A recent study shows 72 per cent of Americans intend to travel in 2021, setting this year up to be a significant year for tourism. Kim Parlee speaks with Ben Gossack, Portfolio Manager, TD Asset Management, on whether this resurgence in travel demand will last and how to capitalize on it.
- Vaccine rollouts have accelerated, and our wanderlust just might be satisfied again. But my next guest says that travel demand and the trend in travel might last a little longer than people think. That's interesting news. Joining me now is Ben Gossack. He's a Portfolio Manager at TD Asset Management.
Ben, always good to have you with us. And I want to start with a chart that you brought to us, which just shows travel coming off a cliff, and then the slow rebound. But tell me a bit about why you think this chart is so important.
- Well, Kim, thanks for having me back. As a PM and previous as an analyst, you want to find charts like this. And then you build sort of company thesis and try to find companies that exploit this. So, what we're looking at is a widely watched industry metric called revenue passenger miles, and effectively, we're looking at the miles traveled by paying customers. And you can see we've had this very steady trend upwards, with a little bit of cyclicality.
But obviously, with COVID, it just comes off the rails. I mean, the last blip was back in 9/11, in 2001. But you don't see any impact from SARS in 2003, and even the '08, '09 financial crisis barely impacted travel. And so you had this sort of thesis around travel and travel leisure, it worked for many years, clearly COVID comes and then just sort of takes apart the industry. We have had a bit of a return, but right now the volume is fairly domestic.
- So where is it going? I think the one thing that I said that I thought was most interesting is there could be pent up demand. We expect a rebound, but it could go on further. And how are you looking at capitalizing on this from a portfolio management standpoint?
- So for me, it's very exciting. So we structure our portfolio around secular trends, it could be payments, it could be a for the cloud. For us, for a large part was travel and leisure. And so now that travel and leisure is coming back, obviously we're not back to where we were prior, but we're heading towards there as people get vaccinated, as we reopen the economy, as people return to their office. So it allows us to go back to the drawing board that we had before.
It could be the air framers, you could look at the airlines, it could be the travel agencies. Payment companies, so people when they forget credit cards or the credit platforms, made a lot of money based on cross-border transactions, FX transactions. And then there are ticketing platforms that support this industry. So for us, it's almost a return to the previous playbook that we had. But because of COVID, this was an uninvestable idea.
- You manage a couple of ETFs amongst other things, TGDE and TUED. So I'm curious about when you talk about these opportunities that weren't really present before, but, I guess, how much opportunity are you seeing in these new structural changes, and then add in the demand is coming back as it was before.
- So from a broader perspective, I think there are three dates that really stand out from 2020. So Feb 19 being the market peak, March 23 being the market bottom. I'd say what has changed everything and it has created a lot of opportunities for our fund, is November 9, and that's the day when Pfizer announced that they had a viable vaccine, I believe Moderna was the week after when they announced their vaccine. And all of a sudden, we had a market that was very focused on technology, or e-commerce, or staples broaden out.
The market has lifted another 22% from that date, but we've seen this broadening out, cyclical stocks doing better, we have been rotating into financials and energy. But as well, a vaccine means that people can travel. There's obviously a lot of pent up demand, and so like we said, a previous idea that had worked for many years, and the chart shows you why. People like to travel, and when they travel, they want to travel more. There's an opportunity now, particularly where we see an hoteling, payments, and even in the airframes, to add capital to these sectors.
- I'm curious, you see it from a fundamental standpoint, you can see everything you're saying and, knock on wood, it's going to continue for the next little while. But what about from a company standpoint? I mean, a lot of companies had to suspend dividends. And a lot of companies had to do a lot more to manage their cash flow, and, you know, the two ETFs I mentioned, one is an enhanced dividend ETF and global enhanced dividend ETF, so how are you feeling about the dividend part of the equation right now?
- Right, so one of the stocks that we've been adding to is Hilton Hotels. Clearly COVID was a massive blow to their business model. And so they had to take drastic measures, suspending their share buyback, suspending their dividends. They're obviously seeing a resumption in demand. They're expecting the summer to be one of the best yet, from a domestic standpoint. And they're expecting trade shows, association conferences, at the end of the year.
But that dividend probably won't come back until 2022. It's exciting and it was by design for our enhanced ETFs, TGDE and TUED, is that we can take a stock that has growth, that's following a secular path, we can use our active call writing, so take some of that potential upside, and we can create income today. So effectively you can own Hilton, which isn't expected to pay a dividend until 2022, but we can create a synthetic dividend yield by writing these calls. Or, in addition, you may have a company like Visa, that will benefit from cross-border transactions when people start traveling, and their dividend's probably about half a percent, so not big. But again, when you layer in these active call writings, we can get you a yield that's above a market level. So that to me that's the exciting element about having that flexibility to own something that's growing, may not give you the cash flows today, but we think we can create synthetic cash flows.
- That was Ben Gossack. He's a Portfolio Manager with TD Asset Management.