There are 29 publicly traded stocks with a market cap of $1 billion or more and operating in the financial services sector listed on a Canadian stock exchange. To create this particular financial portfolio, all you need to do is pick three stocks with the word “financial” in their corporate name.
So, under this simple but effective rule, Royal Bank of Canada would be out, and Fairfax Financial Holdings Ltd. (TSX:FFH) would be in. Make sense? Good, because there are just nine stocks that qualify.
Here are my three picks for this financial portfolio.
Financial portfolio: pick #3
While none of the big Canadian banks qualify under this strict criterion, First National Financial Corp. (TSX:FN) does. And after looking under the hood, I have to believe that I’d be interested in its stock whether or not the word financial was part of its corporate name.
Here’s why.
It is the largest non-bank originator and underwriter of residential mortgages. In the first quarter ended March 31, it had a record $94.5 billion in mortgages under administration (MUA), 2% higher than at the end of December. In Q1 2016, First National grew originations by 8% year over year to $2.9 billion on the strength of single-family and commercial mortgages.
As a result of the 8% growth in originations, First National saw revenues increase 38% in the quarter to $231.4 million with an EBITDA (excluding gains and losses from financial instruments) of $56.8 million, or 48% higher than the first quarter 2015.
It might not be a bank, but given the importance of home ownership in this country, it sits in a nice position to take advantage of this.
Financial portfolio: pick #2
No financial portfolio, no matter how simple, should be without an asset manager. Wealth management is a growing trend in financial services as Canadians work to save enough for retirement. Almost every one of the nine stocks that qualify has some sort of wealth management business, but for me, I have to go with the pure-play asset manager—CI Financial Corp. (TSX:CIX).
While it came to the ETF party late, it’s making up for lost time.
After acquiring First Asset on October 23, 2015, it’s been busy adding new funds to its arsenal to compete with iShares and Vanguard, the recognized global leaders in ETFs. I count no less than 10 new funds added at First Asset since the acquisition, the most recent being in mid-May when it announced the addition of both First Asset Preferred Share ETF and First Asset Long Duration Fixed Income ETF. Today investors can buy 52 different ETFs through First Asset, and this is only the start.
I don’t want to overstate the importance of the First Asset acquisition because CI still has to figure out how to migrate its mutual fund investors over to ETFs. At the moment, 37 of its 52 ETFs are passively managed, whereas most of its mutual fund assets under management are active in nature. That potentially presents two problems: First, active ETFs are still a very small part of the ETF market in Canada; secondly, the fees on ETFs, even when active, are generally lower than a similarly invested mutual fund.
I see CI passing this test with flying colours.
Financial portfolio: pick #1
It’s impossible to imagine a financial portfolio without the presence of Prem Watsa and his holding company, Fairfax Financial. It’s been a star performer on the TSX the past decade, up 22.2% on an annualized basis compared to 6.2% for the iShares S&P/TSX Capped Financials Index Fund, a group of 26 stocks consisting of the five big banks and a weighting of 65% along with 21 other stocks including Fairfax.
Still think the big banks are all that and a bag of chips? Not so much.
Meanwhile, Watsa’s going crazy in India where he was born, investing in almost everything that moves. He’s even set up a public company, Fairfax India Holdings Corp. (TSX:FIH.U), in order to make that happen. One of its first investments was to acquire a 33% interest in the Bangalore International Airport in March for $321 million.
As of the end of March 2016, Fairfax India had $1 billion in assets in India including almost $300 million in cash waiting to be utilized in what Watsa believes will be one of the biggest growth stories anywhere in the world over the next few years.
Buy Fairfax Financial and you get the India play as a bonus.
