In 2010 the Globe & Mail offered a simple Canadian stock portfolio idea. It was also called the Canadian Essentials Portfolio. The portfolio concept was courtesy of political science professor Mike Henderson who singled out the companies for the essential roles they play in the Canadian economy. He identified the companies in the year 2000 and it formed the core of the retirement investments for he and his wife. The cumulative 10-year total return on these stocks to 2010 was 305%, greatly outpacing the 72% for the S&P/TSX composite index. In a recent article, the Globe detailed how Kate, a 71 year old retiree in Guelph used the Essentials Portfolio to take her TFSA to over $250,000.
For those who have a Globe subscription here’s the Essentials article from 2010, and the Essentials update in 2018.
The 2018 update reported that the annualized return since the beginning of 2000 for the Canadian Essentials Portfolio was 13.1%, including dividends, while the S&P/TSX Composite Index made 7.6%.
The blazingly simple portfolio
Once again, the idea was to hold companies that are essential to the Canadian economy. These companies are not going away and they are in everyday use. In fact, it’s the same concept as the Canadian Wide Moat portfolio that I’ve offered on this blog .
The Essentials Portfolio is concentrated in 3 sectors, while the Canadian Wide Moat approach offers 4 sectors by including the very important grocers. The returns would have been helped greatly in the last two decades by adding grocers.
Here’s the ‘Essential’ holdings from 2000 …
Canadian National Railway (CN-T), Canadian Pacific Railway (CNR-T), Enbridge (ENB-T), TransCanada Pipelines, now TC Energy, (TRP-T), Royal Bank of Canada (RBC-T), TD Bank (TD-T), Bank of Nova Scotia (BNS-T), Canadian Utilities (CU-T), Fortis (FTS-T) and Emera (EMA-T).
It’s railways, financials and utilities. It’s a case of boring and staple blue chips beating the crap out of the broader market. That should be of no surprise.
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In Canadian stock portfolios on Cut The Crap Investing I offered this chart from Norm Rothery.
We see that the low volatility approach is a bit better. And there is a lot of boring essentials blue chip in the Canadian low volatility index. The essentials, wide moats, low volatility and high dividend styles are all mostly concentrated in the same sectors.
In the high-dividend space check out the Beat The TSX Portfolio. It too has a long history of incredible performance, but with much greater volatility at times.
Back to Kate and her TFSA
Kate has maxed out her TFSA space and made the life-changing move of dumping her high fee mutual funds in favour of the Essentials stock portfolio approach.
Canadians should dump their high-fee mutual funds.
From the Globe & Mail post …
By early 2020, Kate had a substantial CEP in place. Her TFSA is now worth $247,000 as of mid-June, with most of the growth coming after January, 2020. Kate’s TFSA is not one of the million-dollar-plus TFSAs that the Trouncers series has often profiled, but after adjusting for the constraints of maintaining a relatively smooth ride and an undemanding workload, she sees her TFSA hitting a home run in terms of her own needs.
In the post, how to use your TFSA I noted that a maxed-out growth-oriented global ETF portfolio strategy would have delivered about $225,000 to the end of 2024. Given the gains in 2025 and the additional $7,000 contribution space, we can call it a draw. The ETF global ETF model would also be in the $245,000 range.
More risk for the same returns
For Kate’s experience, she took on much more risk for the same returns as a global ETF portfolio. She’s concentrated in a few stocks (concentration risk). All of her TFSA rests largely on the success of Canada (geographic and political risk). She’s mostly concentrated in one currency – the Loonie.
As we’ve seen recently, President Trump has suggested he might ruin Canada economically if we don’t cooperate on trade terms. He could ruin Canada in the near term. He might. That demonstrates that the risk is present. Risk to Canada could show up in other ways, it’s doesn’t have to be a Donald Trump.
Net, net, just because Kate’s strategy worked very well, doesn’t mean that it’s a good idea. It’s not. 100% concentration in Canadian equities in any account carries incredible risks.
Just because something worked doesn’t mean it’s a good idea. If a driver claims that he drove without car insurance for 30 years, it’s a good idea because he never had an accident? He saved a lof of money; it was a good strategy? Of course not. It’s the same false argument for extreme portfolio concentration risk.
If Kate had invested in the Canadian Essentials and a sensible U.S. stock portfolio, her returns would be much greater.
What is the cost of your Canadian home bias?
Our best performers over the last 15 years are U.S. stocks and ETFs.
Canadian stock portfolio weights
Of course, it’s a personal decision. Do you want a 20% , 30%, 40%, 50% Canadian weight? Many experts will suggest that 30% Canadian is optimal within a global portfolio. And again, I like the idea of the Essentials, Wide Moat, or Low Volatility approach. The long term outperformance is meaningful and likely to repeat IMHO. But we need to pay attention to geographic allocation.
But of course – past performance doesn’t guarantee future returns.
Norm Rothery tracks the Canadian low volatilty stock model for the Globe and at Stingy Investor. The current holdings are …
Algoma Central, Alta Gas, Atco Ltd, Scotiabank, CIBC, Canadian Utilities, Emera, Enbridge, Fortis, Hydro One, Intact Financial, MCAN Mortgage, Metro, National Bank, Royal Bank of Canada, Waste Connections, PowerCorp, Quebecor, Rogers Sugar, Sienna Senior Living.
Other recent holdings are George Weston, Great West Life, Keyera Corp, Loblaw, Pembina, Sun Life and TMX Group. Personally, I would continue to hold stocks that come and go within the low volatility portfolio; I would simply consider and new holdings that are added to the list.
As you can see the low volatility portfolio is dominated by financials, utilities (including pipelines and telco) and grocers.
Inflation protection
Contrary to how the Essentials portfolio was billed, it is not inflation friendly. That was demonstrated in 2021 and 2022 when we had the COVID-inspired inflation spike that led to a rising rate environment.
The Essentials was down 1.9% in 2021 and up only 2.5% in 2022 as inflation surged, delivering a negative real return.
Cut The Crap Investing readers were prepared (at least armed with the knowledge), holding gold in a balanced portfolio. I also put Canadian oil and gas stocks on the table in late 2020. Fantastic returns were on the way in 2021 and 2022. Oil and gas is the most reliable inflation-fighting sector. Here’s XEG-T.
I have long put the Purpose PRA-T ETF on the table as a one-stop, well-diversifed inflation fighting asset. Here’s PRA over the last 5 years, averaging 15% annual.
The inflation paradox
Inflation fighters would have greatly helped portfolios over the last 5 years of course. But certainly unexpected and high inflation is rare.
And ironically, it is the avoidance of these cyclical sectors such as oil and gas and materials that has led to the success of the Essentials and Wide Moat Portfolios since the 1980’s, as we have mostly been in a low inflation, disinflationary environment. It’s possible the inflation fighters will be a drag on performance if we return to low inflation / disinflationary times.
An accumulator might stick to the Essentials / Wide Moat ‘stuff’. I think it’s a good idea for retirees and those in the retirement risk zone to hold some dedicated inflation protection.
As always the above is not advice. Think of it as information for consideration as you build your portfolio. 🙂
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