  • No tax / margin / interest / commission costs incorporated in the stats below – unless looking at portfolio returns (which using XIRR have incorporated those costs)
  • Calculations are now based on start values of January 1, 2014 (if a security was held from 2013) or the purchase date
  • Calculations are based on the end values as of December 31, 2014 or the sell date
  • Returns incorporate gains/losses from currency based on buy / sell dates – this might overstate or understate the performance as I tend to buy USDs in advance of the purchase of an USD denominated security
    • Example: I might buy USDs @ 1.05, but on the date of a stock purchase, the exchange rate was 1.10 which is what I use thus overstating the actual cost (since I was really able to just use the USDs purchased at 1.05)
    • That’ll be something for next year to figure out


Top 10 Holdings (by Market Value in C$):

2014 Rank 2013 Rank Holding % of Portfolio % of Portfolio (2013)
1 N/A Apple Inc. (AAPL) 12.5%
2 2 AIG Inc. (AIG) 7.9% 4.7%
3 6 Berkshire Hathaway Inc. (BRK.B) 5.8% 2.9%
4 29 Bank of America (BAC) 5.2% 1.6%
5 8 Altria Group Inc. (MO) 4.8% 2.8%
6 3 Mastercard Inc. (MA) 3.4% 4.1%
7 5 Broadridge Financial Solutions Inc. (BR) 2.7% 2.9%
8 18 BCE Inc. (BCE) 2.7% 2.3%
9 7 Markel Corporation (MKL) 2.7% 2.8%
10 15 Intuitive Surgical Inc. (ISRG) 2.6% 1.1%

Dropping off the list from last year (and in the portfolio entirely) are Tesla and The Buckle.  Cash was purposely off the list, but we have about 4% in cash putting it down to #6 and much lower than the #1 position from last year.  We’ve been busy putting it to use this past year.

The most obvious additional has been Apple Inc. (AAPL) which was not even part of the portfolio in 2013.  With an initial investment made on what I viewed as great Q1 2014 results; and then a subsequent investment after the company’s even better Q2 2014 results and capital return program, the company continues to execute well and reward shareholders both through an increased stock price, dividends, and share buy-backs.

Other notes of interest for the other holdings:

  • AIG (AIG) – upped our position on continued faith that the company continue’s to trade below book value.  Options expiring in 2014 were rolled into 2015 and 2016.  Unfortunately, the stock hasn’t done much this year as AIG still has a lot of work to do by all the core insurance performance metrics
  • Berkshire Hathaway (BRK.B) – doubled our position and it has performed as well as the entire portfolio.   The financing of the Burger King / Tim Horton’s deal; and the tax savings in acquiring Duracell from P&G are exactly why we want to be shareholders
  • Bank of America (BAC) – Continue to invest as a turnaround candidate from 2008.  With all the mortgage-backed-securities-related-lawsuits (hopefully) in the rear-view mirror, the company can focus on delivering results
  • Altria Group Inc. (MO) – Continued adding more for our dividend portfolio.  The maker of cigarettes has executed well given the declining population of smokers.
  • Mastercard (MA) – Hasn’t done much for the portfolio this year which is a shame considering how much better top dog Visa (V) has done
  • Broadridge Financial Solutions Inc. (BR) – a company I came across in my work life.  They continue to quietly chug along a few percentage points higher than the S&P
  •  BCE Inc. (BCE) –  Being part of the dividend portfolio, has surprisingly done well this year.  The increase in stock price is a welcome addition to the 5% yield we’re getting.
  • Markel (MKL) – The company is like our mini-Berkshire (besides the B-shares which are already junior to the BRK.A shares)
  • Intuitive Surgical (ISRG) – My old favourite cracks the top 10 after a stellar year stock price wise – but still needs to show some of those improving adoption numbers for us to add more

Same concerns as last year – our top holdings involve leveraged plays – which work out very well in rising markets; but will also hurt you the most in falling markets.  There’s still quite a heavy weighting towards financials and financial services related sectors but in a year where the US economy is expected to grow, financials are a great place to be.

Apple is currently breaking my 10% diversification rule – but I’ll make an exception – iPhone 6 sales have been doing exceptionally well (especially since I am cheating a little and writing this after the company’s quarterly results).  I’m going to wait another quarter as I expect phone sales to continue doing well.  I also expect Apple to announce a greater increase their dividend; which will offset a less aggressive share buyback policy from last year (after all, shares have gone up 40% since then).  Then of course, we’re keeping an eye on new product releases and how the Apple Watch does.  A future blog post will be about Apple – but basically, despite not adopting the latest technologies, and highest specs, it definitely knows how to build a brand and so far, the company’s loyal fan base has made it worthwhile owning the company (and Apple’s ability to execute of course!)

2014 Performance:

Portfolio Performance

We’re going to start caring how we do against benchmarks.  We use benchmarks to get an understanding of how well we’re performing and whether or not our portfolio is doing better that some simpler hands-off portfolios:

  • Benchmark #1: S&P 500 (SPY) – simply investing in the S&P 500
  • Benchmark #2: TSX 60 (XIU) – simply investing in the TSX
  • Benchmark #3: 70/30 SPY/XIU split – 70% S&P and 30% TSX (similar to our ratio of US-CAN currency-based holdings today)
  • Benchmark #4: Complete Couch Potato (CCP) – taken from the Couch Potato model portfolios; they’ve actually simplified their portfolios recently (where the CCP no longer exists), but here’s the index benchmark we’re up against:
    • 20% Vanguard FTSE Canada All Cap IDX ETF (VCN)
    • 15% Vanguard Total Stock Market ETF (VTI)
    • 15% Vanguard Total International Stock ETF (VXUS)
    • 10% BMO Equal Weights REITS Index ETF (ZRE)
    •  10% iShares DEX Real Return Bond Index Fund (XRB)
    • 30% Vanguard CDN Aggregate Bond Index ETF (VAB)

We’re going to be satisfied even if we’re lagging a benchmark by 0.5% – our calculations are based on taking our deposits and immediately investing in the benchmarks; reinvesting any dividends/interest received.  Picking individual stock positions, I can’t be as efficient and will always need to have capital available for when I find a new investment.  Hopefully, our portfolio will consistently beat the benchmarks and we won’t have to worry about that.

I’m a big believer in the Couch Potato Model Portfolios – specifically the Complete Couch Potato.  Unfortunately for my performance comparison, some of the ETFs in the CCP only started in 2012 so I can’t work number numbers back (I’ve already substituted XIU for VCN).  In a year where both Canadian and US stock markets have provided double digit returns, a portfolio consisting primarily of stocks should outperform the Complete Couch Potato (which has 50% invested in bonds and REITs).  However, come back when stock markets are crashing or in a downtrend, and the CCP is likely to be beating the markets and that’s what the portfolio is exactly designed to do – reduce some of the volatility year to year.  It’s why I like to use this as a benchmark – on average, the CCP should be returning in the 7-8% range a year – which represents a safe, attainable, and steady return year after year.

Portfolio/Benchmark 1M 3M 6M 1 Yr 2 Yr 3 Yr 5 Yr
Portfolio -0.5% 6.8% 15.9% 24.4% 29.2% 30.3% 19.0%
S&P 500 (SPY) 1.1% 8.6% 15.2% 23.9% 29.4% 26.5% 21.6%
TSX 60 (XIU) -0.46% -0.60% -0.05% 12.0% 12.3% 11.7% 10.8%
70/30 SPY/XIU split 0.7% 6.1% 10.9% 20.3% 24.3% 22.0% 18.4%
Complete Couch Potato 0.0% 2.5% 3.6% 11.4% 11.3% N/C N/C

The table above shows the portfolio’s 2014 return against 4 benchmarks I’ve decided to use.  For the benchmarks, our return is based on taking any inflows (deposits) and outflows (withdrawals) of the portfolio and buying or selling the appropriate benchmark.  It accounts for currency, dividends received, commissions paid (for my own portfolio), and withholding taxes paid.  Our benchmarks assume that any interest/dividends received are re-invested.

Obviously, given some limitations in the data, all the stock based portfolios have killed the CCP return wise.  I’m pretty happy with how our portfolio has been tracking given that ~30% of our portfolio is in Canadian equities; and some portion of that is allocated to short term bonds and REITs via our dividend portfolio.  What has definitely helped the portfolio get caught up with the S&P, despite only have 70% US content is the leveraged plays we’ve made via deep-in-the-money options.  As I said above, it’ll be something to keep an eye out for especially if the US market starts its downtrend in the future.

One might be interested in the drop off in performance in the 2009-2011 period – I don’t want to make excuses, but it seems that when I focus time on investing, the portfolio does better.  That period had more important priorities – getting married, buying a house, changing careers…..investing wasn’t top of mind at that point (although I should have just dumped everything in the SPY and would’ve done reasonably well!).

Individual Stock Performance

Apple Inc. (APPL) +76.1%
Amtrust Financial Services (AFSI) & Preferred A +56.3% (+44.3%)
Intuitive Surgical (ISRG) +50.2%
Tesla Motors Inc. (TSLA) +41.8%
Baidu (BIDU) +39.8%
Skyworks Solutions Inc. (SWKS) +37.4%
American Tower Corp. (AMT) +36.4%
Yahoo! Inc. (YHOO) +36.2%
Berkshire (BRK.B) +32.9%
Altria Group Inc. (MO) +31.0%
Other Holdings
Chart Industries (GTLS) -12.2%%
Ambarella (AMBA) -14.9%
Extendicare Inc. (EXE) -15.1%
TransAlta Corporation (TA) -16.7%
Exelixis Inc. (EXEL) -17.0%
IPG Photonics Corporation (IPGP) -17.2%
Xinyuan Real Estate (XIN) -20.8%
Universal Display Corp. (OLED) -22.4%
iShares Russell 2000 Index (IWM) -26.7%
Hovanian Enteprises (HOV) -65.1%

Just a quick note on the calculations – unlike last year where I only had book and market values available, I actually used starting values on Dec. 31, 2013 and end values of Dec. 31, 2014.  Calculation of returns include any gain/loss from currency, dividends received, and buying or selling throughout the year.  Next year, I’ll hopefully add another column to show the real return (taking out the effect of currency).

I won’t go into detail on the top/bottom 10, but basically, there’s a reason the top performers ended up on the Top 10 Holdings list; and there’s also a good feeling when some of the largest holdings from last year become top performers this year.  The top 10 performers also had the help of some currency tailwinds as the USD gained 10% on the CAD during the year.    As for the bottom 10, I’m not too surprised – the past year, I tried to clean up my portfolio a little and sell some holdings that were too small to make an impact and/or I didn’t feel was worth additional investment dollars.  My dividend portfolio led to lessons from Extendicare and TransAlta (two of the largest dollar wise loses).  Last year, I also tried using the iShares Russell 2000 index as a hedge – which will be another blog post – but short of it is, as a hedge, I expected to lose.

And speaking of cleaning up, I’ve always debated about the number of different stocks to hold.  A look at our complete holdings would probably consistently show 40-50 individual positions.  I always wonder if I’m getting any value by holding two similar companies instead of just spending the time and figuring out which company is better and investing the combined amount in the selected winner.  It’s also difficult, and nearly impossible, to stay focused on and up to date on 50 positions (unless this is your day job, which this is not).  I can honestly say that with the top 10 holdings accounting for 50% of our portfolio, I spend 80% of my research time on those 10.  Now, many of the remaining 30-40 are starter positions just to get my feet wet, and could eventually make their way into the Top 10 – especially as I investigate and read more about the company.  However, sometimes I debate if it’d be easier to replace some of those holdings with more straightforward index investing or even investing more capital in the top 10 (imagine what this year’s return would’ve been then?!).  Index investing (or mimicking parts of the CCP) is actually something I’ve started doing near the end of last year and will probably do more of as my ability and time to stay on top of all my positions goes down.  My next post will be about how I’m changing how I report my current holdings – and we’ll be breaking it down into three main areas:

  • Play – My real passionate area – companies I want to invest in, new strategies I want to try, starter positions, etc.
  • Dividend – Basically my dividend portfolio; used to provide some secondary income throughout the year
  • Index –  Hands off, couch potato investing; we’ve got a few accounts that allow for limited increases in capital each year – I’ve decided that index investing is best suited for these accounts


Holdings by Sector:

As with last year, some of the sectors associated to individual positions, I wouldn’t necessarily agree on, but here’s the chart none-the-less:

2014 Holdings By Sector (Dec. 31, 2014)

2014 Holdings By Sector (Dec. 31, 2014)

The worry last year around financials fell on deaf ears as it now is an even larger proportion of the portfolio – likely due to our dividend portfolio.  As I mentioned above, with the US economy showing signs of recovery, being overweight in financials doesn’t seem like a bad spot to be in.  The technology sector got a much desired boost (mainly due to Apple) as did Telecommunications (which also benefited from addition of positions in our dividend portfolio).   Surprisingly Consumer Goods & Services stayed steady as we traded in electric cars (TSLA) and teen clothing (BKE) for booze & tobacco (MO) and baby clothing (CRI).

Not much analysis this year around the holdings – I’ve put a lot more effort into tracking performance and that’s something I’m going to be more concerned about (and maybe learn about how to hedge over-exposure) than being diversified across sectors – especially sectors I have no or limited knowledge in.

Holdings by Region:

Same comment as last year – our US holdings now account for 70% of our portfolio – but I feel more comfortable investing in American companies than a lot of the precious metals / oil and gas companies in Canada.  In 2014, US stocks again outpaced Canadian counterparts and had a nice tailwind with the currency (yet again).  International equities which accounted for 3% last year, is down even further to 1.5% but I’ve got a few positions in mind and can confirm 3 months in, that we’re going to invest abroad with some funds.

 Final Thoughts and Predictions:

Last year we thought the USD would rise against the CAD due to US rates going higher before Canadian rates.  It turned out neither country raised rates although Canada’s currency seems to be associated with resource prices as oil prices dropped through the last half of the year.

I’m going to continue to make the same prediction for 2015 – US stocks to outpace Canada.  USD to rise against CAD as the US seems poised to raise rates sooner rather than later (given what we know now that it’s March).  In fact, Canada made a surprise move dropping interest rates in January.

I’m actually a little concerned for my home country even though Canadian holdings only account for 25% of the portfolio.  Most of Canada’s economy is now driven by oil & gas and energy.  With oil prices falling so drastically (and with Canada holding some of the more expensive reserves to extract), this doesn’t bode very well for those companies, or Canada overall.  Lower dollar also leads to higher prices (for a resource nation) which leads to inflation.  Government tames inflation by raising rates, which would further hurt exports, and also poke what appears to be a housing bubble paid with growing household debt.

But enough of that worry (as that economic gibberish might not have made any sense) – 2014 was again a year where it was pretty tough to go wrong but I’m on careful watch for 2015.  We’re in a 6 year bull market and it’s going to have to stop, or at least pause, some time.  In the meantime, we’ll continue to up our reporting and analysis capability in the upcoming year.




One thought on “Portfolio Year In Review – 2014

  1. Pingback: Portfolio Year in Review – 2016 (We’re Back!) | Fearless Cal's Investment Journal

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