2016 Year in Review
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,
“I have prepared this commentary to give you my thoughts on various investment alternatives and considerations which may be relevant to your portfolio. This commentary reflects my opinions alone, and may not reflect the views of Harbourfront Wealth Management. In expressing these opinions, I bring my best judgment and professional experience from the perspective of someone who surveys a broad range of investments. Therefore, this report should be viewed as a reflection of my informed opinions rather than analyses produced by Harbourfront Wealth Management Inc.”Disclaimer – This information transmitted is intended to provide general guidance on matters of interest for the personal use of the reader who accepts full responsibility for its use, and is not to be considered a definitive analysis of the law and factual situation of any particular individual or entity. As such, it should not be used as a substitute for consultation with a professional accounting, tax, legal or other professional advisor. Laws and regulations are continually changing and their application and impact can vary widely based on the specific facts involved and will vary based on the particular situation of an individual or entity. Prior to making any decision or taking any action, you should consult with a professional advisor. The information is provided with the understanding that Harbourfront Wealth Management is not herein engaged in rendering legal, accounting, tax or other professional advice. While we have made every attempt to ensure the information contained in this document is reliable, Harbourfront Wealth Management is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or as to the outcome to be obtained from the use of this information, and is without warranty of any kind, express or implied. The opinions expressed herein do not necessarily reflect those of Harbourfront Wealth Management Inc. The particulars contained herein were obtained from sources we believe to be reliable, but are not guaranteed by us and may be incomplete. The opinions expressed are not to be construed as a solicitation or offer to buy or sell any securities mentioned herein. Harbourfront or any of its connected or related parties may act as financial advisor or fiscal agent for certain companies mentioned herein and may receive remuneration for its services. The comments and information pertaining to the Hudson Total Mandate Portfolio and/or the Willoughby Investment Pool (“The Portfolios”) are not to be construed as a public offering of securities in any jurisdiction of Canada. The offering of units of The Portfolios is made pursuant to the Offering Memorandum and Simplified Prospectus and only to investors in Canadian jurisdictions. Important information about The Portfolios is contained in the Offering Memorandum and Simplified Prospectus available through Willoughby Asset Management. Commissions, trailing commissions, management fees, performance fees and expenses all may be associated with investments in The Portfolios. Investments in The Portfolios are not guaranteed, their values change frequently and past performance may not be repeated. Historical annual compounded total returns including changes in unit value and reinvestment of all distributions do not take into account sales, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Unit values and investment returns will fluctuate and there is no assurance that The Portfolios can maintain a specific net asset value. Harbourfront Wealth Management Inc. (“Harbourfront”) has relationships with related and /or connected issuers, which may include the securities or funds discussed in this commentary and are disclosed in our Statement of Policies Regarding Related and Connected Issuers. This policy is included in your new client package, on our website, or can be obtained from your investment advisor on request.