hat a
difference a year makes! A year ago, following the third largest decline in the
Toronto Stock Exchange 300 Composite Index (the TSE 300) going back to 1950 and
the largest drop since 1981, investors were reticent to invest in Canadian
stocks. In October and November 1998, this column (Uncertain Times and Buy Low)
discussed investor psychology at a time when there was a fire sale on at the
TSE.
On October 5, 1998, the TSE 300 closed at 5336.15. On December 31, 1998, it closed at 6485.94. On December 31, 1999, it closed at 8413.75. Thus the TSE 300 index rose 29.7% during calendar 1999 and 57.7% from its October 5, 1998 level. These figures exclude dividends. The 1999 increase is 31.7% when dividends are included.
How good a year was 1999 for the market? The TSE confirms that, in the 76 year history going back to 1924, 1999 produced the 11th highest total increase in the TSE 300. After 1979, only 1983 and 1993 had a larger percentage rise. The TSE 300 increased in 56 of the 76 years in question (ie. 74% of the time).
In April, 1999, this column (Victims of Value Investing) showed how the top 10 performing stocks in the Standard & Poor's Index of 500 stocks on the New York Stock Exchange contributed 41% to the index's 1998 growth.
On December 28, 1999, John Dorfman, President of Dorfman Investments in Boston wrote an article for Bloomberg which described how the NASDAQ Composite Index of U.S. stocks had risen 81% to date in 1999. Of the 4,773 stocks in that index, only 20% had risen by 81% or more in 1999. No fewer than 45% of NASDAQ stocks covered by Bloomberg were down for the year. The median gain for all NASDAQ stocks was about 7.5%! Qualcomm Inc.'s stock showed how one stock's extraordinary gain can skew an index by rising from $6.4375 to $176.25 during 1999 for a 27.4 fold increase in its value!
The year 1999 showed that the TSE 300 is not immune to such skewing. The two stocks with the largest weighting on the TSE 300 are Nortel and BCE. During 1999, Nortel rose from $38.30 to $145.85 for a 281% gain. BCE Inc. increased from$57.85 to $141.15 for a 127% rise.
On October 5, 1998, Nortel closed at $21.98. It rose 563.6% from that date to December 31, 1999, versus 57.7% for the TSE. Similarly, on October 5, 1998, BCE closed at $40.20. It gained 226.2% in the same period ending December 31, 1999.
On November 25, 1999, the TSE 300 finally rose to a level higher than the highest level it had reached previously on April 22, 1998. At that time, the Globe & Mail confirmed that the TSE 300 had risen 21.1% to date in 1999. Nortel represented 12.5 of the 21.1 points, BCE made up 5.5 points while the other 298 stocks in the TSE 300 represented the other 3.1 points.
The Globe further confirmed that, if Nortel and BCE were to be removed from the TSE 300, the index would still be 15% below the level reached in April, 1998. Wood Gundy confirms that, without Nortel and BCE, the TSE 300 would have grown by 6.9% in calendar 1999 instead of rising by 29.7%!!
Mutual funds have a limit with regard to the concentration they can have in one stock. That limit is lower than the weight both Nortel and BCE have in the TSE 300. Accordingly, do not be surprised if your Canadian Equity mutual fund(s) did not fare as well as the TSE 300 in 1999. Unless your fund had a heavy weighting in both Nortel and BCE during all of 1999, it probably did not do as well as the index.
History teaches us that unusual events are generally not sustainable on a long term basis. While it is always worthwhile reviewing the upside potential for any investment in your portfolio, do not panic if you under-performed the index in 1999. Driving your car with your eyes strictly on the rear view mirror can get you in trouble. Keep your eye on the front windshield in order to anticipate the road ahead.
Gerry Leduc, resident of Old Ottawa South, is a Vice-President & Retirement Specialist with Wood Gundy Private Client Investments. He can be reached at 783-7830 (Internet: leducg@cibc.ca). Views expressed are not necessarily those of CIBC World Markets Inc. This article is for the information of investors only and does not constitute an offer to sell or a solicitation to buy the securities referred to herein.