- Q4 crushed my portfolio, with a 7.6% loss, even though over $5,000 in cash was added
- Due to the huge drop in market values, my allocations are closer to target than earlier in the year
- Passive income up 21.8% year over year
It’s periods like this that I am happy I am a “buy it and forget it” type of investor. Long gone are the days where I would monitor my portfolio constantly and start freaking out about drops in the market; if I was still in that mindset I probably would have started selling pretty early in December 2018.
Monthly Performance Summary
The last quarter of 2018 was brutal for the portfolio. Overall, I completely missed benchmark targets: where the benchmark was down 4.0% for December, the portfolio was down 6.1%, which is roughly 50% worse than the benchmark. Even looking at the quarter as a whole, the fund was down 7.6% vs the benchmark 6.4% — not quite as bad as December, but no matter which way you cut it the fund was down.
The portfolio that lead the way in Q4 was the Certificated Portfolio, and the huge spike in November can be attributed to Emera which gained 10% in November – and since that holding is the largest in the Certificated portfolio—at 24%—that 10% increase pulled the rest of the portfolio up with it. Another big winner was CAE which jumped quite nicely, spiking from a 12% gain in October to a 31% gain in November. Even after the December crash, the certificated portfolio managed to break even, with only a $1.00 variance between Q3 and Q4. Regrettably, the Certificated portfolio only accounts for 3% of the total fund, so even with its stellar performance it wasn’t enough to pull the rest of the holdings up.
No, the biggest drag on returns was the RRSP portfolio, which lost 8.6% over the quarter. This was followed by the LIRA which lost 6.8%, and right behind that was the TFSA which lost 6.7%. What’s interesting is that the LIRA portfolio tracks the benchmark (a variant of the Couch Potato portfolio), and the benchmark was only down 6.4% in the quarter – I attribute the variance there (6.8% vs 6.4%) due to rounding, and being constrained to purchasing whole shares, not fractional. The “rounding friction” leaves money on the table since the LIRA cannot stay 100% invested at all times (e.g. if I receive $35 in dividends but the stock is re-invested at $30, I am leaving $5 on the table, uninvested).
In my June 2018 update I mentioned that GE was a drag on the portfolio as well. Not surprisingly, GE was a large drag in October 2018, losing a little over 70% of its value in that timeframe, but for the other two months of the quarter it was flat.
The above graph illustrates the month over month declines when measured against the trailing twelve-month metric. Even more disconcerting is that over the course of Q4 I invested an additional $5,000 in the fund. So even with an absolute increase of $5,000, the fund still lost 7.6% over the quarter, but I still plan on staying the course, the reason for that being passive income.
For the half year update, I spoke of Aecon being one of the key drags on the portfolio. As I had hoped, when speculators jumped off of the merger wagon the price rebounded nicely in the latter half of 2018.
So, the total fund lost a lot in the last quarter, in fact it lost 7.6% — even though I added money. However, as this is a dividend focused fund, a paper loss does not mean much to me when measured against realized gains.
So, even though on a total returns perspective the we did 50% worse than the benchmark (a loss of 7.6% vs a loss of 6.4%), as you can see from the above graph, actual income was much greater than the benchmark. Even though it looks like the benchmark did better in October (which it did, by about $600), in December the fund outperformed the benchmark by over $800. All in all, for Q4 the fund brought in $2,400 vs the benchmark $1,800. And the picture is even better when we revisit the trailing twelve months:
Total income for 2018 is north of $9,200, compared to the benchmark which was a little over $7,500. On a year over year basis, passive income also increased by more than 21% over the same time in 2017. Also, from my 2018 Goals List (link), my goal was to increase passive income by 5%, or to over $8,100 per year. I have more than exceeded that goal, which is a win! I’ll re-iterate what I said in July:
All things being equal, I would rather beat the benchmark on passive returns than on total returns, reason being that I am creating an income fund, not a capital gains fund.
The other saving grace is that, because equities did so poorly in Q4, the overall allocation to equities dropped, increasing the exposure to fixed income and real estate.
I did not publish an update for Q3, but even compared to Q2 he balance is better: Equity exposure dropped from over 70% to a little over 60%, and fixed income and real estate increased as well. The $5,000 of additional funding I spoke of earlier primarily went to VRE.TO to increase my real estate exposure, and the plan is working.
However, I am still a far cry from my target allocations. 2019 will be focused on pouring more money into real estate ETFs to force that component of the portfolio up. With concerns over interest rates, etc., in Canada, I actually expect real estate prices to drop, which means I may be able to pick up real estate ETFs on the cheap over the next twelve months.
I’ve been very lazy the past 6-9 months, with work and fatherhood taking the majority of my time. That laziness somewhat worked in my favour as I was pretty oblivious to the drop in my portfolio until I sat down to crunch the year-end numbers; I simply wasn’t paying attention to the financial news. Since my focus has been on increasing real estate exposure, any free cash flow I had went straight into VRE.TO.
My concerns about a drop in the passive income from paying off my car did not really materialize. I was worried about the loss of $250 in passive income, but due to my aggressive investing in VRE.TO I made up the difference on the other $5,000+ I had invested.
The bigger question is what I will do this year. For now, I am cleaning things up and looking for gaps in the portfolio, including re-initiating coverage on companies I used to research before; at the very least, to ensure that they are still good investments. A challenge with being a passive “buy it and forget it” investor is sometimes you get antsy when you are not doing anything. Next steps will be to revisit my 2018 goals, plan 2019 goals, and see where that takes me.
Onwards and upwards!
- Lack of Aecon buy-out triggered large drop
- TTM income still > $8M which puts us on track to meet our 2018 goal
- Asset allocation still skewed towards equities
Monthly Performance Summary
As I mentioned in my last update, I purchased some GE call options which expire in January 2020. Those options continue to be the biggest drag on the portfolio. Other than that, the Canadian Government blocked the potential takeover of Aecon which I spoke of in a previous post. When the acquisition was first announced Aecon surged 22% in my portfolio, and since then it has dropped back down to “normal levels”. So, while my net gain on Aecon is practically flat, I did experience a material drop in the portfolio in May.
Interestingly, on a month over month basis both the LIRA and EPSP portfolios are lagging the benchmark, which is odd because those two portfolios are couch potato portfolios, as is the benchmark; one would think that they should be tracking each other. However, the variance could be attributed to a few factors:
The LIRA has not been rebalanced in some time, and there is now some tracking error. The portfolio is overweight a few percent in VXC and underweight 5% in VAB. There is also a growing cash position. The portfolio is due for a manual rebalancing soon.
The EPSP portfolio is combined couch potato and shares of my employer through the stock purchase plan. The stock purchase plan is approximately 33% of the portfolio so the remaining 67% is couch potato. But that means that the 75% equity is skewed, and not a perfect tracker to the couch potato.
On a TTM perspective we have been diverging more and more away from the benchmark. The benchmark TTM for June 2018 is 9.96% whereas the total fund is only 3.77%, a whopping 6% spread. Again, a large percentage of this can be attributed to the material decline in the margin portfolio due to the GE options. The other factor is that the certificated portfolios contain Riocan, and H&R REIT, both of which cut their DRIPs earlier this year, resulting in a drop in both holdings. Since REITs are large proportion of the certificated portfolio, insofar as those positions drop, the overall portfolio drops, increasing drag on TTM returns.
As always, passive income is the primary objective of my portfolio.
Passive income has been “okay” the past few months. As expected, non-quarter months (i.e. January, February, April, May) beat the benchmark, but this leveled out on the quarter months (March, June). The reason for this is that VCN and VXC, which are key components of the benchmark, only pay realized returns once a quarter, but the actual fund has dividend payments and distributions scattered throughout the year. But what we really want to see is the TTM passive income, in the following chart.
The good news here is that I am still beating the benchmark. All things being equal, I would rather beat the benchmark on passive returns than on total returns, reason being that I am creating an income fund, not a capital gains fund. Based on that metric, TTM for the benchmark was around $6,750, whereas our fund broke the $8,000 mark. More precisely, I gained 21% more passive income than the benchmark. All in all, that is an impressive feat in my view.
Last but not least, allocation remains a key point of concern.
Equity is still a dominant force in the overall fund, weighing in at north of 70%, well above the 55% target. For the next six months I will be focusing on increasing real estate exposure:
- This will add some more balance to the portfolio
- From a passive income perspective, REITs provide a better opportunity than fixed income
- REIT ETFs are a cost effective addition to the overall fund since I can buy ETFs through Questrade for next to no commissions.
The first six months of the year have not been stellar, but they have not been necessarily bad either. At an aggregate, the losses I experienced were expected (e.g. Aecon dropping, GE dropping). But, as a long-term investor I am not overly concerned. I have literally decades for Aecon to increase back in value, and my GE options have over 16 months before expiry which gives plenty of runway for them to recoup any paper losses.
A bigger concern is passive income over the next six months. 3% of the portfolio was reserved to pay off my car in August of this year (the final “balloon payment” from my finance arrangement with the car dealership), which will mark a material loss on the liquid portion of the portfolio since those funds were in my TFSA account. That drop will also remove $250 of passive income from the overall portfolio; not a large amount but it does represent 3% of overall passive income.
As it stands, the TTM passive income positions me to meet my 2018 passive income goal of $8,100/year. However, if we take 3% off of that, I will miss the goal. My hope is that by investing aggressively in REITs to re-balance the portfolio, the higher yield on REITs will make up for the lost passive income.
Onwards and upwards!