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Looking for better returns and diversification? Try this TSX triple portfolio

Index investors like to gripe about Canada's S&P/TSX composite index as a flawed basket of stocks that tilts too heavily toward financials and commodity producers. Is there a better way to passively invest in Canadian stocks?

I'm starting to wonder. After I assembled my own hypothetical portfolio of 10 equally weighted stocks and discovered that my new creation is up more than 12 per cent this year, I'm also encouraged.

I'm calling the portfolio the TSX Triple 10 (that is: 10 stocks, 10 sectors, 10 per cent weighting for each stock). I'd like to tell you that I spent weeks drilling down to these picks by thoroughly analyzing all 249 members of the composite index, weighing valuations against profit growth, examining debt levels and commodity price assumptions and plotting risk-adjusted returns.

However, I was after something far less active.

My approach was simple: I wanted 10 world-class stocks, so I looked at all 11 sectors in the S&P/TSX composite index, picked the biggest or most typical company in each, ignored health-care stocks and chose a technology company that is not in the index.

I then created a portfolio using Globe Investor tools. I allocated $10,000 to each stock, rounded up or down so that there are no fractional shares, for a total starting value of $100,000 on Jan. 1. I plan to rebalance the portfolio every year.

The 10 stock picks are hardly surprising. I tapped Royal Bank of Canada among financials – RBC being the biggest stock by market capitalization. Canadian National Railway Co. is the largest member of the industrials sector.

Although it is an auto-parts manufacturer, Magna International Inc. is the top company in the consumer discretionary sector, and who am I to argue? Loblaw Cos. Ltd. is not the largest member among consumer staples, but it is the biggest grocer. Fortis Inc. is the largest utility.

Barrick Gold Corp. is the top materials stock. Analysts don't think much of it, but that's no concern to my passive portfolio. Suncor Energy Inc. is the No. 2 stock in the energy sector, but it is the biggest oil producer. RioCan Real Estate Investment Trust is the biggest REIT, and BCE Inc. is the largest telecom stock.

Here's where my selection becomes a bit controversial. I ignored health-care stocks because I did not think the sector had any big players that can stand shoulder-to-shoulder with the likes of RBC and BCE. Even Valeant Pharmaceuticals International Inc. has shrivelled to a market capitalization of just $6-billion.

Another controversial move: For technology, I went with Shopify Inc., the Ottawa-based e-commerce software company. The stock has been trading for just two years, and it is not a member of the S&P/TSX composite index yet. But it is valued at nearly $11-billion, it's a rising international star, and it embodies the entrepreneurial spirit of the technology sector.

Admittedly, Shopify's blistering 104-per-cent return this year is having an outsized impact on the TSX Triple 10's outperformance. Is that a problem?

If I went with CGI Group Inc., a bigger, more established company but one that provides technology services, the portfolio would still be outperforming the composite index. And BlackBerry Ltd., another potential alternative, is up more than 54 per cent this year.

Hey, maybe it's just a good idea to own some Canadian technology – a sector that the composite index is woefully underweighting right now, at just 3 per cent.

The TSX Triple 10 gives technology, as with every other sector, a 10-per-cent weighting. That's very different from the actual benchmark, where financials have a 34-per-cent weighting, energy stocks sit at 20 per cent and telecom is 5 per cent.

The different approach to the TSX Triple 10 has driven the initial portfolio to a value of $112,330, up 12.3 per cent – while the S&P/TSX composite is up just 0.1 per cent. My portfolio has also churned out another $1,300 in dividends.

You can accuse me of data mining here, but I did not adjust holdings to massage the result. I only backdated the portfolio to the start of the year to give the index a track record.

You can also accuse me of stock-picking rather than constructing a passive portfolio. However, I did not choose any of these 10 stocks based on my hopes for their success, but rather their world-class status and hefty size.

What I wanted was an alternative to an exchange-traded fund that tracks the S&P/TSX composite index or the S&P/TSX 60 index.

For now, this is purely an academic exercise designed to see if my dissatisfaction with the Canadian index is warranted. My 10-stock portfolio may be narrow, but it offers strong sector diversification – and that looks to be an attractive tradeoff.

The TSX Triple 10

David Berman allocated $10,000 to each stock in his hypothetical portfolio for a total starting value of $100,000 on Jan. 1.

CompanyTickerYTD Performance %Invested value $
Barrick Gold Corp.ABX-T-3.29,680
BCE Inc.BCE-T310,300
Canadian National Railway CNR-T1911,900
Fortis Inc.FTS-T10.711,070
Loblaw CompaniesL-T2.510,250
Magna InternationalMG-T0.510,050
RioCan REITREI.UN-T-6.69,340
Royal Bank of CanadaRY-T410,400
Shopify Inc.SHOP-T104.420,440
Suncor EnergySU-T-118,900
Portfolio value YTD112,330
Portfolio gain %12.33%
S&P/TSX composite index YTD %0.80%

Source: Bloomberg; David Berman. Data as of midday Monday.

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