Up Financial – New Monthly Market Update
A few of you noticed (and commented) on our lack of email update in June! We have tried to keep these consistent without being overwhelming, but June marked a slight change in our approach. After discussing these monthly emails with many of you, we heard feedback that it was our investment market updates that were the most useful, while the information in the planning updates was more situational.
Because of that feedback, we’ve decided to flip our schedule from July onwards – we will now be sending out investment market commentary on a monthly basis with planning and general financial updates on a quarterly basis.
Thank you all for continuing to read these dispatches and for your continued trust and support!
How are the markets doing right now?
As you might recall from our last update, Q2 of 2019 was characterized by a deep dip in May followed by a rebound in June. This sort of ‘deep v’ volatility, where markets worldwide tumble sharply only to rebound relatively quickly, is indicative of a number of issues threatening increased volatility. From investor fear of those ups and downs (an issue when your horizon is short and your need for capital preservation high) to political instability to institutional investors looking to capitalize on short-term drops in security prices, the nature of the markets is starting to look increasingly like a roller coaster ride. Unfortunately, unlike those at the Stampede, we’d all prefer the roller coasters to stay on the Stampede ground midway rather than in our investment statements.
With American markets (S&P 500) down nearly 7% before fees in the calendar month of May, rebounding to even higher highs in June and a similar story with the Canadian markets (S&P TSX Composite), the good news is that many of the economic indicators of recession still indicate that there is time before the business cycle truly turns over.
While always an inexact science in predicting these economic movements, many of the more reliable indications still point to a global economic slowdown rather than a hard and deep recession as we saw in 2008 in the US and 2015 as in Canada. Indeed, as we’ve mentioned before, the Federal Reserve in the US is concerned enough that it is considering a rate cut in 2019; the exact opposite policy move as helped trigger the dip in 2018*. This sort of dovish behavior by a central bank tends to increasingly buoy stock prices as companies can continue to finance growth cheaply.
*U.S. leading indicators flat in May, point to slower economy
What is being done to protect and grow my assets?
As always, we turn for insight to our preferred asset managers at companies like Forstrong, Shaunessy, Edgepoint, Dynamic, Manulife, Fidelity and other firms who have long proven track records of managing not just in the good times (2013’s double-digit returns come to mind) but also through volatility and down markets. A key metric to remember, and every one of these managers will reaffirm the statement, is that bad times will always pass and the best thing to do when you’re halfway to shore is keep swimming. Staying invested in high quality, well diversified portfolios will always bounce back and climb again given enough time.
One of the more common pieces of commentary we hear when discussing market and economic outlooks with managers is that they don’t really pay all that much attention to ‘indicators’ that economists and media pundits like to harp on. Frank Mullen of Edgepoint is fond of stating openly that no one really has an ‘edge’ when it comes to interpreting and forecasting central bank behaviors and policies. The example he gives states that a manager is historically far better served looking at the potential up and down sides rather than trying to guess the perfect action to take for a given situation. Their deliberate positioning of their fixed income portfolios for the potential downside meant that they under-performed when rates fell instead of rising. Their thesis still stands though: they determined that it was more important for their ‘safety net’ of fixed income to be prepared not to tumble wildly if markets went bad and that they were willing to give up some potential upside if things went good to protect their investors. We tend to agree with this mentality – a loss always hurts far more than a gain feels good*.
Good active managers are focusing on many things, but primary among them are:
Are the companies whose securities they are buying positioned well for their industry? Do they have good growth prospects and, if so, what creates that ‘edge’? If they cannot survive in good and bad times, why would we want to own them in our funds?
Experienced ‘bottom up’ managers such as the PMs at Mawer, focus on building their portfolios by only including strictly vetted companies they’ve analyzed thoroughly. Once that analysis is done and it’s determined that the company fits well as a whole, the manager then elects to purchase it for the portfolio. By building their portfolio this way, rather than buying indexes and sectors as a whole, many of these managers have been able to outperform both their peers but the passive indices and markets as well*.
Are our portfolios well diversified to help reduce the risk that any one sector or country can disproportionately impact our returns?
Forstrong Global Asset Management uses Exchange Traded Funds on a global scale to ensure that their portfolio is extremely well diversified away from one bad company, sector or economy critically impacting their entire mandates*.
How important is income to our mandate? Are our clients investing for dividend or interest income and, if so, how do we seek out the best companies and securities to achieve that goal?
Dynamic’s David Fingold, manager of their Global Dividend Mandate, specifically seeks out companies that not only pay a regular dividend but specifically those that increase their dividends over time as their research has shown these companies to tend to survive and succeed better than their competition*.
1: Edgepoint Fixed Income Commentary
2: Mawer: Our Investment Approach
3: Forstrong: Why Macro Matters
4: Dynamic Global Dividend Fund Facts
As always, we’re here to answer any questions you may have. Please do not hesitate to reach out to chat.
Thank you and enjoy the (hopefully) warm weather.
