Newhaven’s investment strategy is centred on identifying companies with sustainable dividends, with the ability to grow those dividends over time. Dividend growth strategies in developed markets have consistently outperformed comparable relative or indexed market strategies, with the added benefit of lower volatility. Each holding is evaluated with a keen focus on the sustainability of the business, including long-term competitive positioning and growth prospects. Over time, the focus on long-term dividend growth allows the portfolio to provide a growing stream of annual income which can be used as needed or reinvested and compounded for additional growth. An additional benefit of the strategy is low turnover, which in turn lowers transaction costs and taxes, regardless of the market or economic environment.
Concentrated portfolios of 20-30 equity holdings are constructed for each client. Newhaven is not inclined to own the market, and as a result, our strategy comes in and out of favour. Newhaven stands apart, not merely for the sake of being different, but because the popular thing to do is often not the intelligent thing to do. Newhaven is only concerned with owning the most optimal portfolio that will help clients achieve their goals over their individual time horizon.
Note: dividend growers in Canada have significantly outperformed both the TSX and S&P 500 on a total return basis over the last four decades, especially when volatility, as measured by standard deviation, is considered. Canadian oligopolies in the Financial, Utility, Telecommunications and Energy Infrastructure sectors have consistently provided above average total returns with lower risk and the added benefits of lower taxes and currency risk for Canadian investors. As such, these sectors are well represented in all Newhaven portfolios.
Newhaven seeks to control volatility in client portfolios, without giving up potential return. Our portfolios aim to provide capital preservation, while funding an ongoing personal liability stream. Dividend-paying equities have consistently provided a lower volatility total return stream when compared with the broad stock market, with a higher income level than could otherwise be achieved in the bond market. Volatility control is the psychological and mathematical key to matching an investment portfolio to a client’s multi-decade time horizon, where they are consistently in need of capital.
Note: clients who are at, or near, retirement often cannot afford significant capital impairment when drawing significant funds from their portfolios, nor can they afford to give up much return, due to increasing life expectancies. Increasing the volatility in a portfolio by 5-10% can have a disastrous impact on the portfolio’s ability to fund ongoing expenses in retirement. Dividend-paying equities have consistently had annual volatility in the 10% range, while indexed and momentum strategies are 5-10% higher on average. As a portfolio’s volatility increases and the annual income level decreases, the chance of the portfolio running out of money increases significantly. Relative to a quality dividend portfolio, an indexed strategy roughly doubles a client’s chances of running out of money in retirement and a momentum-based strategy roughly quadruples the chances of running out of money, even with conservative return and annual drawdown assumptions.
Newhaven portfolios are composed primarily with Canadian equities. The Canadian market is home to a significant number of dividend-growers, with above-average yields that have been shown to both reduce volatility and outperform over time. Additionally, Canadian dividend-payers provide a higher level of current income, lower taxes and less currency risk when compared to market relative strategies. US dividend-payers and select ETFs are used to complement the Canadian core, especially in sectors like Technology, Health-Care and Consumer, where the Canadian market is under-represented. Over time, the Canadian market has shown to be more consistent and less volatile than the US market, with similar returns. Dividend-payers have outperformed in both markets.
Note: over the last 20 years, the Canadian market has outperformed the US market (in $CAD), even including significant recent US market outperformance. The US market had a terrible period from 2000-2012 where it provided NEGATIVE returns in $CAD. When the US market does well, so does their currency and vice versa. This does not match well with a consistent $CAD denominated expense stream for Canadian clients. Additionally, the US market has only just caught up to Canada on a century-to-date basis, and has had to move to a significant 50% price to book value premium to do so.
Note: when examining only the bust periods (periods with extended negative returns), the US market exhibits significantly more instances of long-term negative returns than the Canadian market. In fact, on a rolling 5-year basis over the last 5 decades, the US market has been NEGATIVE when measured in $CAD more than 17% of the time, while the Canadian market has only registered a NEGATIVE return in less than 3% of the 5-year periods. Extended periods of acute NEGATIVE returns significantly impair a portfolio’s ability to fund an ongoing liability stream, even if the overall return ends up being comparable for a client’s full time horizon.