In the June 10 issue I mentioned that while I had been tilting from the U.S. back to Canadian investments, the results of the election caused a re-evaluation of that thinking and I would start looking more extensively at markets outside our two nations. This was followed up with a column that appeared Aug. 12, “Where in the world are the best opportunities?”
A recent article appearing in Juno News stated that foreigners are divesting Canadian assets while Canadians are investing more in foreign securities, a double whammy to Canadian investments. A direct quote was, “The result of these dual movements — a retreat by foreign investors and an outward push by Canadian ones — was a net outflow of $16.2 billion from the Canadian economy in May.” A similar article appeared in the Financial Post with a chart exhibiting year-to-date outflows from Canadians to U.S. securities, both stocks and bonds, of $59.9 billion. In half a year there were more outflows than any full-year period dating as far back as 1990. The government may be experiencing a honeymoon period with voters but not with investors.
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Additionally, during second-quarter earnings calls, both our largest midstream pipeline companies, Enbridge and TC Energy, discussed future investments. The comments were widely reported with a headline in the Edmonton Journal reading, “Despite pipeline hopes, Enbridge, TC Energy see strong demand in U.S., hurdles in Canada,” summarizing the sentiment. Despite political verbiage supporting major development projects, past legislation stands in the way.
While I generally like being lonelier making investment decisions, in this case it looks like the sentiment I experienced immediately after the election was mirrored by others — the main difference being I am looking outside Canada and the U.S., while it appears most others are focused on U.S. investments.
To free up cash to buy more foreign securities, I made two significant sales, one in Canada and one in the U.S. Both are examples of my minimal turnover approach. In a taxable account I sold Bank of Montreal (BMO). The shares were purchased in July 2015 and March 2020 for an average holding period of about 7.5 years. I sold for slightly more than twice what I paid, and with accumulated dividends made 163 per cent total return. While overall BMO is fine compared to other Canadian banks, it has one of the lowest return on equity (ROE) ratios of 9.8 and trades with an above-average price earnings (P/E) ratio of 14.4. I like to see the ROE above the P/E.
In my RRSP I sold half my position in U.S. bank JPMorgan Chase (JPM). I purchased the shares in 2003 for a 22-year holding period, paying $20.46 per share. I sold for $286.39 per share, and a 1,300 per cent capital gain. Add in $46.34 of accumulated dividends (based on the charts on my brokerage website) for a total return of $312.27 on $20.46 invested. Contrary to BMO, JPM has an excellent bank ROE of 16.9 with a P/E of 14.9, which is why I kept half the shares. JPM has been one of the best-performing banks in the world. Its famous CEO Jamie Dimon is, however, 69 years of age and not everyone is as timeless as Warren Buffett. While I have not used cash from this sale, it frees up capital for other foreign opportunities.
I purchased four different Canadian currency-based foreign ETFs (exchange-traded funds). I am a relative rookie at ETFs and used my internet website’s ETF sorting tool to buy the highest-performance funds. I added one emerging-market fund and one developed-market fund to both my RRSP and taxable account.
I selected ticker FCIM, which had the best three-year performance, and VXM, which had the best five-year performance for the developed-markets funds, putting the highest dividend payer into the RRSP.
I selected ticker DRFE, which has the best three-year performance of the emerging-market funds, for the taxable account, and REM, which has the fourth-best five-year performance record and sports a high dividend for my RRSP.
Past performance doesn’t guarantee future performance, but the probability is better.
While I am not exactly sure how taxes work on ETFs, in general there will be withholding tax on dividends paid by companies to the ETF, but when dividends are paid from the ETF to individual investors, if in a tax-sheltered account, those dividends should be tax-free. I will learn more as I become familiar with this investment tool.
Studying ETF performance for the first time, I was surprised by the wide range of performance across funds that are similarly focused. Three-year performance for the emerging-market funds ranged from 16.25 to 1.72 per cent per year, while the five-year performance ranged from 11.7 to 3.44 per cent. Developed-market funds’ three-year performance ranged from 27.06 to 10.74 per cent, while the five-year performance ranged from 19.11 to 7.21 per cent. Three-year performance figures look outstanding because we were in the midst of a bear market in 2022. With myriads of choices, my focus was on long-term performance while also considering the average P/E of the fund and, to a lesser extent, dividend yield and the Morningstar rating.
Overall, I only have about five per cent exposure to international markets and will continue to evaluate opportunities with a plan to double, if not quadruple, this level of exposure over the next few years.
