Investing in a Bear Market

Cash is king – have plenty of it

Avoid Rate Reset Preferreds

Avoid High Yield Fixed Income

Both US Treasury  and Govt of Canada bonds perform well in a recession. However with current yields so low there is not much upside.

Avoid Equity Index funds and ETF’s

Favour defensive equity sectors like Reits, Utilities and Telcos

Gold bullion performs well when the following occurs:

Falling Interest rates like we have today

During most previous economic recessions, gold outperforms benchmark equity indices

When real interest rates are negative like today, gold performs well


Passive Index Funds vs. Active Management – Which is the best strategy in a bear market?

Passive indexing not a good strategy in a declining market

No place to hide in index funds

Active management sharply outperforms an index fund in a bear market due to the following:

Have more cash and invest in more defensive industries like Reits, Utilities and Telcos.

Individual stock selection weeds out poor performers and over leveraged ones


Algorithm based program selling triggers liquidation of both strong and weak sectors equally. However when markets rebound once again, defensive sectors and stocks tend to come back first.


Avoid passive index funds in a bear market

Active asset mix, stock and equity sector selection is the preferred strategy especially in a falling equity market


Downsizing your family home to a condo – Be very careful

As our children leave the family home, it is only natural to want to downsize by switching to a smaller condo. On the surface this may appear financially viable with average condo prices lower than two story homes.

However, there are a lot of other factors that you must take into account before doing anything as follows:

What is the monthly cost of the condo and what does this monthly fee cover?

How much has the monthly cost risen over the last several years?

Have there been any major capital improvements and maintenance costs over the last several years that have led to a one time cost assessment for every individual condo owner?

Does the condo fund have a capital surplus to cover annual maintenance costs plus some capital improvements? Alternatively if the fund has a deficit, this is a red flag.

Have you reviewed the financial statements of the condo association? This is absolutely essential and far more important than your assessment of the individual unit. If you are not comfortable reading the financial statements, hire a independent accountant who is not associated with the condo to read and assess them for you.

Lastly condo insurance rates are rising dramatically in Canada and will ultimately lead to a combination of higher monthly condo fees plus an additional assessment for each separate unit owner. In some instances insurance premiums have risen this year by up to 200-500% over last year. It is very important to review the building’s insurance rates for both the last several years and for this year in order to determine if the individual condo owners will be required to pay more monthly fees and one off cost assessment fees.



Buying a condo may not be the best decision you make financially.

Consider other options such as renting an apartment or purchasing a freehold property that does not involve any of the negative issues that condos have.




Trading Costs and how they differ between Discretionary and Non Discretionary Investment Accounts

Commission per share will be normally much lower for a discretionary account where your adviser combines purchases and sales into block trades.

The bid and ask spread price also affects trading costs and this is largely affected by the liquidity of the security being transacted.

Hidden trading costs or execution costs are far larger than the combination of commissions and bid and ask spreads for most transactions.

For example an adviser that wants to complete a block purchase for all their discretionary accounts has to be cognizant of the amount of stock being offered, not simply the price. Assume a buy order is placed for 100,000 shares of a security with only 25,000 shares being offered. Even for a relatively liquid security, this order imbalance of 75,000 shares will drive the share price higher than the combination of the commission per share and the bid ask spread.

On the other hand, an adviser dealing with a non discretionary account may recommend the purchase of a small quantity of 200 shares for the same security. This purchase order is obviously much smaller than the previous block order and would not affect the share price materially over the bid and ask spread.

Lastly a client that has a discretionary account with their adviser must be very careful of the tax consequences for a non registered account.


While there are lower commission costs for discretionary accounts, the hidden execution costs are normally much greater than the commissions. In addition the increased probability of capital gains being realized will trigger more negative tax consequences.

Regardless of your adviser’s recommendations, my advice is to stick to a non discretionary type of account where you, the client, have the final say for all buy and sell transactions.


Please see our disclaimer at Copyright 2019 McMurtry Investment Report. All rights reserved. 

Threat of Global Recession increasing

Germany’s economy is on the verge of a recession  and already has negative interest rates

US economy continues to weaken especially in the capital goods / industrial sector

US year over year corporate profit growth slowing to 1-2%.

Global business confidence continues to erode from trade wars, Brexit fears, inverted yield curve, negative rates in Germany and Japan


A cautious investment stance is critical in this environment. Maintain high cash levels, reduce equity exposure and tilt equity exposure to more defensive groups like utilities, consumer staples, telcos and Reits.


Adding Magna International to both portfolios

Current industry fundamentals are not favourable with slowing US car sales and weaker global growth

However, Magna’s shares are discounting this weak environment with its shares trading at 1.4 times book value and a little over 8 times 2019 EPS.

Time to purchase a cyclical company like Magna is when its shares are out of favour.

Its shares offer a free cash flow yield of over 12%. Its dividend yield is 2.99% while its cash dividend payout ratio is a low 21.7%.

It has a strong balance sheet with debt only 31% of total equity.

Over the last twelve months it has generated free cash flow of $2.7 billion  or $8.005 per share.


Canadian Banks – Quality of Management

TD, RBC and Bank of Montreal derive a material contribution to their revenues and earnings from the US market.

Scotiabank derives very little contribution from the US.


What does that imply about the quality of management of Scotiabank given the strength of the US economy?


Are large unrealized capital gains affecting your investment decisions?

Always manage your investments based on future outlook for earnings and dividend growth


Do not let the tax man paralyze you in making proper investment decisions


Take some profits for those with large unrealized capital gains in a few securities


Too many investors have massive holdings in Canadian financials, yet hesitate to take profits for fear of a large tax bill.


Critical to reduce overweight security holdings to reduce portfolio volatility


Keep a close watch on your recent investment performance to ensure that your overweight securities are not penalizing your returns

Adding Logitech International LOGI US American Depository Receipt

I am adding Logitech International’s US $ ADR to both the Income and Growth Portfolios. Logitech is a Swiss holding company that makes a range of products including computer mice, keyboards, wireless speakers, headphones, gamepads and steering wheels.

The company is benefiting from the new secular trends in video gaming, rise in E-sports and competitive PC gaming and in video collaboration devices used in business.

The company has a strong balance sheet with no long term debt. The company is a large generator of free cash flow that can be used to buy back stock, increase the dividend and to make acquisitions.

The revenues are expected to remain strong in fiscal 2020 with growth in the range of mid to high single digits. The fiscal year end for 2019 was March 31st. Non GAAP Earnings Per Share are expected to rise 5.7% in fiscal 2020 and rise by almost 12% in fiscal 2021. The stock is trading at a little over 18 times fiscal 2020 earnings and 16.5 times 2021 earnings. Gross margins are expected to remain high at 38%.

The dividend yield is 1.78% and the cash dividend payout is a very manageable 42.33%.


Save up to 1.5% in ongoing annual investment fees. Rotate out of mutual funds.

Switch into exchange traded funds (ETF’s) and individual stocks. Put the difference in fees in your pocket, not your advisor’s.

You must follow a strategy to minimize any remaining deferred sales charges or loads before you sell your mutual funds.

Stop immediately all ongoing contributions into mutual funds with deferred sales charges. Every time you make a new contribution it takes about seven years before the investment will be free of any sales charges upon redemption.

Every year you are entitled to redeem your fee free units without incurring any sales charges. Normally this works out to 10% of your initial investment, but varies by company. You can request this information simply by calling the head office of the mutual fund company to request the number of fee free units. Make sure you ask them for the final date of expiry of the sales charges and the total cost of the sales charges remaining. Every year you will need to call the head office of these fund companies to obtain the above information and to find out the number of fee free units.

Once you have determined  the cost of liquidation, you can decide the best course of action. You need to keep in mind that the annual cost savings by switching into ETF’s and stocks will be substantial. You can compare the annual cost savings with the sales charges remaining to determine how long it will take you to break even.



Stop all your monthly contributions into load funds immediately.

Never request the liquidation of your mutual funds without obtaining all the remaining sales charge information in advance. Mutual fund companies can charge up to 5.5% of the market value and you never want to be faced with this charge. Only when you are equipped with the relevant details can you make a proper decision to liquidate your funds or not. 

Liquidate all your fee free units every year.

Once you have done the above points, you will need to once again ask the head office of the fund company the dollar value amount of sales charges remaining and the expiry date of the funds you hold.

Make a comparison of your estimated ongoing annual management fees by investing in individual stocks and exchange traded funds to your annual costs of the mutual funds you own.

Determine the number of years for you to break even as follows:

If the annual difference in fees works out to 1.5% and you have $300,000 invested, this works out to an annual savings of $4,500. If the remaining deferred sales charges works out to be $4,000, it will take you 0.89 of a year to break even.

Determine a break even compromise that makes sense to you. After making all these calculations, you may decide to only liquidate the 10% fee free units annually, but it is essential having all your facts before doing anything.






Having Difficulty Achieving Satisfactory Investment Returns

Maybe you are over diversified in mutual funds with high management fees negatively affecting your performance. Maybe you are taking on too much risk by placing all your bets on a few securities that are not working out.

Tone down your bet in any one security.

The key is to make a lot of small bets rather than one or two large ones. The probability of achieving better, more consistent investment returns with less volatility is much higher.






Dividend Growth vs. Dividend Yield – Which strategy offers better returns?

Do not invest in companies that borrow to pay the dividend. Free Cash Flow takes into account operating cash flow less capital expenditures and is a much better statistic in the calculation of a realistic dividend payout ratio.

Invest in companies that are financially sound with a lower debt / equity level relative to their peers. Companies that are less levered are more likely to increase their dividends over time.

Invest in companies that consistently increase their dividends every year. As a general rule, do not invest in companies that offer high dividend yields with little dividend growth prospects.

Invest in companies with growing operating and free cash flows as this is more likely to lead to rising dividends. Companies that have a low dividend payout ratio are preferred.

As many companies cut their dividends in a recession, do not invest in cyclical companies where the dividend may be cut.



Dividend growth companies are the preferred choice for long term investors.




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Reset Preferreds vs. High Yield Bonds – Best one for Income?

iShares XHY US High Yield Corporates in Cdn $


Horizons HPR Active Cdn Preferreds


Total Return                                       Year to Date                                 1 year

XHY                                                           3.77                                                    0.25

HPR                                                        -4.01                                               -14.50


The current dividend yield is 5.61% for XHY and 4.79% for HPR

The difference in performance is quite dramatic.

The High Yield Corporate ETF, XHY,  does well when economy is strong and does poorly in a recession

Rate reset preferreds perform well when rates are rising and perform poorly when rates fall


Canadian preferreds eligible for dividend tax credit while the High Yield bonds are not.

Despite the tax advantage for preferreds, I do not recommend them.

In a recession neither ETF will perform well

In a slow growth economy with flat to declining rates but no recession, the High Yield ETF XHY will outperform rate reset preferreds

Currently we are not in a recession, but in a slower growth environment going forward.

In this environment High yield will continue to outperform Rate reset preferreds.