Canadian Small-cap Model Portfolio Financials
We are adding a position in Brookfield Asset Management Reinsurance Partners Ltd. (BAMR-T) at 3.0%.
As a tracking stock, its purpose is to give small-cap investors an opportunity to own the much larger Brookfield Asset Management Inc. (BAM.A-T) to their holdings, but with a market float that fits the small-cap criteria ($2.1bln versus ~ $90bln). We are adding Brookfield to our small-cap portfolio following its -22% pullback from its early January 2022 high.
As we have previously mentioned, most recently earlier this month when we added ATCO Ltd. (ACO.X-T, portfolio weight 1.9%) to our small-cap portfolio (link), we see many similarities between today and the macro backdrop through the 2018 market sell-off. Like today, the Fed was raising interest rates, growth stocks were under pressure (Q4/18), earnings growth was decelerating, there were rising concerns of a slowing global economy (i.e. recession risk), and geopolitical uncertainties were elevated. With these risks also present today, along with increased market price volatility, stocks with low volatility and dividend growth characteristics have been sought-after factors for investors at present. As we show in Exhibit 1, these factors also led through the late-2018 market sell-off.
Brookfield follows our recent portfolio additions of ATCO and Gibson Energy Inc. (GEI-T, portfolio weight 3.3%), in which we also cited their low volatility and dividend growth attributes. For Brookfield, its five- and 10-year betas versus the S&P/TSX Composite Index are 0.77 and 0.70, respectively. Compared with the S&P/TSX Small Cap Index, these betas are even lower, with both the five-year (0.61) and the 10-year (0.52). Dividend growth has also been strong for Brookfield, with its quarterly distributions increasing to US$0.14 from US $0.1067 (+31.2%) three years ago and US$0.0933 (+50.1%) five years ago. Although we would not consider Brookfield as an earnings momentum-driven stock, we believe that these qualities of low price volatility and dividend growth are desirable attributes in the current market.