By John Klotz.
Just returned from a due diligence conference in New York. It was a wonderful, informative event where we got to hear from numerous economists and portfolio managers.
The dominant theme of the speakers was about market uncertainty. While there has been a 9 year bull market, the next chapter has elements that are different. Kim Shannon, of Sionna investments, the Canadian value manager of for the Counsel funds, indicated that there is a huge gap between the way growth investments have performed versus value. Looked at on a graph, the gap is obvious. She points out that value investing has underperformed from growth by 86 percent. However, at some point, the gap gets pinched. In other words, growth investments contract and value becomes attractive. Timing this event is practically impossible regardless of the inevitability. But, it’s coming.
Kim also expressed concerns with the Canadian banking sector and indicated that they are carrying too much debt. She indicated that Canadian insurance companies were more attractive in the financial sector. And being the ultimate patriot, Kim showed us that Canada remains an amazing place to invest, outperforming US and global markets historically. An interesting case for having home bias which most of us are guilty of practicing. But if it makes sense, keep doing it.
Tim Rudderow, the US Value Manager at Mt. Lucas, also expressed both optimism and concerns. At the January due diligence, Tim expressed that 2019 was similar to 1994 and 1995. In 1994, there was incredible uncertainty as well and there was a market correction. The Federal Reserve, however stalled raising interest rates, just like they did in 2018. The result was that 1995 had a 30 percent increase in the stock market. If you have looked at your statements for the first quarter of 2019, you can see that there was a big jump in the equity markets very similar to 1995 (about 10 percent on average). So, for the short term, Tim was bang on. How does he feel now? He mentioned that the inverted US yield curve, a benchmark of predicting a recession, is a blunt instrument and doesn’t necessarily always come true. In his opinion, the US economy is in very good shape and that we are probably going to see another jump in stocks for the rest of the year. That being said, he is concerned about uncertainties in the market. One of his concerns is that there are too many entry points for investors and only one exit point. In other words, there can be panic selling and it will impact returns significantly.
Of course, there were questions about Trump and the China deal and his tweets. The consensus was that Trump is a New York real estate guy who starts off every negotiation with “you are a jerk” sentiments and goes from there. But it’s all posturing and a deal is probably going to be made.
With all this information, it’s overwhelming as to what to do? You’ll notice that’s the name of this blog? So…what do you do? Does one move all their assets out of growth and run to value? Do you re-allocate your investments to other sectors?
The Answer has and always will be to retain a balanced portfolio. What might be of interest is what Counsel is doing with a factor based approach. It uses strategies that diversifies six different market risk factors mid cap, value, high momentum, low volatility, high probability, and low investment. The end result is lower risk and higher returns, something we can all appreciate in the volatile markets we are facing.
What was also of interest was the Global Trend Strategy. This solution also seeks to recognize and react to a wide range of market conditions to capture investment returns while seeking to reduce downside risk. It’s mandate is to purchase securities with positive momentum characteristics, while systematically avoiding markets and securities where momentum is negative. It’s the kind of investment that is ideal for the market volatility we can expect moving forward.
Another strategy that was discussed was currency hedging which added close to 2 percent in returns in this year alone.
After all the presentations, speeches, wining and dining, there has to be a bottom line. So…here it is.
- We are living in interesting times.
- There is going to be market volatility moving forward. Buckle up.
- Stop trying to be a market timer – you’ll get killed.
- A properly diversified portfolio is your best protection.
- Always work with a qualified financial advisor to achieve your goals and avoid the mine fields.
Please note that all comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of IPC Investment Corporation. While every attempt is made to ensure accuracy, facts and figures are not guaranteed.