2016 Year in Review
by Kelly Hemmett on 01.31.2017
by Kelly Hemmett on 01.31.2017
You may have already received your 2016 year-end reports or statements. We wanted to share a few comments, especially in light of the market rebound in Canada in 2016 after a nasty decline in 2015. From time to time we are asked questions regarding performance relative to market returns or receive calls from clients who have seen on tv that the TSX or DOW have taken a nasty spill. When reviewing their accounts with that in mind, they are usually pleased to see that the drop experienced by the index has not translated into equivalent declines in their accounts. They are understandably pleased by this and generally move forward with minimal questions.
However, when markets move rapidly upwards and rates of return seem to lag behind, the questions on the relationship between the indexes and their rates of return often come up again. In this case, clients become concerned that they are not fully participating in the market return and perhaps are “leaving something on the table.” Although our clientele varies in terms of portfolio structure, they also tend to be similar in nature. Most have done well accumulating capital over many years and would like to hang on to it. Many are moderate investors seeking both income and reasonable growth over time. This is done in order to protect their capital from inflationary effects while producing income to support their long-term cash flow needs. Most understand from experience (even if not their own) the risks associated with chasing returns or following the latest market tips. They are also aware of the challenges that a low interest rate market creates in trying to achieve their income needs while remaining within their stated moderate risk profiles. Remaining in fixed income (bonds) in order to satisfy risk profile objectives and government regulations despite the challenges facing these investments as pressure on interest rate increases mount is something we struggle with on a daily basis. On the other hand, buying GICs paying 1% and 2% that do not keep up with inflation after tax and guarantee the erosion of capital and purchasing power over time, simply won’t cut it.
Bonds, for all of their challenges, have been relatively good performers over the past few years, and with the volatility surrounding the U.S. election, the Brexit vote, the collapse of oil and declining Canadian dollar, we have been happy to hold them as they have reduced volatility and protected our clients’ wealth. Most of our clients saw better returns than the TSX from mid 2015 to the end of 2016 on the strength of currency gains and fixed income holdings. The bond market has come under pressure since Trump’s victory and changes in monetary policy in the U.S. suggest looming additional interest rate increases. So why not just pile money into the TSX and DOW?
As you may well know, we are reluctant to bombard clients with charts and graphs, however, we have attached the S&P/TSX composite 1 year and 2 year charts to help illustrate our point. We also like to point out to clients that the markets do not know the beginning and end of the year, so it’s good to examine tops to bottoms rather than year end points. Although things can work out well in indexes if “left alone,” for clients who have already built their capital, the volatility from the high to the low before the recovery can really stress people out. If you lose 50% of your value ($100,000 becomes $50,000), it will take a 100% rate of return before your account is back to the starting value ($50,000 has to double to become $100,000).
TSX 1 Year Chart
While the 1 year returns are good, most have come from the appreciation of investments that are either not target core investments (large cap companies) or higher risk investments (which can be volatile). These holdings are generally not our target as they are not good candidates for building client wealth consistently.
TSX 2 Year Chart
As you can see below, during the past two years the TSX has had modest growth and significant volatility. Holding the index, you would have earned just over 2% per annum since January 1, 2014. During that time, you would have also seen a decline of over 20% in your portfolio value before the market recovered.
Recently, we have increasing amounts of clients asking about building additional stocks into their portfolios to assist in growth and income while alleviating embedded costs. Royal Bank of Canada and Teck Resources are two examples of current market “darlings” thanks to recent gains. However, consider that in late 2007 RBC fell 62.5% in 15 months! Teck Resources has been priced in the mid $30’s recently, however Teck was trading at $91 in Dec of 2006. Needless to say most of our clients do not have 10 year timelines to end up with a 60% decline in a holding. This is just food for thought, but although stocks can help with performance, they also have significant downsides and reducing diversity will generally not increase security.
Some of our clients now hold the Willoughby Investment Pool. This fund allows us to actively take advantage of stocks, bonds, ETFs, funds, sectors, geographical areas and so on with minimal hassle to our clients and active management from our portfolio managers. We are confident that over time this approach will yield better than average risk adjusted returns. It will generally not track the TSX index, nor should it be compared to the TSX as many companies in the TSX will not meet Willoughby’s required criteria. We are happy to revisit this with you at any time should you have questions on this, but in short, active management of quality core holdings with an ability to move to more secure holdings should prevail in good times and bad.
We hope you will find this basic review helpful and encourage you to ask any questions of us that you may have. Our entire team continues to work hard towards both protecting and growing your capital. We know that by utilizing the Willoughby pools (which many of you are now participating in) and adhering to a tactical approach when selecting other holdings, will aid in this endeavour going forward. We continue to work hard in pursuing our Certified Investment Manager designations so that we can further enhance our responsiveness in dealing with an ever changing market landscape on your behalf. Our continued dedication to making advances in all areas will help us to do more and better for you in what likely will be an “interesting” and unpredictable world in the years ahead.
All the best,
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