In this reader portfolio review, I have a larger portfolio to assess than the previous one and I am adding another aspect to the diversification review as I thought it was pertinent for this portfolio. I will also be looking at the market capitalization diversification.
As previously mentioned, I engaged my readers through my newsletter (those are the benefits of subscribing :)) and got an amazing response for this diversification review project. My goal was not to do an extensive review of portfolios but rather doing a surface level sector diversification review and see what readers have to say as well. The entire process is anonymous.
Diversification by Sector
I believe that sector allocation in your portfolio is very important as it represent how money is spent by consumers and companies. The sector classification can actually be complicated with multiple levels of classification and I prefer to keep it simple. As such I look at classifying stocks in the following sectors.
- Consumer Discretionary
- Real Estate
I have added a couple of sectors with Bonds and Resources. Bonds aren’t stock but they have a purpose. It’s also important to note that a diversified portfolio doesn’t need to be equally spread across all sectors but rather to avoid being overexposed by sectors (some sectors are more risky than others too)
Below is the 31 stocks in this reader’s portfolio. Take a few minutes to look at the stocks. They are all Canadians and I have to admit that some stocks were not obvious to look up as they trade on the CVE. Let us know what you conclude.
|Altagas Ltd||ALA.TO||Utilities||4.45||Medium Cap|
|Ainsworth Lumber Co.||ANS||Resources||0.85||Small Cap|
|Algonquin Power & Utilities||AQN.TO||Utilities||1.48||Medium Cap|
|Avigilon Corp.||AVO.TO||Technology||0.67||Small Cap|
|Amaya Gaming Group Inc.||AYA||Technology||0.53||Small Cap|
|Bell Canada||BCE.TO||Telecommunication||39.91||Large Cap|
|The Bank of Nova Scotia||BNS.TO||Financials||78.37||Large Cap|
|Boston Pizza Royalties Income Fund||BPF.UN||Consumer Discretionary||0.34||Small Cap|
|Corby Distilleries Ltd.||CDL.A||Consumer Discretionary||0.59||Small Cap|
|Calian Technologies Ltd.||CTY.TO||Technology||0.14||Small Cap|
|Contrans Group Inc||CSS.TO||Transportation||0.37||Small Cap|
|Directcash Payments Inc||DCI.TO||Technology||0.39||Small Cap|
|Enghouse Systems Limited||ESL.TO||Technology||0.66||Small Cap|
|Gibson Energy Inc.||GEI.TO||Energy||3.06||Medium Cap|
|GENIVAR Inc||GNV.TO||Financials||1.28||Medium Cap|
|Loyalist Group Limited||LOY||Financials||0.08||Small Cap|
|New Flyer Industries Inc.||NFI||Consumer Discretionary||0.614||Small Cap|
|North West Company||NWC.TO||Consumer Discretionary||1.12||Medium Cap|
|Pembina Pipeline Corp||PPL.TO||Energy||10.36||Large Cap|
|Toronto-Dominion Bank||TD.TO||Financials||78.44||Large Cap|
|Crescent Point Energy Corp||CPG.TO||Energy||14.41||Large Cap|
|Davis + Henderson Corp||DH.TO||Technology||1.41||Medium Cap|
|Inter Pipeline Fund||IPL.UN||Energy||6.53||Medium Cap|
|Pizza Pizza Royalty Corp||PZA.TO||Consumer Discretionary||0.27||Small Cap|
|Sylogist Ltd.||SYZ||Technology||0.11||Small Cap|
|Innergex Renewable Energy Inc||INE.TO||Energy||0.82||Small Cap|
|Andrew Peller Ltd.||ADW.A||Consumer Discretionary||0.19||Small Cap|
|Boyd Group Income Fund||BYD.UN||Consumer Discretionary||0.29||Small Cap|
|Exchange Income Corporation||EIF.TO||Energy||0.54||Small Cap|
|Liquor Stores N.A. Ltd||LIQ.TO||Consumer Discretionary||0.40||Small Cap|
|Whitecap Resources Inc.||WCP.TO||Energy||1.66||Medium Cap|
Related: How To Rebalance a Stock Portfolio
This portfolio is not currently diversified. It is largely exposed to energy, technology and consumer discretionary. Some technology companies operate in specific fields and it might be tempting to associate them to those sectors but I find that technology changes so fast that a new competitor could always be around the corner. As such, companies like Davis+Henderson (DH) are still technology companies even though their clients are all financials.
Even though 4 sectors are highlighted as missing, there are 2 in particular worth pointing out and those are Healthcare and Real Estate. Being a very Canadian portfolio, it’s understandable to not see much on the healthcare side but there are good REITs worth considering. The energy sector is also interesting as many of the investments are small companies compared with the really big players such as Suncor (SU) or Husky (HSE) or Imperial Oil (IMO) to name a few. Many of those companies were income trusts with higher yield prior to the tax changes and it might be why they are part of the portfolio. (I may add yield for the next portfolio review)
Normally, being invested exclusively in large cap is not a risk as those companies are usually leaders and consequently own a large market share. However, the opposite can be risky. I find that this portfolio has too many small cap holdings. It may be great for growth at times but still, they can be vulnerable.
One part of the portfolio that we can’t see is how much is invested and in some cases the number of investments is not representative of the amount of money exposed to risks. For example, CDL.A, ADW.A and LIQ are all in the liquor business and probably the top 3 Canadian holdings in that sector. Is the investor spreading risks across the three of them or is it too many holdings.
Also worth noting (and I might add this in the future) is the P/E of some companies. BYD.UN trades at a really high P/E and also a number of other holdings are in the 60.
In summary, the portfolio is not fully diversified and some risks is identified in a couple of areas through the holdings of many small cap and high P/E holdings.
Related: How To Review Your Portfolio
If you want to rebalance, you could subscribe to a Free Technical Trend Analysis to get indication of your stock trend.
Reader Portfolio Reviewed
- Portfolio #1 – Missing investments in some sectors
- Portfolio #3 – A Balanced Portfolio with both Canadian and US holdings
- Portfolio #4 – Heavy Financials
Readers: What do you think of the portfolio diversification?
Disclamer: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your decision at your own risk – see my full disclaimer for more details.
Image courtesy of Stuart Miles / FreeDigitalPhotos.net