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Perspective

Richard Croft
April 15, 2013
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Listen to the US media and you might think your portfolio has underperformed, with US stocks making record highs with a 12.14% year to date return for the iShares S&P 500 index ETF (TMX: XSP). Note this ETF is hedged to the Canadian dollar, which added about 3 percentage points to the year-to-date return.

Unfortunately, Canadian stocks have done nothing that remotely resembles the US numbers. The S&P TSX 60 Index Fund (TSX: XIU) is virtually unchanged, down -0.19% year-to-date, including re-invested dividends. No wonder Canadians feel left out!

It gets worse if you were to annualize the first quarter performance data for US equities. It leads to a very lofty number! On the other hand, if the performance is based on an overly optimistic forecast, the best may be behind us, in which case not so much!

That’s where perspective plays such a critical role. Ask what’s propelling US equities; economic growth, Fed liquidity or Wall Street spin? Seek supporting evidence by perhaps looking at the Canadian market, which I believe is a more accurate gauge of current conditions.

At least the Canadian equity markets are being spearheaded by economic activity rather than liquidity enhancement. Although some would argue that Canadian indices have been hobbled by major declines in the price of gold and oil, and therefore are not reflecting the economic growth prospects that seem to be driving US equities.

To that point, I would argue that recent weakness in Canadian banks has been a major stumbling block for Canadian equity indices. It is hard to argue that banks are not representative of broader economic activity.

If you accept that Canadian stocks are resting on a stronger foundation, you might want to focus on high dividend paying stocks of blue chip Canadian companies, which tend to move more deliberately. The iShares Dow Jones Canada Select Dividend Index Fund (TMX: XDV), which represents a basket of such companies, is up 3.57% year to date.

You might also consider covered call writing strategies that generates cash flow, although the risk reduction metrics that accompany the strategy tend to reduce short term fluctuations, both up and down. At least the strategy provides some defensive characteristics in your portfolio.

If the economy is really as strong as some investors believe these two strategies will do well. If the economy is not as strong as anticipated these strategies will offer some downside protection with a floor supported by solid dividends.

The point to all of this is that perspective should not be guided by sentiment but rather supported by facts.

Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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