Watching grass grow is boring. So is reality TV. But is your investment portfolio boring, too?
If that's how you describe most of the stocks you own, then according to Paul Harris you're doing something right.
"We do nothing but boring stuff here," he says, describing his investment philosophy as a portfolio manager for Avenue Investment Management in Toronto. "For us, a company that slowly plugs away and pays a nice dividend is not boring. It makes the stock more attractive."
Boring is beautiful?
Years of research have shown that slow-and-steady stocks often outperform flashier offerings, producing solid long-term earnings. That's the kind of low-volatility performance that people who are saving for, say, retirement should own, says Jason Whiting, portfolio manager for Trimark Investments in Toronto.
It's a simple matter of investor psychology. When an investment swings wildly year to year, even if it ultimately offers a nice 12-per-cent return over a decade, many people can't stomach it. They want off the ride too soon.
That can have a huge financial impact. For instance, someone who invests $100 a month for 15 years and earns 12 per cent compounding monthly ends up with $50,557.60. But if that investor sticks around just five more years he or she will wind up with $100,014.79 in the bank. Time is on their side.
"Being in a boring stock that's a little smoother actually keeps people invested for the long term, and that's the best thing they can do for themselves," Mr. Whiting says.
Jeff Mo, a portfolio manager and chartered financial analyst at Mawer Investment Management in Calgary, is also a big fan of investing in so-called boring companies. After all, Mawer's slogan is, "Be boring. Make money."
He calls established companies that stick to the basics – those with little competition, easily understood business models and strong management teams – "wealth creating companies."
Buying dull performers makes it easier to predict where they will be five or even 10 years from now, says Mr. Mo. "Otherwise, you're not investing, you're speculating."
So, which companies deserve a place in your portfolio in 2015 and beyond? Here are a few picks from three portfolio managers:
Paul Harris, Avenue Investment Management
Leon's Furniture Ltd.: This is Mr. Harris's ultimate buy-and-hold pick, although fessing up to owning it is not going to make for sparkling dinner party conversation, he admits. "It's a very boring company. It's the furniture business and is run by a family." Even so, Leon's paid a reasonable 9 per cent rate of return over the past 10 years, and most of its competition is from smaller players.
Brookfield Asset Management Inc.: This company makes the list because it sticks with what it knows: infrastructure. It buys timberland, ports and power generating companies, and it does it well, Mr. Harris explains. "They're very skilled at buying those assets and they buy them at the right time."
Canadian Pacific Railway Ltd.: Take a look at CP's 10-year performance. Although its stock has dipped of late (deal hunters, take note), it's been on an upswing over the years. And no wonder. After dumping a number of non-core businesses, such as its resort hotels, and focusing on its main railroad business, the company has bounced back. "What's happened with oil and the lack of pipelines has really helped them a lot," Mr. Harris maintains.
Jeff Mo, Mawer Investment Management
Stantec Inc.: Not all top-tier boring companies have to be monolithic entities, says Mr. Mo. He manages a small-capitalization portfolio and is always on the lookout for what he calls "small cap, blue chip" companies. Stantec, an engineering consulting firm based in Edmonton, makes his list because it focuses on run-of-the-mill engineering work that's quietly vital to the economy. Think gas station soil sampling or parking lot structural-integrity inspections. Boring? Maybe. But the company usually grows between 4 and 6 per cent each year, and its profit growth before tax is 11 per cent.
Stella-Jones Inc.: Sounds like a line of costume jewelley, but Stella-Jones is anything but swishy. Its business is weatherproofing wood and you've probably walked by its handiwork on utility poles, railway ties and fences. It's a smart choice, Mr. Mo says. The company has consolidated the industry through acquisitions and enjoys volume advantages against its competitors. Its return on equity has consistently been in the mid-teens.
Constellation Software Inc.: Want a company in your portfolio that focuses on obscure niches? This one's for you. Constellation creates mission critical software for transit bus routing, golf tee times and even juror selection. Separately, there's not much profit in it, but together, "they make a lot of money because, as you can imagine, these niches don't have the same level of competition as, say, search engine software," Mr. Mo says.
Jason Whiting, Trimark Investments
Extendicare Inc.: With baby boomers aging, senior health care is a solid place to park money for the long term, Mr. Whiting says. Extendicare, which has a stable industry in Canada, sold its more volatile American division in late 2014. Although some investors were not happy with the smaller-than-expected price tag, he still sees the sale as good news. "Now they have all this money to invest back in Canada, which is a much more attractive and stable market."
Guardian Capital Group Ltd.: This asset-management company's real hidden value is in not what it has, but in what it doesn't have: a mutual fund business. A few years ago it sold the business to Bank of Montreal and in return, received BMO shares, which now make up the majority of Guardian's value. Want to buy a solid bank stock, but you're scared away by the high price tag? Purchase Guardian instead and you're essentially getting it at a discount.
Pulse Seismic Inc.: Yes, you can count this company's employees on your fingers and toes. And yes, it's a publicly traded firm with a "buy" rating. Pulse Seismic sells seismic images to energy companies for less than it would cost them to take the images themselves. "Because it's essentially a database sitting on computers, there's almost no money needed to maintain it," Mr. Whiting says. So if markets drop and clients stop calling for a while, the company doesn't worry about keeping plants running or paying employees. It's structured to ride out the dip.