What Your Portfolio Managers Think about your Investment Opportunities.

9 May, 2018

Last week,  I attended the IPC Due Diligence seminar in the windy city of Chicago.  It was a great trip and was my 3rd time to Chicago.  It’s an amazing city and has a lot of similarities to Toronto, although it’s clearly a lot richer and they’ve mad

Last week,  I attended the IPC Due Diligence seminar in the windy city of Chicago.  It was a great trip and was my 3rd time to Chicago.  It’s an amazing city and has a lot of similarities to Toronto, although it’s clearly a lot richer and they’ve made better use of their waterfront!  And the Art Institute of Chicago screamed out my name and I spent my non-conference time being amazed by the fabulous pieces of art on display.  Even saw the famous painting from Ferris Bueller’s day off scene and had a one hour educational seminar on modern art.

But I wasn’t in Chicago to attend an art exhibit.  I needed to know what various portfolio managers were thinking about the investment climate.  So, I’ll give you my thoughts on their thoughts.

Here goes.

I asked various managers what their greatest fear was with respect to the stock markets.  It was generally the same answer, namely interest rates and threat of global war, perhaps nuclear.   This was a theme that came out during the conference and was worth noting.

One investment manager of significance was  Elsa Goldberg of Franklin Advisors.  She is an income specialist who clearly knows her stuff!  Here’s her take.  US Interest rates are being suppressed. Therefore, don’t be surprised if they start rising up.  This interest rate theme continued through all the manager presentations. 

She also discussed Europe. Polls taken 2013  expressed major concerns  were  immigration and terrorism.  5 years later, the major concerns are economics, member state finances, and unemployment. 

Where she saw opportunity was in the emerging markets where currencies are attractively trading. As well, there are attractive government bond yields in a variety of emerging markets countries such as Mexico, India, and Brazil to name a few. 

The bottom line is that if you are hiding your “safe” money in Canadian bonds, that’s not a good strategy.  With rising interest rates, those funds will suffer a capital loss.  A properly diversified global strategy will offer better returns with less risk.

Speaking of less risk and better returns, let’s talk global real estate.  Had the opportunity to hear from Corrado Russo of Timbercreek Asset Management. He argued  that you should own global commercial real estate fund  as part of your portfolio.  Here’s why:

  • It creates Income for you.
  • It’s an alternative to the stock market and co-relates conversely to it. 
  • You can expect reasonable rates of return.
  • You get access to real estate that you otherwise wouldn’t have access to, such as large office towers and global properties.  These include the US markets as well Europe and Asia.  This results in significant diversification.
  • Liquidity.  You can cash out your REIT just like any other asset.  
  • Access to Private Equity  / Debt that reduces volatility and creates income for the portfolio.

If anyone has read the book, the Apprenticeship of Duddy Cravitz, the grandfather constantly tells Duddy that “You’ve gotta own land.”  So, it’s not rocket science to figure out that owning a global real estate portfolio can only help you in the long run.  However, what was rocket science is the fact that the manager stated that REITS outperform in markets of rising interest rates, like the one we are in. Historically, according to Russo, REIT’s have generated 13.5 % annualized rates of returns during periods of rising interest rates.  Again, the theme returned – namely how to deal with the threat of rising rates.   As well, the global real estate is trading at a current discount, making market valuations attractive.

That being said, not all real estate funds are created equal.  So,  don’t go running out and buy the first fund that catches your fancy, like AAA Real Estate Investment Trust.  The folks at Counsel Portfolio services do a great job of screening their portfolio managers so as to provide only the top of the top in candidates. Well worth the visit to their due diligence to hear these captivating managers.

We also heard from the Canadian portfolio manager.  Because we only represent 2 percent of the world stock market, I always find these managers incredibly subdued and often negative.  There were a few concerns such as our reliance on our housing market as the significant part of the Canadian GDP.  The feeling is that the housing market is unsustainable with its current expansion.  A correction in the market will cause big hurt to the Canadian banks as they are the ones lending all the dough for our homes.  Remember, the Timbercreek manager was talking “global real estate” not GTA real estate.  So, get a hold of yourself, I am not making contradictory statements.  Again the walkaway….don’t hold all your investments in Canada.  We’re a great country, but we are lopsided financially. Be diversified. Again, the ugly speak about interest rates messing with us.

With respect to diversification, this leads naturally to what the US and International managers had to say.  Gradon Geisler of Marisco Capital manager, a US Growth portfolio, discussed the rapid rise of the US stock market and it’s now apparent volatility.  He remains optimistic about the market and looks for opportunities in the technology and health care sectors.  Of course, the US leads in these areas and will continue to grow and dominate.   There was talk of Amazon being a great opportunity.  The audience argued that the stock price was very expensive, so why was he calling it a buy?   Geisler  argued that they had increased their subscription rates by from $5 to $6 resulting in a huge influx of funds.  And their industry disruptive planning continued to make new opportunities for growth. 

Finally, we heard from David Frum, son of the late Barbara Frum of CBC fame.  An extremely intelligent man who was George Bush’s speech writer.  He is absolutely terrified of what Trump is doing to the US and it’s foreign policy.  His concern was that Trump will screw up the negotiations with North Korea if he feels he is “losing” to Kim Un Jung.  I won’t get into all the gory details, but he feels the threat of conflict is higher now than it ever was due to Trump’s impulsiveness and aggressiveness.

Here’s the takeaway.  There is volatility in the marketplace.  What else is new. 
Interest rates are going to mess with your portfolio. Been there, done that.
You have no control over world events and the outcome can be scary.
So….what do you do?

You need to be properly diversified in high quality instruments.
Not all financial instruments are equal.
Find yourself a good financial advisor who knows the landscape and can properly assist you on the way up and protect you on the way down.

Have a tax efficient day!

John Klotz