North American markets start 2012 on a positive note

Megan Saxton - March 30, 2012

Despite the recent out performance of US equities, the Quarterly Review reminds readers that Canadian dollar investors have not made positive returns in the US market for 12 years, and that includes dividends

North American equity markets started 2012 on a positive note, especially in the United States.

  • The S&P/TSX Composite Total Return Index gained 4.4% during the quarter.
  • South of the border, the S&P 500 Total Return Index gained an impressive 12.6% following an equally impressive 11.8% gain in the fourth quarter of 2011.

The US market has benefited from domestic economic strengthening in the manufacturing and consumer sectors, as well as the housing market, which appears to have reached bottom. The S&P 500 now sits less than 10% away from its 2007 high while the S&P/TSX Composite is almost 20% away from its 2007 high.

Given these recent outcomes, there is a temptation to shift focus toward the US market. Indeed, many pundits are now touting the virtues of diversification and the perils of resource-related concentration in the Canadian market.

We believe the story is much different than a simple comparison of the widely quoted price-only indices.

Chart One shows the relative performance for the Canadian and US markets since 2000, as well as the LFA Equity Composite, all on a total return basis.

Clearly, the recent performance of the US market is relatively meaningless when looking over a longer time frame. The reality is that Canadian dollar investors have not made positive returns in the US market for 12 years and counting, even when dividends are included!

Meanwhile, Leon Frazer’s strategy of selecting a portfolio composed primarily of Canadian companies that maintain and increase dividends has produced compelling results.  It is why we do not alter our long-term strategy based solely on recent events.

Focus on the long term

Because LFA portfolios include selective positions in resource producers, they are not immune from cyclical setbacks, as we have recently seen.

The company’s discipline forces us to participate, in moderation, in different sectors and markets where appropriate. Our aversion to large tactical shifts keeps our portfolios well diversified and focused on what matters — the long-term.

Chart One shows Leon Frazer’s equity selection process quite literally pays dividends over long periods of time, while making investment decisions based on recent history has long been the enemy of the retail investor.


Modest economic growth will continue

The sovereign debt situation in Europe is much improved compared with three months ago. The European Central Bank (ECB) executed a massive $1 Trillion Euro bailout of the banking system which stabilized confidence and sent equity markets around the world higher. At the end of 2011, we estimated a bailout similar to the one executed by the US Federal Reserve in 2008–2009 was at least as likely as the meltdown scenario that many were loudly predicting.

The ECB’s decision to inject liquidity into the banking system was prudent and predictable, as was our decision to remain fully invested last fall. Sovereign debt levels remain elevated in Europe and North America and will continue to be a drag on economic growth for years to come. We continue to stick to our view that modest economic growth will continue, fuelled by developing world demand and developed world recovery. This view is less concerned with making headlines and more focused on making money for our clients over the long-term.

Optimism on portfolio returns

Leon Frazer client portfolios slightly lagged the market during the first quarter.

The market is still down almost 10% year-over-year, while client portfolios are relatively unchanged.

We continue to be optimistic on portfolio returns for 2012 given the dividend growth exhibited by our core holdings over the past 15 months.

As a reminder, in 2011, approximately three quarters of our core holdings increased dividends with no capital appreciation from the portfolios. Thus far in 2012, we have already seen half of our core holdings increase dividends with very little response from the capital value of the portfolios. The pace and frequency of dividend increases in our portfolios is what gives us so much optimism going forward. The market tends to pay for dividend increases over time and we are confident our patience over the past year will be rewarded.