Bridgeport Asset Management Inc.

China: Are There Trouble Signs Ahead?

John — Thu, 15 Mar 2012 14:05:05 +0000

The rise of China over the past decade has been nothing short of astounding. The country’s consistent double digit growth has resulted in their GDP eclipsing Japan (on a purchasing power parity basis) as the world’s second biggest economy with expectations of overtaking the United States in less than 20 years. Many leaders and pundits have touted China’s economic model, which combines aspects of central economic planning with capitalism, as superior to the more free market economic model that has been adopted by most developed economies because it allows the government to act more swiftly during times of crisis. There are, however, signs that China’s well-polished economy may not be as perfect as once thought.

While there has been talk of a real estate bubble in China for quite some time now, only recently have we begun to see the extent of this bubble. In March of 2011, a team of reporters from Dateline Australia travelled to China to document the growing number of empty cities in that country. At the time of the report it was estimated that there were more than 64 million empty apartment buildings in China, enough to house more than 200 million people. It appears that in an attempt to maintain GDP growth and employment, the communist government of China has been developing massive real estate projects for which there is currently no demand.

Another issue that could have a significant impact on China’s long term growth prospects is their rapidly aging population, a result of the one-child policy. It is now estimated that within the next 10 years China’s population will peak and then begin to decline. The government burden of caring for an aging population while the size of the Chinese workforce is dropping could be staggering.

The possible implications of China’s real estate sector declining and slower Chinese GDP growth are numerous and could have a cascading economic effect. Of particular concern, China is a massive consumer of a wide variety of commodities including many base metals and oil. Slower economic growth in China would undoubtedly hurt commodity prices, affecting many Canadians who are often overexposed to the energy and material sectors of the stock market (given that they represent a large proportion of our domestic stock market).

At Bridgeport, we generally avoid commodity stocks as it is incredibly difficult to predict the corporate earnings of these companies given that they are so dependent on underlying commodity prices which can fluctuate wildly. Instead, we focus on attractively priced businesses that have high levels of recurring revenue and over time are able to pass on price increases to customers without impacting demand for their products or services. We believe this approach allows us to deliver more stability in investor returns over time.

Check out this fascinating documentary by Dateline Australia.

http://www.sbs.com.au/dateline/story/watch/id/601007/n/China-s-Ghost-Cities

Extendible Notes are a Losing Proposition for the Investor

John — Thu, 09 Feb 2012 15:26:10 +0000

Extendible Note issuances have become increasingly popular in the last few years as a way for Canadian banks to raise capital. While Extendible Notes may seem attractive on the surface, investors should be cautious about adding them to their portfolios.

Extendible Notes are similar to multi-year Guaranteed Investment Certificates (GICs) with some very important differences. A typical Extendible Note might have a five year term with a different pre-determined fixed rate of interest in each year. For example, an interest rate of 2% might be offered for years one and two, 3% for year three, 4% for year four and perhaps 4.5% for year five. After year five, the holder of the Extendible Notes is entitled to cash in their investment.

At first look, these notes seem appealing because the interest rates offered may be significantly higher than those available from regular GICs or investment grade fixed income securities. The problem, however, is that the issuer of the Extendible Notes (i.e. the bank) has the option to redeem them at the end of each year, paying only the principal and interest owed up to the redemption date.

Regardless of one’s view of the direction of interest rates over the next several years, it is difficult to see how Extendible Notes are a good choice for investors when the issuing bank has this annual redemption right.

Our view at Bridgeport Asset Management is that Extendible Notes mainly benefit the issuing bank and are generally a losing proposition for the investor. For example, if interest rates rise significantly in the future, the notes will turn out to be of greater benefit to the issuing bank. The bank will not redeem them as the rate to raise new capital would be higher than the rates on the Extendible Note. The investor, on the other hand, will be upset about being locked into a note that is paying a rate of interest less than what is available in the market on similar investments.

Alternatively, if interest rate levels remain unchanged or decline in the future, the issuing bank will likely choose to redeem the notes and raise capital at a lower interest rate than it would have otherwise paid on the Extendible Note. In this scenario, the Extendible Note investors might rightfully complain that the high future rates of interest originally offered to them were used as a “teaser” to get them to invest. The only way the investor would ever earn the higher rates of return on the Extendible Note would be if interest rate levels rose so quickly that the Extendible Note rate of return turned out to be lower than the market rate of interest.

So as you can see, we are not in favour of investing in Extendible Notes. Investors seeking safety and income would be better off investing in plain vanilla GICs or investment grade bonds. Feel free to let us know what you think.

Welcome to the Bridgeport Asset Management Blog

John — Fri, 03 Feb 2012 19:35:50 +0000

Bridgeport Asset Management is an independently owned investment counselling firm delivering exceptional individualized service and providing a comprehensive approach to investors’ wealth management needs. As a core principle, we invest our own personal capital alongside our clients, creating a strong alignment of interests.

Our firm provides unbiased financial advice to investors as we do not receive any fees from third parties for recommending or selling financial products or any transaction commissions from buying and selling securities. We are paid exclusively by our clients for our services.

Bridgeport is led by its President, John Fisher, who has over 20 years of business and investment experience. Before founding Bridgeport, John served as a Managing Director at Clairvest Group, a Toronto-based private equity firm with approximately $1 billion of capital under management. John also holds the Chartered Accountant, Chartered Business Valuator and Chartered Financial Analyst designations and earned an MBA from Northwestern University’s Kellogg School of Management.

Bridgeport is licensed as Portfolio Manager in Ontario, Quebec, Manitoba and BC.