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portfolio strategy

In a time of soaring cryptocurrencies and marijuana stocks, it hardly seems noteworthy that the Two-Minute Portfolio beat the S&P/TSX composite index last year.

The 2MP made 9.7 per cent on a total-return basis (share-price changes plus dividends), while the index gained 9.1 per cent. A narrow win for the 2MP. Nothing to get excited about, which is kind of the whole point of this strategy.

The 2MP was conceived back in 1999 as a continuing experiment in low-effort stock picking. At the beginning of the year, you buy the two largest dividend-paying stocks as measured by market capitalization (shares outstanding multiplied by share price) in each of the 11 subindexes on the S&P/TSX composite. Typically, there isn't much changeover in the sector leaders from year to year. So while there's a bit of portfolio rebalancing to be done in early January every year, the process is relatively painless from the perspective of time and money spent on stock-trading commissions.

There's nothing trendy or zippy about the 2MP, which means you're almost guaranteed to never participate in the latest hot stocks and sectors. Marijuana stocks aren't in the mix, and they won't be eligible in the future unless they mature to the extent that they pay a dividend. Neither are there any obvious connections to other hot themes of the day including artificial intelligence, robotics and blockchain technology (a way to send data between parties without a central intermediary that is used by cryptocurrencies such as bitcoin).

Still, the 2MP's sector-by-sector diversification does ensure you own some strong stocks. Several stocks delivered total returns above 20 per cent last year, including top-performing Rogers Communications. There were also a few duds, notably dividend darling Enbridge Inc.

Over all, the 2MP produced a characteristic performance in 2017. Good, but not great. It's a style that has well outperformed the market over the past 15 years, even while turning in some putrid years now and then. One of these setbacks occurred in 2016, when the index surged 21.1 per cent and the 2MP made just 7.6 per cent.

The 2MP can't keep up with a red-hot TSX, and it's hopeless when compared with hot sectors such as marijuana and speculative plays such as bitcoin. Where the 2MP excels is in down markets. When the index falls, the 2MP typically loses less. It's an attribute worth keeping in mind if you're weighing risks and rewards in a stock market that hasn't undergone a serious correction in a long time.

The worst setback for the 2MP was during the financial crisis – a peak-to-trough decline of 31.5 per cent that compared with 43.4 per cent for the index's worst decline. The 2MP lost 19.8 per cent to the index's 33-per-cent loss in calendar year 2008. In 2015, the most recent down year for the TSX, the index fell 8.3 per cent and the 2MP eked out a 0.3-per-cent gain.

Data for the 2MP is maintained by Morningstar CPMS, which has done back testing to 1986. There have been nine down years for the index since then on a total-return basis, but just four negative years for the 2MP.

There's a line of thinking that investors get the best long-term results when their holdings reflect the total stock market, which means big blue chips plus medium and small-size companies that have more growth potential. If you invest with exchange-traded funds, you'll find that many companies now offer the choice of buying well followed indexes such as the S&P/TSX composite and S&P 500, or more diversified total market indexes.

With the 2MP, you're sticking strictly to the largest stocks in each subindex as measured by market cap. A stock earns this distinction by a mix of size – being a big company with lots of shares outstanding – and popularity in terms of investors supporting the share price.

The 2MP strategy brings a portfolio that holds the bluest of blue chips – examples are Royal Bank of Canada and Toronto-Dominion Bank in the financial sector, or Enbridge and Suncor in energy. But you also get some smaller, less-known companies through the portfolio's exposure to Canada's underdeveloped information-technology and health-care sectors.

The two health-care stocks in the portfolio are seniors residences – Chartwell Retirement and Sienna Senior Living. The IT stocks are Open Text and Constellation Software, which is a rare example of the 2MP exposing people to a growth company. Constellation's cumulative five-year share price gain to Jan. 10 was 485 per cent.

Inevitably, the stocks in the 2MP run both hot and cold in any given year. The portfolio was unlucky enough in 2016 to include Concordia Healthcare, which plunged a staggering 91.8 per cent on a total-return basis. In addition to Enbridge, last year's money losers included Loblaw Cos., Extendicare Inc. and RioCan Real Estate Investment Trust. After Rogers Communications, up 27.4 per cent, the best return came from Constellation at 25.7 per cent.

This year is a quiet one in terms of changes to the portfolio. Sienna Living replaces Extendicare, and Brookfield Infrastructure Partners replaces Hydro One. One more change is that Potash Corp. has been renamed Nutrien Ltd. after its takeover of Agrium.

Annual rebalancing of the 2MP means swapping out some companies, and adjusting the weighting of the holdover stocks by selling down the winners and buying more of the losers. The idea is to have each of the 22 securities account for about 4.5 per cent of the whole.

If you estimate the cost of a stock trade at $10 a transaction and project 20 trades a year, the total cost comes in around $200. On a $50,000, that's like paying an annual fee of 0.4 per cent. You can get Canadian market ETFs with ultra-low fees of 0.06 per cent, which makes them a great alternative to the 2MP and stock-picking in general.

The Two-Minute Portfolio in 2017 and 2018

Sector/Company (2MP 2017)TickerTotal Return* (%)2MP 2018Ticker
Magna Int'lMG-T24.7Magna Int'lMG-T
Restaurant Brands Int'lQSR-T22.4Restaurant Brands Int'lQSR-T
Alim. Couche-TardATD.B-T8.3Alim. Couche-TardATD.B-T
Loblaw Cos.L-T-2.2Loblaw Cos.L-T
Suncor EnergySU-T8Suncor EnergySU-T
Royal Bank of CanadaRY-T16.8Royal Bank of CanadaRY-T
TD BankTD-T14.8TD BankTD-T
Chartwell RetirementCSH.UN-T14.9Chartwell RetirementCSH.UN-T
Extendicare Inc.EXE-T-2.5Sienna Senior LivingSIA-T
Cdn Nat'l RailwayCNR-T16.5Cdn Nat'l RailwayCNR-T
Cdn Pacific RailwayCP-T21Cdn Pacific RailwayCP-T
Constellation SoftwareCSU-T25.7Constellation SoftwareCSU-T
Open TextOTC-T9.4Open TextOTC-T
Barrick GoldABX-T-14.7Barrick GoldABX-T
Potash Corp.POT-T8.8Nutrien Ltd.NTR-T
Rogers CommunicationsRCI.B-T27.4Rogers CommunicationsRCI.B-T
FortisFTS-T15.1Brookfield Infrastructure PartnersBIP.UN-T
Hydro OneH-T-1.3FortisFTS-T
Brookfield Property PartnersBPY.UN-T0.2Brookfield Property PartnersBPY.UN-T
Portfolio total return9.7
S&P/TSX total return index9.1

Source: Morningstar CPMS

* dividends plus changes in share price