Although this is a fairly technical article, the concept is simple. We want to invest in companies that have a history of, and prospects for, generating real wealth to shareholders. Three ways to measure this wealth are Dividends, which we have spoken a lot about, Return on Invested Capital (ROIC), and Economic Value Added (EVA).
The following article by the Globe’s Rob Carrick does a good job of explaining that much of the market’s top performers last year, accomplished their returns in somewhat of a speculative manner; stock prices rose in anticipation of increased earnings, not necessarily due to real generation of wealth. We like Portfolio Managers who appreciate this real wealth generation. By comparing the names in this article and those in your Portfolios, you will see the gains you have enjoyed the last few years have been from real generators of wealth. We have been at or above benchmark in all portfolios which is encouraging because these gains have therefore been “quality gains”. This should give us confidence in the strength of future gains and of course added downside protection as compared to the market as a whole when that day comes.
You can view the article here.
As always we invite the opportunity to discuss your individual portfolios at your convenience.