If you take a conservative approach to investing in stocks, the bull market has left its hoof prints all over your account statements in the past 20 months or so.
It’s fine to plan your investments to sacrifice upside in order to contain downside damage. It’s something else entirely to see other investors making more than you for an extended period.
This is the story lately for the Two-Minute Portfolio, a long-running experiment in the idea of simplifying stock-picking in the Canadian market by investing equal amounts of money in the two largest dividend-paying stocks in each of 11 sectors of the S&P/TSX Composite Index.
The past few years have not been great for the 2MP, and that’s no bull. The total return in 2021 was 19.4 per cent, which looks strong until you compare it with the 25.1-per-cent return for the index. All you had to do to get within sight of that return was buy an exchange-traded fund tracking the S&P/TSX.
The 2MP’s three-year annualized total return of share price changes plus dividends is 13.8 per cent, which compares with 17.5 per cent for the S&P/TSX. Such is life with the 2MP when stocks go on a run.
The reward, at least as far as the 2MP has shown with past results, is a comparatively strong long-term performance. The 2MP’s annualized total return of 10.2 per cent beats the index’s 8.5 per cent gain since 1986, according to CPMS Morningstar, which manages data for the 2MP. Over the past 10 years, the 2MP’s 11.2 per cent beats the 9.1-per-cent return of the index. The S&P/TSX outperformed by a small margin over the past five years – 10 per cent compared with 9.7 per cent.
The index-beating returns over the long term for the 2MP are more than sufficient to offset the cost of the stock-trading commissions needed to maintain the portfolio. For 2022 and beyond, these costs are a non-factor if you use a broker or trading app that charges nothing to buy or sell stocks.
National Bank Direct Brokerage, Desjardins Online Brokerage and Wealthsimple Trade are in the zero-commission club. Wealthsimple Trade also offers fractional shares on a limited number of stocks (including many in the 2MP), which can help you more precisely divide your 2MP portfolio into equal slices.
The 2MP is designed to have about 9 per cent of its assets in any one sector, which limits the downside in a market correction. When the index fell 8.9 per cent in 2018, the 2MP fell 1.7 per cent.
But equal weighting of stocks limits the upside when particular market sectors surge. Last year, rising oil prices powered the S&P/TSX Capped Energy Index to a stunning gain of 85.2 per cent, while a bank stock rally helped the S&P/TSX Capped Financials Index rise 36.5 per cent. The S&P/TSX Composite has a combined weighting of about 47 per cent in those sectors, compared with 18 per cent for the 2MP.
The 2MP’s focus on large stocks also holds it back in the speculative market conditions we saw in 2021. Ten of the dozen best performing stocks in the index were in the energy sector, but none of them were big enough to be captured in the 2MP. To qualify for the 2MP, a stock has to be the largest or second-largest dividend-paying stock in a sector, as measured by market capitalization (shares outstanding multiplied by the share price). Stocks like these are rarely growth leaders.
Still, you’re not a complete bystander as a 2MP investor in a bull market. The portfolio last year included Toronto-Dominion Bank , up 42.1 per cent in 2021, and Loblaw Cos. Ltd. , up 69.5 per cent.
The biggest drag on performance in the 2MP last year was Barrick Gold Corp. , which fell 16.4 per cent. Other laggards were Newmont Corp. , up 1.7 per cent, and Open Text Corp. , which gained 2.9 per cent.
Following the 2MP means some work at the beginning of each year to substitute the latest market-cap leaders in each sector and get the other holdings into balance. This year’s substitutions: Sell TC Energy Corp. and buy Canadian Natural Resources Ltd. ; sell Barrick Gold and buy Nutrien Ltd. .
One other bookkeeping note is to buy FirstService Corp. in the real estate sector. FSV replaces Brookfield Property Partners LP (BPY.UN), which was taken private last summer by parent Brookfield Asset Management Inc. The 2021 performance numbers for the 2MP are based on the proceeds of the BPY.UN deal being kept in cash for the duration of the year.
Backward-looking numbers in investing should always be regarded with caution because they do not foretell the future. But the 2MP has consistently shown an ability to weather down markets better than the index. This is best seen in the results for 2015, when the 2MP gained 0.3 per cent and the index fell 8.3 per cent.
There have been four negative years for the index in the past 15 years and the 2MP outperformed in each. These stats are offered up as a diversion to investors uneasily listening to those bull market hoofbeats.
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Rob Carrick