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A Pareto (80/20) Portfolio To Start The New Year

Summary Using the 80/20 principle to create an outperforming portfolio. Outperforming the market and the average investor with fewer stock holdings. Holding fewer stocks makes managing a portfolio much easier. How many stocks is it necessary to hold in a portfolio in order to minimize risk and outperform the market and the average investor? What’s your opinion? Some of the contributors on SA hold 20, 30, 40 and even more than 50 stocks in their personal portfolios. I have no reason to criticize holding that many stocks in a personal portfolio, as that’s something that is, well, personal. Nevertheless, I don’t believe it’s necessary to hold so many stocks in a portfolio in order to beat the market and most investor’s returns. In fact, I believe that any investor, by simply choosing the right stocks, could create an out-performing portfolio with as few as five to ten stocks. This is based on the Pareto, or 80/20 principle. If you’re not familiar with the Pareto principle, what it states is that 80% of the results, outputs, or rewards are generated from only 20% of the causing inputs or efforts. You can read much more about the Pareto principle and its history here. Theoretically, this means that over a specific period of time, if you were holding 30 stocks in your portfolio, only about six of those stocks would have contributed to about 80% of the returns you enjoyed. Of course, this could be back-tested, which I would love to do but don’t have the will or time for right now. Now, many investors will immediately agree that a minority of their portfolio holdings contribute to a majority of their returns during a given time frame. But, they will argue, the reason for holding a larger number of stocks in one’s portfolio is because no one can pick which stocks are going to perform the best over a given time period. Although on the surface this argument seems to make sense, I am not presently convinced that this is true. So, with that in mind, I am going to use my own real money to find out if I can pick a few stocks and still outperform the overall market and even the average investor. Following is my Pareto Portfolio holdings at the present time. Stock Shares Buy Price Price at 2014/12/24 Change Avigilon Corp. ( OTCPK:AIOCF ) 290 23.4732C 17.25C -27% Cisco (NASDAQ: CSCO ) 125 26.2695U 28.30U +7.7% Coach (NYSE: COH ) 100 35.3175U 36.97U +4.7% Dream Office Reit T.D/UN 700 25.5122C 24.76C -3% Pembina Pipelines (NYSE: PBA ) 90 39.6206C 41.58C +5% Following are brief overviews of each company. Avigilon Corporation was founded in 2004. The company designs and manufactures high-definition video surveillance solutions. The company’s systems protect and monitor various locations worldwide and their customers include major corporations, government institutions, stadiums, retail environments, casinos, transportation stations, and more. Financial Highlights: 2008 to 2013 CAGR of 102% FY14 first nine months revenues of 191.9 million FY14 first nine months adjusted EBITDA and net income of 35.3 million and 22.2 million respectively FY14 projected revenues of 280 million projected revenues of 500 million by end of FY2016 the company does not pay a dividend Analysts Recommendations Recommendation Trends This Month Previous Month Strong Buy 1 1 Buy 8 9 Hold 0 0 Underperform 0 0 Sell 0 0 Cisco Systems was founded in 1984. The company designs, manufactures, and sells Internet Protocol (IP) based networking products and services related to the communications and information technology industry worldwide. It provides switching products and storage products, as well as offering service provider video infrastructure and collaboration products. Further, the company offers wireless products and provides technical support services and advanced services. The company serves businesses of various sizes, public institutions, telecommunications companies, other service providers, and individuals. Financial Highlights (Source: Valuentum ) 3-year historical Revenue CAGR of 2.9% and 5-year projected of 3.4%. 3-year historical EBITDA CAGR of 3.6% and 5-year projected of 7.4%. 3-year historical Net Income CAGR of 6.6% and 5-year projected of 8.6%. 3-year historical ROIC (without goodwill) is 56.4%, giving Cisco a ValueCreation rating of EXCELLENT . current Dividend Yield of 2.69% Analyst Recommendations Recommendation Trends Current Month Previous Month Strong Buy 10 9 Buy 16 16 Hold 11 11 Underperform 4 5 Sell 1 1 Coach was founded in 1941. The company provides luxury accessories and lifestyle collections for women and men in the U.S. and internationally. The company markets its products through a network of company-operated stores, including Internet in North America, and Coach-operated stores in and concession shop-in-shops in Japan, Mainland China, Hong Kong, Macau, Singapore, Malaysia, South Korea, the United Kingdom, France, Ireland, Spain, Portugal, Germany, and Italy. It also sells its products to wholesale customers and distributors in approximately 35 countries. Financial Highlights (Source: Valuentum) 3-year historical Revenue CAGR 4.9% of and 5-year projected of 2.9% 3-year historical EBITDA CAGR of (3.6%) and 5-year projected of 5.3% 3-year historical Net Income CAGR of (3.9%) and 5-year projected of 5.6% 3-year historical ROIC (without goodwill) of 106.7% giving Coach a ValueCreation rating of EXCELLENT. current Dividend Yield of 3.65% Analyst Recommendations Recommendation Trends This Month Previous Month Strong Buy 2 2 Buy 4 5 Hold 21 18 Underperform 4 4 Sell 1 1 Dream Office REIT (TSX:D.UN) Dream Office REIT is an unincorporated, open-ended real estate investment trust. The firm owns a portfolio of high-quality, well-located and attractively-priced business premises. The company’s portfolio comprises central business district and suburban office properties totaling approximately 24.7 million square feet of gross leasable area in major urban centers across Canada. Financial Highlights ttm Revenues of 757.26 million ttm EBITDA of 428.15 million ttm Diluted Earnings/Share of 1.95 Book Value per share of $35.27 ttm Dividend Yield of 9.05% Analyst Recommendations Ford Equity Research Buy N/A TD Securities Buy $31.00 price target CIBC World Markets Sector Perform $31.00 price target National Bank Sector Perform $31.00 price target Scotia Capital Sector Perform $31.75 price target RBC Capital Sector Perform $30.00 price target Pembina Pipeline Corporation Pembina Pipeline Corporation was founded in 1997. The company provides transportation and midstream services for the energy industry in North America. It operates through four segments: Conventional Pipelines, Oil Sands and Heavy Oil, Gas Services, and Midstream. The Conventional Pipelines segment operates 8,200 kilometers pipeline network and related facilities that transport crude oil, natural gas liquids, and conventional oil and condensate in Alberta and British Columbia. The Oil Sands and Heavy Oil segment owns and operates Syncrude, Horizon, Nipisi, and Mitsue Pipelines, as well as the Cheecham Lateral, which transports synthetic crude oil to oil sands producers. This segment operates approximately 1,650 kilometers of pipeline. The Gas Services segment operates natural gas gathering and processing facilities, including 4 gas plants and 12 compressor stations, as well as operates gathering pipelines. The Midstream segment has interests in extraction and fractionation facilities; and provides terminalling and storage hub services. Financial Highlights ttm Revenues of 5.34 billion ttm EBITDA of 879.06 million ttm Net Income of 319.82 million ttm Diluted Earnings/share of $1.00 ttm Dividend Yield of 4.30% Analyst Recommendations Company Recommendation 12-month Price Target RBC Capital Outperform $51.00 TD Securities Buy $57.00 National Bank Outperform $55.00 CIBC World Markets Outperform $55.00 Scotia Capital Outperform $52.00 Haywood Securities Buy $57.00 There is only one rule I will follow regarding this portfolio. At no time can I exceed holding 10 stocks at one time. Other than that, I can add to any of the current positions at any time, I can add new positions at any time and I can sell any portion of or all of a position at any time. The point is to see how well this portfolio will perform in 2015 against the overall market. I will immediately update my readers of any additions to or changes I make to the portfolio. I’ll also do a complete update of the portfolio’s progress at the end of each month. I’m very interested in seeing how this Pareto Portfolio is going to do and I’ve love to hear your comments, ideas, feedback too. Additional disclosure: I am also long on the Dream Office REIT, symbol D.UN on the TSX.

3 Thriving ETFs With Over 500% AUM Growth In 2014

The global ETF industry has grown rapidly this year hitting a record of $2.76 trillion at the end of November with 1,659 products from 68 providers on three exchanges, as per the data from ETFGI . It is on track to cross the $3 trillion milestone in the first half of 2015. The industry has gathered $275.3 billion in new capital since the start of the year through November, representing all-time high inflows and surpassing the prior full-year net inflows. About 72% ($1.98 trillion) of the total AUM came from the U.S. ETFs. In fact, November has been the strongest month in 2014 with net inflows of $42 billion. Equity products have been leading the way higher with net inflows of $38.8 billion, followed by $4.9 billion inflows in fixed income products last month. Commodity ETFs/ETPs were the laggards with $221 million of asset outflows. The U.S. ETF industry has hit the $2 trillion mark this week, accumulating $232 billion in new assets year-to-date buoyed by massive inflows into the equity products. It easily topped last-year record inflows of $188 billion. This is especially true as investors continue pouring their money into the equity ETFs on rising confidence in the U.S. economic growth, accelerating job market, renewed optimism in housing recovery, low interest rates, low energy prices, healthy corporate earnings, and a flurry of merger & acquisition activities. Further, the U.S. has enjoyed back-to-back quarters of strong growth not seen in more than a decade. The economy expanded at a solid clip of 3.9% annually in the third quarter, up from the initial estimate of 3.5%, and was preceded by 4.6% growth in the second quarter. The country is also on track for the strongest annual job growth since late 1999. This suggests that the U.S. has emerged as a stronger nation trumping global economic concerns and geopolitical threats of 2014. Moreover, the Fed’s latest dovish comment that it is not in a hurry to raise interest rates has propelled the U.S. stocks higher. As a result, a number of U.S. equity ETPs have seen over 500-fold increase this year. Below, we have highlighted some of those in detail: iPath S&P MLP ETN (NYSEARCA: IMLP ) MLP ETPs have gained immense popularity this year, primarily due to crumbling oil prices that have badly hurt the overall energy space. This is because MLPs have lower correlations to oil price and thrive in a low oil price environment, thereby having stable revenues. Beyond the stability, yields are also pretty high thanks to favorable tax rules that push firms in the MLP space to substantially pay out all of their income to investors on a regular basis. Further, these firms remain the major beneficiaries of the U.S. oil boom over the longer term. While most of the products in this space have substantially increased their sizes, IMLP emerged as the biggest winner. Its AUM surged to $775.9 million from about $52 million at the start of 2014. The ETN follows the S&P MLP Index and charges 80 bps in fees per year from investors. It sees good volume of about 147,000 shares per day on average and has added 4.2% so far this year (read: 3 Promising MLP ETFs Now on Sale ). VelocityShares Volatility Hedged Large Cap ETF (NYSEARCA: SPXH ) While 2014 is turning out as another banner year for the U.S. stock market, volatility has also been on the rise thanks to global economic slowdown concerns, geopolitical tensions, and lower oil prices. As a result, many investors have taken advantage of the rising volatility while protecting their long equity positions simultaneously by investing in volatility hedged equity ETFs. Investors should note that the space is not much crowded and most of the products gained greater traction this year. Out of these, SPXH has pulled in over $73 million in capital, propelling its total asset base to $83.3 million. The ETF tracks the VelocityShares Volatility Hedged Large Cap Index and looks to hedge “volatility risk” in the S&P 500, offering investors’ exposure to not only the S&P 500 but also both long and inverse exposure in short-term VIX futures (read: Hedge Volatility in Your Portfolio with These Alternative ETFs ). The product provides target equity exposure of 85% to the S&P 500 while the remaining 15% goes to the volatility strategy. It trades in a light volume of roughly 20,000 shares a day and charges 71 bps in annual fees. The ETF has gained nearly 8% this year. ProShares S&P 500 Aristocrats ETF (NYSEARCA: NOBL ) In the current ultra-low rate environment and amid global uncertainty, investors have become defensive and are seeking safe and stable investments. Dividend Aristocrats generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis. In addition, aristocrats tend to skew the portfolio to less volatile sectors and mature companies (read: Guide to Dividend Aristocrat ETFs ). This fund has accumulated about 87% of the AUM as $428 million inflows this year shot up its total asset base to $490.3 million. Expense ratio is 0.35% while average daily volume is moderate at 78,000 shares. The product provides exposure to the companies that raised dividend payments annually for at least 25 years by tracking the S&P 500 Dividend Aristocrats. Holding 54 stocks in its basket, the fund is widely diversified across securities as each accounts for less than 2.2% share. Consumer staples dominates about one-fourth of the portfolio while industrials, consumer discretionary, and health care round off the next threes pots with double-digit exposure. NOBL surged about 16% on the year and has 30-day SEC yield of 1.84%. It has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook.

The ABCs Of Mutual Fund Share Classes

Originally published on Nov. 19, 2014 You don’t need to read a prospectus to benefit from knowing the basics about mutual fund share classes. It will help you uncover your actual investing costs (especially when dealing with a broker), avoid unnecessary fees, and boost long-term performance. As you will see, even after you select a fund, it is crucial that you choose the most appropriate share class of that fund. Bringing Funds to the Marketplace Just like a farmer needs to get their crops to market, mutual fund companies work through multiple distribution channels to sell their products. These could include direct sales via online brokerages, sales to pension plans, through a broker, a registered investment advisor, and so forth. Each of these channels has different end clients and associated costs; and because of this, companies have developed different versions (share classes) of the same mutual fund to suit each situation. Typical Mutual Fund Fees Annual Expense Ratio – The ongoing fee to manage and administer the fund. Most investors will never notice this cost since it’s a tiny fraction taken from the share price (NAV) each day. Trading fee – A fee charged by the executing brokerage company/custodian, typically $0 to $50 per buy or sell order. Front-end Load – A sales charge applied when a fund is bought; it typically declines for larger purchase amounts. Back-end Load – A sales charge applied when a fund is sold; it typically declines over several years. Fund Share Classes with an Example “A” shares have a front-end load. “B” shares have a back-end load, but have a lower expense ratio if held long enough. “C” shares have no load after a short time, but have a higher expense ratio. Other shares such as “D” or “Institutional” exist. These shares typically have no load, but may have limited availability. The well-known Pimco Total Return Fund (MUTF: PTRAX ) provides a great illustration of how one mutual fund offers many different share classes of the same fund. Broker Assisted Investors After considering the overall costs from the table above, you will see where the costs are built into the mutual fund structure and sales channels. Brokers are typically compensated by the A, B, or C share classes, but also can get residual compensation via fees built into the mutual fund expense ratio (e.g. 12b-1 fees). Remember, brokers do not have a legal obligation to put you in the “right” share class. So if you are using a broker, be sure to give them more information on how you plan to invest or you could end up paying them larger fees than you should. With a broker for example, if you knew you were going to buy $10,000 of the Pimco Total Return fund, but sell it within 3 years, you will probably be better off with the “C” shares. However, if you have no idea how long you will hold the fund, the “B” shares may be a better bet – since the costs to own will decrease over time. If you had a substantial amount to invest for a long time, the “A” shares may ultimately be the cheapest option even though you are paying the 3.75% front-end load. Advisor Clients Registered Investment Advisors like us typically have “Institutional” share classes available to them. At our firm, we pay close attention to fund expenses and transactions costs for our clients. Because of this, we will frequently use more than one share class of the same fund, or two slightly different funds in the same asset class – all in order to minimize the long-term costs for our clients. It is certainly more complex to juggle the various share classes in a portfolio, but we believe you can use them to your distinct advantage.