Why Diversify Across Asset Classes: A Canadian Example

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The US equity markets have had another excellent year with the S&P 500 on track to close out 2021 with a total return of over 29%. This is the 3rd year in a row the index has shot up by double digit percentage points. It remains to be seen if the bull market will continue in 2022. With that said, it is important to not get too complacent. One of the key strategies I have repeated in this blog over the years is diversification. Investors should not put all their eggs in one basket instead diversify across many asset classes. Diversification can also include holding various assets across countries, regions, etc. The key point is not to YOLO one’s assets into some meme stocks like Gamestop(GME) or AMC(AMC) to strike it rich quickly. The meme stocks phenomenon is an aberration to say the least in the grand scheme of things.

In any given year, various asset classes perform differently as expected. For example, in 2020 emerging equities were the best based on the MSCI Emerging Markets Total Return in Canadian dollars while cash was the worst with a paltry 0.6 return. US stocks were the top performers in 5 of the 10 year period from 2011 to 2020. Canadian equities had the best return only in one year in 2016 during the same period.

The following chart shows the returns of various asset classes from 2011 to 2020 in Canadian Dollars:

 

Click to enlarge

Note: US returns (S&P 500 Total Return Index) shown above have different figures since they are in Canadian Dollars. 

Source: RBC Global Asset Management

For an interactive version of the above chart go to the RBC site.

Related ETFs:

  • iShares MSCI Emerging Markets ETF (EEM)
  • Vanguard MSCI Emerging Markets ETF (VWO)
  • Vanguard Developed Markets Index Fund ETF (VEA)
  • SPDR S&P 500 ETF (SPY)
  • Vanguard Total Bond Market ETF (BND)
  • SPDR® Barclays High Yield Bond ETF (JNK)
  • iShares MSCI Canada Index Fund (EWC)

Disclosure: No positions

Covid-19 Levels Soar Across The U.S.

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The daily average for Covid-19 cases in the US reached 301,472 yesterday according to NY Times. In the past 2 weeks, it has soared by more than 153%. All previous records are getting broken in many states across the country.

Compared to other developed and even emerging countries, the vaccination rate is still low at 62%. The following awful chart from CNN below shows the community transmission of Covid-19. Pretty much the whole country is in the red category.

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Source: Omicron surge is ‘unlike anything we’ve ever seen,’ expert says, CNN

Below is all-time Covid-19 cases chart:

Source: The U.S. breaks its single-day case record, nearly doubling the highest numbers from last winter, NY Times

Canada’s Railway Profile: Infographic

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Canada is the second largest country in the world in terms of land after Russia. It is interesting to note that Canada is also slightly larger than the US. Canada’s economy is about one-tenth the size of the US economy. However one major difference between the economies is unlike the US economy, Canada is a resource-based economy. Most of the country is uninhabited but rich in natural resources like timber, gold, diamond, nickel, etc.

To move all the natural resources across vast land it is necessary to have an efficient rail network. Though the country has passenger rail systems the Canadian railway system is dominated by freight railways. This is not surprising since the vast majority of the population lives closer to the coasts and closer to the US border. So much of the resources from up north and west are transported thru railroads. Two major Class I railroads – Canadian National(CNI) and Canadian Pacific(CP) – cover the entire country with some smaller routes supported by short line networks. Both CN and CP are also publicly traded and transcontinental. In fact, the recent acquisition of Kansas City Southern(KSU) in the US by Canadian Pacific will provide CP an amazing network connecting Canada all the way to Mexico.

From an investment standpoint, CN and CP are some of the best ways to profit from not only the growth of the Canadian economy but also also the US economy since both railroads are highly interconnected with the US rail network. With that brief intro, below is an interesting infographic I recently came across at the Railcan website.

Click to enlarge

Source: Railway Association of Canada

Disclosure: Long CNI

Bancolombia S.A. to Raise Dividends Next Year

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Bancolombia S.A. (CIB) is the largest financial institution in Colombia. The bank is also the largest in the country based on assets. CIB was the first Colombian company that listed its ADR in the NYSE bank in the 1990s and has operations in other countries as well including Panama, El Salvador, Puerto Rico, the Cayman Islands, Peru and Guatemala.

In 2020, the bank slashed its dividend payouts significantly and the current yield is just 0.80%. In 2019, ADR holders received around $0.30 per quarter excluding fees and taxes. This was cut to $0.06 per quarter. Year-to-date the stock is down about 21%. However the bank plans to increase the dividends for 2022 when the decision is in February/March. Below is the press release:

BANCOLOMBIA S.A. ANNOUNCES REVISION OF PROFIT DISTRIBUTION POLICY
The Board of Directors of Bancolombia S.A., taking into account the current capital and results of
operations and businesses of Grupo Bancolombia, recommended that management revise the
dividend policy to increase the percentage of profit distributions to be proposed to shareholders at
the next ordinary meeting.

Source: Bancolombia

The chart below shows the year-to-date returns of the stock:

Click to enlarge

Source: BNY Mellon

Investors looking for income and growth can consider adding CIB at current levels or under $30 per share. Dividend withholding taxes are not charged if held for qualified retirement accounts. Per BNY Mellon, the DSF fees for dividend is up to $0.05 per share but this was not this year.

Bancolombia Headquarters, Medellin, Colombia

Disclosure: Long CIB