Overview of equity markets and Schwaben’s investments in 2010



February 3, 2011

To our dear friends and clients,

We have now completed our first year of operation and have started a track record of our Canadian stock model portfolio. Our model portfolio is a portfolio that has been set up with a quote vendor that track positions when we purchase or sell these in the model portfolio. The actual purchase and sale in our clients portfolios may differ from when we purchase and sell securities in the model portfolio due to risk and other portfolio restrains. The model portfolio however offers a good representation of what a portfolio would look like if we had invested the funds starting January 4, 2010 and it had no restraints. A model portfolio is not eligible for an official performance track record thought, based on the CFA Institute guidelines or as it is official referred to the “Global Investment Performance Standards” or other regulatory organizations as it cannot be audited and does not meet some of the rules and guidelines that are required when calculating investment returns for official performance guidelines. It offers a good indication though how well all of our selections have performed.

The return on our Canadian dollar model portfolio including dividend and distributions was 25.5%.  Our portfolio was fully invested for almost the entire year.  The only sale we made was our position in Western Coal on November 18, 2010. We purchased Western Coal at $3.86 at the beginning of the year and sold it on November 18 for $10.75, with a 178% gain, after a takeover bid from Walter Energy pushed the stock as high as $11.00. The stock has since appreciated to over $12.00 however we were happy with the return that we achieved as we did not want to be exposed to a potential decline should the takeover bid have fallen through. We put Enbridge on our watch list, were we will not add the position to any portfolios as we feel it may be a bit expensive and we want to review the position to determine to what extend and how much more upside there may be in Enbridge.

Last year we also established some selected positions in the US to offer some of our clients where appropriate some exposure to the US. This year we established an entire model portfolio that will allow us to track our US performance. One of the positions that we established last year in the US was Apple. We have sold Apple earlier this year at U$342.00, for a 36.8% gain, after Steve Jobs indicated a medical leave of absence. It was our concern and opinion that a complete absence of Steve Jobs would have a sever impact on Apple. Steve Jobs has had two major medical complications since he has taken the helm at Apple. Initially he was a survivor of on of the least lethal forms of pancreatic cancer in 2003 and he recovered in 2009 from a liver transplant operation. While we hope that Mr. Jobs recovers from his current medical ordeal we feel that we do not want to risk the potential price volatility that may occur if he does not. The Chief Operating Officer Tim Cook is not a very well known personality and in the total absence of Steve Jobs would likely not attract the instant confidence of many investors. A further point is that growth expectations for Apple have increased significantly and with the increased competition in the smartphone and tablet area, we feel that Apple could miss the market expectations.

While we feel that equities have appreciated significantly over the past 6 months, in fact since the bottom of last August at just above 11,000 on the TSX and just above 9500 on the Dow and just above 1,000 for the S&P every Index has marched straight North to levels not seen since 2008. In the last two quarters equities in all sectors across the board have surprised investors as well as Analysts with stunning results. This has resulted in an almost 30% appreciation in the S&P 500, a 25% appreciation in the Dow Jones Industrial Average and an almost 23% capital appreciation since then. You may ask yourself why your portfolio did not achieve such spectacular results.

1.)  Your investment period was most likely longer than July 2010. January 2010 equities levels were higher than the low point in July of last year. Returns from December 31, 2009 to December 31, 2010 on equities were significantly less, in fact 12 months 12 months return have only been 14.1% for the Dow Jones and 15.1% for the S&P 500. Please see the statistics below for further insight,

2.)  Our equity selection is skewed away from cyclical equities such as resource based stock. Resource based stocks have done extremely well over the past 6 months with metals and Oil appreciating significantly since then. We do not believe in specific market timing, resource based and cyclical stocks generally can add significant volatility to portfolios. Our focus is to achieve solid returns with smaller troughs and peaks. We prefer that our clients sleep well at night. We think there are still enough reasons to have ups and downs that we don’t need to add volatility created by commodity speculation.

3.)  The asset allocation to equities and fixed income including preferred shares in your portfolio most likely resulted in less than 100% exposure to equities. In many cases we have used high yielding, high quality preferred shares to obtain income in lieu of actual bond. We feel that the yield premium and the preferential tax treatment of dividends more than make up for the extra interest rate risk or credit risk that high quality preferred shares may have.

In spite of all these facts our twelve months return December 2009 to December 2010 on our model portfolio, of which our clients portfolios are partially made up, was 25.5%.

Although the last six months have had very significant capital appreciation we feel that many equities are still not overvalued and that with proper stock selection this may be a time when active stock selection can still be of significant value.

In spite of many political and economic hurdles, equities seem to continue to march higher both in Canada and the US. There may be some volatility over the next few months however we believe that since equity markets have broken new highs and established new support levels the downside should be limited at this point in time.

Performance of North American indices and

Schwaben Canadian $ Model Portfolio

in 2010

Price Return Total Return
TSX 14.4% 17.6%
S&P 500 12.8% 15.1%
Dow Jones 11.0% 14.0%
NASDAQ 16.9% 20.1%
Schwaben Model Portfolio n/a* 25.5%

* There is no price return performance measured for the Schwaben Model Portfolio because of purchases and sales of securities.


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