Steve Ladurantaye is The Globe and Mail's real estate reporter.Deborah Baic/The Globe and Mail
Volatility has ruled North American markets this year, and a slower summer could see many investors lulled gently to sleep by flat markets. But that doesn't mean there aren't opportunities to break away from the pack in search of returns.
"It takes some skill and care but the good news is money can grow really well during these periods," said Danielle Park, president of Venable Park Investment Counsel Inc. in Barrie, Ont.
So far this year, the S&P/TSX has swung to a daily gain or loss greater than 1 per cent 79 times, or 62 per cent of the time. The other days saw gains or losses within 1 per cent, considered a flat performance.
Twelve of those sideways days (the most of any month this year) were in June, as traders took a breather from frantic action that pushed the index about 36 per cent higher than its March lows. Here are five ways experts try to avoid the market's sideways rut.
Dividends
Stocks obviously take longer to rise in a flat market, making it difficult to accumulate capital gains. Ms. Park said investors should snap up high-quality, dividend-paying stocks.
"Dividends are key in order to keep compound growth working," she said. "In raging bull markets many people get more reckless and blind luck looks like brilliance. But in sideways markets passive capital-gain focused strategies don't work."
She said it's important to own high-quality assets to ensure a steady payout. For example, she said, an investor might hold 30 per cent of their capital in Canadian investment quality bonds or bond ETFs, 20 per cent in Canadian corporate or higher yield bonds, 30 per cent in Canadian dividend-paying stocks and real estate investment trusts and 20 per cent in U.S. and international dividend-paying stocks.
"Think of rowing rather than sailing with the capital," she said. "It takes more work and it may seem slower moving, but in the end your boat doesn't capsize and you get to where you want to be."
Preferred shares
In a race to raise their capital levels over the last year, Canadian banks issued more than $2-billion of fixed-rate preferred shares. These shares are issued in five-year terms, and offer a spread above the Bank of Canada rate (usually 4 or 5 per cent). At the end of the five years the banks can reset the rate to match current interest rates, though they are more likely to recall them for cancellation if rates are rising.
"They are fairly unique and provide great security, and excellent cash flow," said Sloan Levett, director of wealth management for Fuller Landau LLP. "They are a good way to handle sideways markets."
Small caps
When the markets started crashing in October, large-cap managers fled small-cap stocks en masse, said Alex Lane, who manages the Dynamic Power Small Cap Fund for Dynamic Funds.
They weren't the only ones.
"Not only did the big guys leave, so did all the small cap managers," he said. "There's nobody left - so for value investors looking for neglected stocks this is an interesting opportunity for entry."
They left behind shares that were driven down to bankruptcy levels, he said, and while that option is less likely for many of the companies, their shares are still trading lower.
"As we come into true recovery these small caps tend to come back the fastest," he said. "I'd caution that I don't necessarily think we're into full recovery, but if someone is patient this is a great entry point."
He's looking to Com Dev International Ltd. for big gains in the coming year, saying the shares are "worth at least double current prices over the next 24 months."
Technology
Duncan Stewart, director of research and analysts at Duncan Stewart Asset Management, is looking for lesser-known technology companies to rise above any market mediocrity in the second half.
"There's an old famous phrase that in flat markets you want to invest in things that exhibit the most volatility," he said. "Anything with a high beta will be a good stock picker's friend, and you can find that in technology."
Beta measures how far a stock will move along with the wider market. Anything above 1 indicates it will rise (or fall) at a rate greater than the market.
While technology stocks have risen since March, Mr. Stewart said it's been the large players such as Research In Motion (up 60 per cent year to date) and Apple (up 65 per cent) that have seen the greatest gains.
"The smaller and mid-sized tech stocks worldwide haven't had the same bounce, from an investment perspective," he said, citing Descartes Systems Group Inc. and Open Text Corp. as examples. "A lot of those companies haven't participated in the rally, which to me says they have some room to run."
Take a chance
If you want big gains later, Avenue Investments partner and portfolio manager Bill Harris said you need to be willing to make big bets now. He sees opportunities in commodities, but believes much of the gains have already been made. He also thinks pipelines are selling cheaply and should be accumulated.
But for big gains, he's looking to the battered U.S. financial sector.
"The recession isn't over, but the liquidity crunch is over," he said. "The sector that really got wiped out was U.S. financial services, and if Bank of America is going to recover it will make absolutely astronomical returns."
He concedes it's a risky bet - just a few months ago investors were pricing in the likelihood of an outright failure or nationalization. But since hitting its low of $2.53 (U.S.) in March, it's regained 395 per cent to $12.64.
"Nobody wants to believe Bank of America can go up another 500 per cent," he said. "Everyone is rushing to make 100 per cent more on gold, but I think you can make five times that in financials. You need to look where things aren't so obvious when things are flat."