Portfolio Year in Review – 2016 (We’re Back!)

Source: thepassiveincomeearner.com

Source: thepassiveincomeearner.com


Well, it’s been a long, long time since I posted and no better way than to start off with a new post for the New Year and a review of last year.  Similar to 2014 (the last time I did a portfolio review)’s review, the standard disclaimers/notes apply.

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

2016 Rank 2014 Rank Holding % of Portfolio % of Portfolio (2014)
1 4 Bank of America (BAC) 11.9% 5.2%
2 10 Intuitive Surgical (ISRG) 11.0% 2.6%
3 2 AIG Inc. (AIG) 7.0% 7.9%
4 3 Berkshire Hathaway Inc. (BRK.B) 5.6% 5.8%
5 5 Altria Group Inc. (MO) 4.7% 4.8%
6 N/A Middleby Corp. (MIDD) 4.5% N/A
7 N/A Extendicare Inc. (EXE) 4.3% N/A
8 N/A Claymore S&P/TSX Canadian Preferred Share ETF (CPD) 3.7% N/A
9 7 Mastercard Inc. (MA) 3.6% 3.8%
10 8 Markel Corp. (MKL) 2.6% 3.7%

It’s difficult to look at top 10 changes over time spanning two years as many events have happened to individual holdings, but here are some key notes on how the top 10 came to be:

  • Bank of America (BAC) – Holding mostly warrants now at the end of the year, but this one got a significant late push from the Trump election with talk of reducing financial regulations and 3 interest rate hikes planned for 2017
  • Intuitive Surgical (ISRG)Last wrote about potentially investing more into the company which we did after the company showed double digital revenue and procedure growth.  More money flows in when worldwide procedure and revenue growth hit 25%+.
  • American International Group (AIG) – We’re still holding on here as while the company may benefit from rising interest rates, they haven’t been able to show the operational improvements and book value growth we were hoping for.
  • Berkshire Hathaway (BRK.B) – Surprised I haven’t added more as Buffett & Co. continue to beat out owning the S&P500 straight up.
  • Altria Group (MO) – We’re holding this one simply for the dividends – a company that has raised its dividend for 47 years straight and with our yield at cost above 6.5%, well worth continuing to hold
  • Middleby (MIDD) – A maker of commercial (and now residential) ovens and kitchen equipment.  I’ve been following this company for over a decade and missed out on a 2000% (yup, no typo there) run-up over that time.  CEO Selim Bassoul’s understanding of the business and his client’s business (listen to any conference call and you’ll know what I mean) makes me believe while those hyper growth days of the paste are liking gone, this is one company I can get behind.
  • Extendicare (EXE) – First I hated the company, then I learned to love it again as the company is finally making use of funds from divesting its US properties.  The hope here is that as more cash starts to get generated from their new purchases, dividend and share price should go up as well.
  •  Claymore S&P ETF (CPD) –  We’ve bet big on rate reset preferred shares this past year and well into the future.  While they’re part of the reason for a big dip at the beginning of the year, they’ve also come roaring back at the end of the year as bond yields have surged due to potentially rising interest rates.  This ETF provides good coverage of all the preferred shares, but we’re using it along with picking individual ones out.
  • Mastercard (MA) – We’ve been holding this for awhile and the company, and top-dog Visa, hasn’t really provided the return that we thought would come from increasing worldwide payments.  Both have done well, but lag broader S&P.
  • Markel (MKL) – The mini-Berkshire company has actually outperformed it’s role model by 3:2 since we’ve owned both……and if Berkshire has beat out the S&P, then…..

Biggest concern this year is the >10% Bank of America holding as it is entirely in Bank of America warrants that expire in 2019.  These warrants are great in that they adjust for any dividends or share dilutions but they are extremely leveraged as you can own the equivalent of 100 shares of the company for about 35-40% of the cost of owning the real shares.  In fact, I’ve already made some trades to try and protect the huge run-up that has happened since the US election.

Other than that, no other top 10 worries me too much – happy to own them all and they’re very low maintenance in terms of keeping an eye on how they’re doing.

2016 Performance:

Portfolio Performance

Portfolio/Benchmark 1M 3M 6M 1 Yr 2 Yr 3 Yr 5 Yr
Portfolio 4.9% 8.7% 19.4% 8.0% 10.7% 14.6% 18.9%
S&P 500 (SPY) 2.7% 4.4% 7.9% 17.2% 14.3% 17.2% 19.2%
TSX 60 (XIU) 1.5% 4.3% 7.7% 10.4% 5.1% 7.1% 7.7%
70/30 SPY/XIU split 2.4% 4.4% 7.8% 16.5% 11.8% 14.4% 15.9%
Complete Couch Potato -0.5% -0.5% -1.0% 7.3% 5.3% 7.0% N/C

Getting 8.0% this year may seem okay, but it has been a disappointing year when you look at some of the gains that could have been made by simply investing in the US and Canadian benchmarks.  There are some easy explanations:

  • US currency dropped 5% over the year and in a portfolio largely USD based, that led to a few percentage points
  • A more conscientious look at diversifying the portfolio to focus outside of individual US companies – significant holdings in rate-reset preferred shares, holding fixed income and international ETFs
  • Haven’t really been able to increase savings and investments due to family financial commitments this year
  • Some significant drops in key holdings – AAPL, BOFI, BAC, AIG, preferred shares at the beginning of 2016

At the end of the day, the real reason why this year has been disappointing is that I got fearful at the beginning of the year as the market dipped (portfolio dropped >15%!) and I reduced holdings instead of using the opportunity to buy more great companies at a discount.  Had I taken a step back instead of being reactive, I should have bought more, or simply just kept holding.  It was only fortunate that I regained my senses and re-invested back in some of those companies in April – but a little late, in many cases, buying back shares at a higher price than I sold.

Some of the inability to action was also looking at the weighting of an individual security in the portfolio.  For example, Bank of America had gone from $18 all the way back to $12!  If I was willing to buy it all the way up to $18, $12 should have been a steal – but the only thing stopping me was how much I already held.  Don’t get me wrong – the stock has rebounded more than I would have expected; but at the time, I felt I already had enough exposure to the company.

*Sigh*, as they say, hindsight is 20/20 – and if there’s anything I’ve realized investing in stocks, there will always be opportunities to buy.  You just have to know how to identify them!

Individual Stock Performance

American Tower Corp. (AMT) +65.9%
Shopify Inc. (SHOP) +50.8%
Dundee Corp Preferred Series B (DC.PR.B) +50.2%
Bank of America Corp. (BAC) +44.2%
Transalta Corp. Preferred Series E (TA-H) +44.1%
Apple Inc. (AAPL) +26.4%
Aimia Inc. Pref Series 3 (AIM-C) +23.6%
NuVasive Inc. (NUVA) +19.5%
Altria Group Inc. (MO) +17.9%
Mercadolibre Inc. (MELI) +15.6%
Sandvine Corporation (SVC) -11.3%
Lumber Liquidators Holdings Inc. (LL) -16.6%
Wells Fargo & Co. (WFC) -17.5%
Arista Networks Inc. (ANET) -19.5%
Skyworks Solutions Inc. (SWKS) -23.6%
Ambarella Inc. (AMBA) -23.6%
Chipotle Mexican Grill Inc. (CMG) -30.9%
Baidu Inc. (BIDU) -36.6%
Tesla Motors Inc. (TSLA) -72.0%
ProShares UltraShort S&P500 (SDS) -100.0%


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:

Portfolio Holdings By Sector (December 2016)

Portfolio Holdings By Sector (December 2016)

The big surprise here is the 18.6% in fixed income – which largely consists of the rate-reset preferred shares – something I never thought I’d put so much portfolio weight behind.  However, you’ll also see that that high percentage is counterbalanced with the -10% cash position.  As mentioned when I first thought of investing in rate-resets, there was an opportunity to leverage the low interest rate environment we currently live in.  I decided to take one of the aggressive options and use margin to fund half of the dividend portfolio (mostly consisting of rate-resets).  With a borrow rate of prime (~2.85%)  and the C$ side of the dividend portfolio yielding 6.0%+, that’s already a spread of 3.15% not even including the potential capital gains that we were expecting from the preferreds.  Add in that the interest rate is tax deductible and the preferred shares follow the dividend tax credit, it’s like borrowing at 2% and getting 7.5%! Even better is that if the cost of borrowing rises, so should the dividends (and stock price) of the preferreds.  That’s the thinking anyways – time will tell if my logic works.

Previous worries about how much we were overweight in financials (>40%) has at least gone done and been distributed somewhat to other areas as new money as been put in.  However, there’s an even greater concern that this portfolio is based on interest rates rising (for the financial sector and the dividend portfolio) which will likely determine 2017 as a make or break year.

 Final Thoughts and Predictions:

For the past few years, I’ve always thought that the USD would rise against the CAD due to US rates going higher before Canadian rates.  Surprisingly, despite the US starting to raise rates ahead of Canada, the loonie has proved resilient ending 2016 higher than it started.  I also would have predicted US markets to outpace Canada in 2016 which was surprisingly not the case as Canada benefited from rising oil prices.  So, the only prediction I’m going to make this year is rates are going to go up (hence my big investments in those sectors).

From an investment education standpoint, the goal is always to beat the benchmark indices – but this year, I’m going to decide if I’m going to do that through concentration (investing heavily in specific areas and hedging appropriately) or diversification.  Part of that will be learning the benefits of both and how I can apply that to the current portfolio.  Hopefully, there’ll be some posts along way!


3 thoughts on “Portfolio Year in Review – 2016 (We’re Back!)

  1. Pingback: Intuitive back on top (and how they might be getting their groove back)! | Fearless Cal's Investment Journal

  2. Pingback: Portfolio Update January 2017 (+2.6%) | Fearless Cal's Investment Journal

  3. Pingback: Portfolio Year in Review – 2017 | Fearless Cal's Investment Journal

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