Room for Improvement - Odlum Brown

odlum brown limited trust • vision • investment integrity
ob report
january 2012
inside this issue
Room for Improvement
> Page 1
OB Model Portfolio
> Page 3
Odlum Brown’s 18th Annual
Address > Page 4
Odlum Brown Limited
Suite 1100 – 250 Howe Street
Vancouver BC Canada V6C 3S9
Tel 604 669 1600
Fax 604 681 8310
Toll Free 1 888 886 3586
information@odlumbrown.com
odlumbrown.com
Kelowna 250 861 5700
Victoria 250 952 7777
Chilliwack 604 858 2455
Courtenay 250 703 0637
Campbell River 250 286 3151
Member-Canadian Investor Protection Fund
PLATINUM MEMBER
> Room for Improvement
many canadians believe the united
States is headed for an economic disaster.
Yet despite high unemployment, consumer
deleveraging, troubled banks, a trillion-plus
dollar Federal deficit, and political gridlock,
U.S. stocks led the world in 2011. For the year
through to December 15, 2011, all three of
the major U.S. stock benchmarks produced
positive total returns, measured in Canadian
dollars.
Canadian stocks returned –12 per cent over
the same period. Not surprisingly, the major
European bourses were down even more.
Emerging market stocks produced the worst
returns, led by declines of 25 per cent and 32
per cent in Brazil and India, respectively.
Chinese stocks were down 15 per cent.
The Odlum Brown Model Portfolio had an
unspectacular yet respectable 2011. For the
year through mid-December, the Model’s value
was roughly unchanged. Owning foreign stocks,
particularly U.S. multinational companies,
helped its relative performance. The Model
also benefitted by being underweight cyclical
resource stocks and overweight less cyclical
businesses in Consumer and Health Care
sectors. At year-end, almost 50 per cent of the
portfolio was invested outside of the country.
The divergent returns between the U.S. and
emerging markets provide two important and
related insights. First, economic growth and
stock market returns are not highly correlated.
Second, it is change relative to expectations
that drives investment performance, not the
absolute condition of a stock, industry sector,
or country.
China is a prime example. The country has led
global growth since the 2008/09 financial
crisis, yet its stock market has been trending
downward since mid-2009. From a rear-view
mirror perspective, China’s economy looks
great, but what matters to investors is where
China is headed. While the country’s long-term
potential seems bright, there are signs that
China’s credit-driven investment boom is faltering.
Chinese bank and property developer stocks
2011 stock market returns 1
(including dividends)
U.S. - Dow 10%
U.S. - S&P 500 3%
U.S. - Nasdaq 1%
OB Model Portfolio 0%
U.K. -1%
Japan -9%
Korea -11%
Canada -12%
China -15%
Germany -16%
Hong Kong -16%
France -17%
Russia -17%
Italy -23%
Brazil -25%
India -32%
1 Year-to-date total return as of December 15, 2011
(measured in Canadian dollars)
have performed poorly and it is increasingly
apparent that the country is not immune to the
economic cycle.
The American economic recovery remains on
track. In fact, the troubles in Europe and the
deterioration of China’s economy are helping to
brighten the U.S. outlook. Worries about
European banks have caused investors to prefer
American fixed income investments, driving
U.S. interest rates even lower. This in turn,
benefits consumers and businesses. Moreover,
the slowdown in China has taken the edge off
of commodity prices, alleviating the pressure
on corporate profit margins and leaving more
money in consumer wallets.
There is no doubt that slower global growth
will have a negative effect on U.S. exports, but
the overall U.S. economy will likely prove to be
resilient because exports represent a relatively
small 15 per cent of economic output. Indeed,
the same argument about the resilience of the
continued on next page

2/ob report
“
there is a lot more
room for improvement
and potential for
investors to be positively
surprised following
periods of economic
adversity than periods
of prosperity.
”
continued from page 1
> Room for Improvement
insular U.S. economy proved to be prescient
following the 1997/98 Asian financial crisis.
Investors remain confident in the credit of the
United States, even despite all the hoopla over
the recent U.S. debt ceiling fiasco, the S&P debt
downgrade, and the failure of the congressional
“Super Committee” to forge a budget compromise.
The yield on 10-year U.S. Treasury bonds
has fallen from more than 3.5 per cent in early
2011 to less than two per cent, as of late.
The monstrous U.S. budget deficit may rightfully
scare investors, yet large deficits are normally
followed by good stock market returns. The
history of this seemingly counterintuitive reality
is brilliantly chronicled in Ken Fisher’s latest book,
Markets Never Forget (But People Do): How Your
Memory is Costing You Money.
While it is hard to believe, stocks generally
perform much better in the years following big
budget deficits than they do following the years
of surpluses (or smaller deficits). Consider what
happened following the spike in the U.S. budget
deficit during the nasty recession in 1982. Three
years later, the S&P 500 was up more than 50
per cent. Conversely, the budget surplus during
Bill Clinton’s presidency in 1999 was anything but
a recipe for good things to come. Three years later,
the benchmark U.S. stock index was down more
than 40 per cent. While we have highlighted a
couple of extreme examples, the pattern is fairly
consistent and there is actually a logical explanation
for the outcome.
There is a lot more room for improvement and
potential for investors to be positively surprised
following periods of economic adversity than
periods of prosperity. During economic setbacks,
stocks fall out of fashion and become inexpensive,
as corporate profits and government finances
deteriorate. Conversely, government finances
improve during booms, as do corporate profitability,
investor sentiment and stock prices. Stock market
returns are greatly influenced by starting
valuations, which are best during troubled times.
We are enthusiastic about the outlook for the
U.S. economy and favour many U.S. listed
securities simply because there is lot of room
for the U.S. economy to recover. Positive change
will not happen overnight, but it should not
take much marginal improvement to move
valuations off depressed levels.
Europe is commonly cited as the biggest risk for
2012. While the economic and political issues in
the Eurozone are complex and formidable, we
think that most of the concern has already been
reflected in stock prices. Europe’s big problems
could be setting the stage for excellent stock
returns, much like big budget deficits. Collectively,
the governments of the European Union have
less debt leverage than the United States. The
distribution of the debt is the problem and the
reason why it will take time to develop and
institute policies that will ease investor concerns.
Nonetheless, we are hopeful because there is
scope for positive change in Europe.
We are cautious regarding the outlook for
Canada’s economy and stock market. While our
country will benefit from renewed U.S. economic
strength, there is simply not much room for
improvement. Home ownership is at a record
high and consumer debt leverage has never been
higher. In fact, Canadian consumers are now
more leveraged than their American and British
counterparts. Housing investment has been a big
driver of Canada’s economy in recent years, but
with consumers increasingly tapped out and
home prices on the richer side of fair, there is not
much latitude for Canada’s housing market to get
even better. The resource sector is another area
that has been a boon for the Canadian economy
in recent years, yet it too will likely be less of a
growth factor going forward if China’s credit-driven
property boom comes to an end.
Our government managed to balance the books
while the housing and resource sectors were
booming, but now that both have slowed, the
Federal budget is in the red. Canada remains in
excellent fiscal shape relative to other developed
nations and the country will undoubtedly benefit
from the U.S. economic recovery. Still, Canadian
investors would be wise to diversify beyond our
borders.
Overall, we believe that the global economy will
muddle through in 2012. America’s economic
strength and resilience will be the big surprise
this year. Good businesses will continue to find
room for improvement and add shareholder
value. Those that embrace quality investments
and foreign diversification should do well. Happy
New Year.
murray leith, bcomm, cfa
vice president and director,
investment research

FINANCIALS
Toronto-Dominion Bank (TD)
Brookfield Asset Management Inc. (BAM.A) 1
Onex Corp. (OCX)
Intact Financial Corp. (IFC)
JPMorgan Chase & Co. (JPM)*
The Howard Hughes Corp (HHC)*
Berkshire Hathaway Inc. (BRK.B)* 2
28.6%
Manulife Financial Corp. (MFC)
Royal Bank of Canada (RY)
Bank of Nova Scotia (BNS)
MATERIALS
Barrick Gold Corp. (ABX)
Potash Corporation (POT)
Agrium Inc. (AGU)
ENERGY
Royal Dutch Shell PLC (RDS.B)* 3
Cenovus Energy Inc. (CVE)
TransCanada Corp. (TRP)
Nexen Inc. (NXY)
EnCana Corp. (ECA)
Trinidad Drilling Ltd. (TDG)
INDUSTRIALS
Canadian National Railway Co. (CNR)
3M Co. (MMM)*
United Parcel Service Inc. (UPS)*
Ritchie Bros. Auctioneers Inc. (RBA)
CONSUMER DISCRETIONARY
Starbucks Corp. (SBUX)*
Lowe’s Companies Inc. (LOW)*
Thomson Reuters Corp. (TRI)
INFO TECH
Syntel Inc. (SYNT)*
Dell Inc. (DELL)*
Cisco Systems Inc. (CSCO)*
Apple (AAPL)*
Google (GOOG)*
STMicroelectronics NV (STM)*
CONSUMER STAPLES
The Coca-Cola Co. (KO)*
Diageo PLC (DEO)*
Colgate-Palmolive Co. (CL)*
Sysco Corp. (SYY)*
Loblaw Companies Inc. (L)
Wal-Mart Stores Inc. (WMT)*
TELECOM SERVICES
BCE Inc. (BCE)
UTILITIES
Fortis Inc. (FTS)
HEALTH CARE
Stryker Corp. (SYK)*
Novartis AG ADR (NVS)*
Becton Dickinson and Co. (BDX)*
SUB TOTAL
SHORT-TERM INVESTMENTS
PORTFOLIO TOTAL
odlum brown model portfolio
S&P/TSX
Weight
22.4%
26.6%
5.7%
4.1%
1.4%
2.9%
5.1%
1.9%
1.4%
100%
Dec 15/11
Price
$71.85
$27.39
$32.70
$58.13
$31.76
$45.10
$74.90
$10.25
$48.29
$48.74
$45.79
$40.25
$67.12
$72.44
$31.00
$43.10
$15.02
$18.71
$7.09
$75.03
$78.86
$71.55
$20.48
$43.40
$24.66
$27.02
$45.26
$15.05
$18.04
$378.94
$619.54
$5.52
$66.89
$84.51
$90.58
$28.99
$36.55
$57.95
$40.53
$32.23
$46.63
$56.11
$71.15
Shares Cost Market
Value
1,600
3,700
2,700
1,200
2,000
1,300
600
3,700
750
750
1,900
1,550
900
1,500
1,900
1,400
3,100
2,000
3,900
800
650
650
2,000
1,800
2,500
500
1,500
4,000
3,400
120
75
3,000
1,000
700
550
1,200
900
550
2,000
2,500
1,400
1,050
700
$71,826
$89,816
$49,293
$43,380
$77,846
$63,704
$49,545
$82,991
$23,805
$15,713
$90,915
$64,434
$43,227
$90,034
$65,792
$21,550
$96,024
$66,178
$46,800
$42,264
$56,003
$50,735
$41,880
$41,912
$58,391
$20,605
$29,558
$61,149
$53,270
$39,079
$38,148
$31,490
$49,982
$48,931
$45,094
$42,458
$38,214
$31,394
$69,350
$58,375
$75,744
$57,696
$51,043
$2,285,639
* = Prices in U.S. dollars U.S. Exchange ($US/$CDN) $0.9675 Foreign Weight 49.0%
$114,960
$101,343
$88,290
$69,756
$65,654
$60,600
$46,450
$37,925
$36,218
$36,555
$87,001
$62,388
$60,408
$112,311
$58,900
$60,340
$46,562
$37,420
$27,651
$60,024
$52,981
$48,070
$40,960
$80,745
$63,721
$13,510
$70,171
$62,223
$63,397
$47,001
$48,027
$17,116
$69,138
$61,145
$51,493
$35,957
$32,895
$32,943
$81,060
$80,575
$67,475
$60,895
$51,478
$2,503,732
$21,382
$2,525,114
Portfolio
Weight
26.0%
4.6%
4.0%
3.5%
2.8%
2.6%
2.4%
1.8%
1.5%
1.4%
1.4%
8.3%
3.4%
2.5%
2.4%
13.6%
4.4%
2.3%
2.4%
1.8%
1.5%
1.1%
8.0%
2.4%
2.1%
1.9%
1.6%
6.3%
3.2%
2.5%
0.5%
12.2%
2.8%
2.5%
2.5%
1.9%
1.9%
0.7%
11.2%
2.7%
2.4%
2.0%
1.4%
1.3%
1.3%
3.2%
3.2%
3.2%
3.2%
7.1%
2.7%
2.4%
2.0%
99.2%
0.8%
100%
Dividend
Yield
3.8%
1.9%
0.3%
2.5%
3.1%
0.0%
0.0%
1.0%
4.5%
4.3%
1.4%
0.7%
0.7%
4.6%
2.6%
3.9%
1.3%
4.4%
2.8%
1.7%
2.8%
2.9%
2.2%
1.6%
2.3%
4.7%
0.5%
0.0%
1.3%
0.0%
0.0%
7.2%
2.8%
3.8%
2.6%
3.7%
2.3%
2.5%
5.4%
3.7%
1.8%
4.2%
2.5%
$87.00
$40.00
$44.00
$67.00
$50.00
$75.00
$120.00
$21.00
$55.00
$55.00
$71.00
$62.00
$101.00
$105.00
$47.00
$45.00
$34.00
$20.00
$12.00
$85.00
$105.00
$85.00
$25.00
$48.00
$30.00
$37.21
$65.00
$20.00
$22.00
$525.00
$730.00
$13.00
$80.00
$95.00
$105.00
$36.00
$46.00
$60.00
$42.00
$34.50
$71.00
$70.00
$95.00
1 Class A shares elect on-half of the company’s Board of Directors.
2 A share of Class B common stock has the rights of 1/1,500 th of a share of Class A common stock except that a Class B share has 1/10,000 th of
the voting rights of a Class A share.
3 Class A shares have a Dutch source for tax purposes, and the Class B shares have a UK source.
Target
Price
Total
Return
Potential
25%
48%
35%
18%
61%
66%
60%
106%
18%
17%
56%
55%
51%
50%
54%
8%
128%
11%
72%
15%
36%
22%
24%
12%
24%
42%
44%
33%
23%
39%
18%
143%
22%
16%
18%
28%
28%
6%
9%
11%
54%
29%
36%
ob report/3
The Odlum Brown Model
Portfolio was established on
December 15, 1994 with a
hypothetical investment of
$250,000. The Model provides a
basis with which to measure the
quality of our advice. It also
facilitates an understanding of
how we believe individual
security recommendations could
be used within the context of a
client portfolio. Trades are made
using the closing price on the
day a change is announced.
Performance figures do not
include any allowance for fees.
Past performance is not
indicative of future performance.
The Odlum Brown Model
Portfolio is an all-equity portfolio.
It is important to note that a
well-diversified portfolio should
also include an appropriate mix
of fixed income and money
market instruments, which
will depend on an investor’s risk
tolerance and individual
circumstances.

4/ob report
please read our odlum
brown limited disclaimer &
disclosure / it is important
Odlum Brown Limited is an independent, full-service
investment firm focused on providing professional investment
advice and objective research. We respect your right
to be informed of relationships with the issuers or strategies
referred to in this report which might reasonably be
expected to indicate potential conflicts of interest with
respect to the securities or any investment strategies discussed
or recommended in this report. We do not act as a
market maker in any securities and do not provide investment
banking or advisory services to, or hold significant positions
in, the issuers covered by our research. Analysts and
their associates may, from time to time, hold securities of
issuers discussed or recommended in this report because
they personally have the conviction to follow their own
research, but we have implemented internal policies that
impose restrictions on when and how an Analyst may buy
or sell securities they cover and any such interest will be
disclosed in our report in accordance with regulatory policy.
Our Analysts receive no direct compensation based on
revenue from investment banking services. We describe
our research policies in greater detail, including a description
of our rating system and how we disseminate
our research, on the Odlum Brown Limited website at
odlumbrown.com.
This report has been prepared by Odlum Brown Limited and
is intended only for persons resident and located in all the
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Limited's services and products may lawfully be offered for
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other particular circumstances of any person who may
receive this report, clients should seek the advice of a registered
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as applicable, regarding the appropriateness of investing in
any securities or any investment strategies discussed or
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solicitation for the purchase of securities nor an offer of
securities. The information contained in this report has
been compiled from sources we believe to be reliable, however,
we make no guarantee, representation or warranty,
expressed or implied, as to such information’s accuracy or
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are subject to change without notice.
Please note that, as at the date of this report, the Research
Analyst responsible for the recommendations herein, associates
of such Analyst and/or other individuals directly
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> Odlum Brown , s 18 th Annual Address
Debra Hewson, President and Chief Executive Officer, invites you and your guests to Odlum
Brown’s 18 th Annual Address. Join us for an informative discussion on the current investment
environment featuring Vice President and Director of Investment Research, Murray Leith, and
Fixed Income Strategist, Hank Cunningham.
Presentations will take place throughout the province beginning February 13.
Debra Hewson, President
and Chief Executive Officer
west vancouver
Monday, February 13, 7PM
Kay Meek Centre
1700 Mathers Avenue
RSVP by February 6 to Jennifer at
604-844-5338 or jhadley@odlumbrown.com
vancouver
Tuesday, February 14
afternoon session 2PM
Fairmont Waterfront Vancouver
Waterfront Ballroom
900 Canada Place Way
RSVP by February 7 to Jennifer at
604-844-5338 or jhadley@odlumbrown.com
victoria
Wednesday, February 15, 7PM
Delta Victoria Ocean Pointe, Ballroom
45 Songhees Road
RSVP by February 8 to Monica at
250-952-7775 or mpratt@odlumbrown.com
Murray Leith, Vice President and
Director of Investment Research
chilliwack
Thursday, February 16, 7PM
Coast Chilliwack Hotel, Rosedale Room
45920 First Avenue
RSVP by February 9 to Matt at
604-824-3376 or mehrenreich@odlumbrown.com
Hank Cunningham,
Fixed Income Strategist
south surrey
Tuesday, February 21, 7PM
Morgan Creek Golf Course
3500 Morgan Creek Way
RSVP by February 14 to Jennifer at
604-844-5338 or jhadley@odlumbrown.com
courtenay
Wednesday, February 22
afternoon session 2PM
Crown Isle Resort, Ballroom
399 Clubhouse Drive
RSVP by February 15 to Richard at
250-703-0637 or rdobbs@odlumbrown.com
kelowna
Thursday, February 23, 7PM
The Coast Capri, Ballroom
1171 Harvey Avenue
RSVP by February 16 to Nicole at
250-861-5700 or npelletier@odlumbrown.com
Register online via the
Client Centre at odlumbrown.com
Reserve seating early as space is limited.