Turchansky: Investment strategies when markets move sideways

EDMONTON – A period of sideways movement in stock market cycles, as we’ve been in since the year 2000, will be perilous or profitable depending on your approach.

David Burrows, president of Barometer Capital, explained to clients of Canaccord Wealth Management that there are three aspects to surviving a sideways market.

“In these choppy periods, on the equity side you’ve got to pick your spots, you invest at certain points, and two or three-year rallies can be very good to you,� Burrows said. “Secondly, income or dividend yield becomes a little more important. And thirdly, you have to have a really disciplined selling strategy.�

He showed how stock markets traditionally have moved like steps, with a 15-to-20 year growth period when a rising tide lifts all boats, alternating with a 15-to-20 year period of ups and downs but overall stagnation. After a great bull market from 1981 to 2000, the tech bubble and “irrational exuberance� shuffled us into a sideways period.

“In each case, it takes sideways or choppy markets to wash out that over-ownership in favour of other markets,� Burrows said.

“At some point we’re going to be through this difficult period and back in a nice bull market – I don’t know whether it’s a year from now, five years from now, or maybe we’re in it now. When we get there we’re all going to make lots of money, but you’ve got to get there intact.�

He said that Canadians want to focus on energy stocks, metal stocks and gold stocks, “but that’s not where the money’s being made.� He’s dropped stocks with large gas exposure.

The income portion of his portfolio is currently 30 per cent invested in mid-stream energy assets, 25 per cent in Real Estate Investment Trusts, and 13 per cent in financial companies. He owns InterPipeline Income Fund, he likes REITs because the Target department store is moving into Canada in a big way, and he holds financials as they passed recent stress tests, freeing up capital.

“A year ago we thought the banks would be dead for a while, because they were becoming like utilities. But it turns out utilities are what people want, low share growth rate with a little bit of dividend growth.�

The equity part of his portfolio holds more United States-based companies than it has in years, but most are large global multi-nationals in the consumer space. He’s added technology companies “because they’ve become mature businesses and they’re going to become growth companies.� And he’s added pharmaceutical firms.

Names include Estee Lauder, Yum Brands, Starbucks, Hugo Boss and IBM.

Historically, Burrows noted that 80 per cent of investment portfolio return comes from the market itself, and the industries you focus your portfolio on. The other 20 per cent comes from individual business characteristics of the companies you invest in.

He said the first step in a sideways period is “to understand the market we’re in to say ‘should we be making investments now?’ You find a great investment, but if it’s the wrong time, in a tough market you lose all kinds of money.�

If you decide it’s a good time to invest, target industries that stand to prosper.

“What we’re looking for are parts of the market that are seeing net inputs of capital; where is the money going? The way you make money investing is you hope that other people will come in behind you, and raise prices.�

In the income portion of his portfolio, he looks for investments that pay dividends, distributions or interest payments, and that grow their dividends.

“There hasn’t been a time when you had a better risk reward getting a dividend versus a government bond. There’s more cash sitting on balance sheets than any time since the 1950s. Companies are paying less to their shareholders than any time in the last century, only 26 per cent of earnings.�

He said firms are ripe to increase dividends, which in turn boosts share prices.

“Telus has had a great run; and a lot of the run has come from the moment it said ‘we will raise our dividend twice a year for the next three years.’�

The third part of Burrows’ strategy, which he feels is most important, is having a disciplined selling strategy. He uses stop losses, selling stocks at a certain set point. But he bases them not on percentage of fall, because some stocks are more volatile than others, and instead looks at when a security moves outside its historical normal price range.

“It’s not the first month of a decline that costs you a bunch of money, it’s month four, five, six or seven. But we’ve been 11 or 12 years in a sideways market, and not many people are willing to make big speculative bets. We’ve had a five-month great rally in the stock markets, and there’s still money coming out of equities each month.�

Ray Turchansky writes Fridays in the Journal.



Thursday, March 29th, 2012 EN

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