Nobody can accuse portfolio manager John O’Connell of home bias.
In his $400-million portfolio, the chairman and chief executive officer of Davis Rea Investment Counsel holds about 95 per cent U.S.-listed names in about 25 stocks across sectors, including technology, banking, industrials and health care.
It’s been a good strategy so far this year, with the portfolio returning 17.6 per cent year-to-date as of July 27, slightly ahead of the S&P/TSX Composite Index at 15.5 per cent. He says the performance also beat the S&P 500 and the Dow Jones Industrial Average, which returned 15.5 per cent at 14.3 per cent respectively so far this year (when converted to Canadian dollars).
“I just think it’s the right place to be,” Mr. O’Connell says of U.S. holdings. “We want to invest in companies that are multinational, that touch billions of people. Unfortunately, there just aren’t that many of those in Canada.”
He does own a few select Canadian-listed names, including Brookfield Asset Management and two energy stocks: junior oil and gas company Kelt Exploration Ltd. and energy infrastructure company Keyera Corp. These are companies Mr. O’Connell believes have strong management teams and good performance track records. The energy names alone provided 30 per cent of the portfolio’s 7.8-per-cent return in the second quarter.
“It was a huge performance for a small part of the portfolio, which proves the value of stock picking and portfolio diversification,” he says.
Mr. O’Connell also prefers U.S. banks such as Bank of America Corp. , JP Morgan Chase and Co. , the PNC Financial Services Group Inc. and Citigroup Inc. He hasn’t owned Canadian bank stock in about four years.
“I can think of a thousand reasons why you want to own U.S. bank stocks over Canadian ones,” he says. “Canadian banks are exceptionally well run, but they’ve done a fantastic job of indebting Canadians to the point where we are the most indebted population of the OECD. That doesn’t strike me as a great growth story.”
Some of his top overall holdings are technology names like Amazon.com Inc. , his largest holding representing about 8 per cent of his portfolio, as well as Google parent Alphabet Inc. , Facebook Inc. , Apple Inc. and Microsoft Corp. , which each represents about 3 per cent to 5 per cent.
While tech valuations are high and some investors worry about growing government interference in the sector, Mr. O’Connell isn’t overly concerned.
“It’s really going to be difficult to legislate away what consumers want,” he says. “I’m not downplaying that there are problems, but there’s no cohesive global opinion on what to do and on what the problems actually are.”
He prefers to focus on the innovation, massive markets, ability to scale and huge free cash flow these tech names generate.
“They’re the most profitable companies in the world,” he says. “They’re always going to trade at a premium valuation. I don’t think you can say these companies are expensive at all.”
His three favourites right now are Amazon, Google and Facebook:
With Amazon, Mr. O’Connell is bullish on the e-commerce giant’s ability to continue investing in improving its existing services and expanding into new areas. For example, Amazon is also getting into the health care sector and recently launched an industry accelerator. Mr. O’Connell sees it as very promising, given that health care is largely about logistics, an area where Amazon excels.
“It’s investing massive sums of money to get better. It’s constantly trying to think of ways to do things, cheaper, better and faster,” he says.
With Google parent Alphabet, Mr. O’Connell likes its more aggressive move into payment processing as well as health care. And Facebook is another innovative company that’s become deeply embedded in consumers’ lives.
“Everyone hates Facebook, but everyone uses it,” Mr. O’Connell says, including its Instagram and Messenger platforms. He also sees more potential in the Facebook marketplace, where people buy and sell items online.
“The Facebook marketplace growth has also been amazing,” he says.
He also sees growth in the company’s media and advertising division and augmented and virtual reality that is increasingly used across industries, from mining to health care.
“These are some of the most dominant companies in the world,” Mr. O’Connell says of the big tech names. “These companies are successful because they create delightful and powerful services for people. That drives huge revenues and profits that the companies, in turn, reinvest for the future. What’s not to like about that?”
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