Market Musings
By: Erik Moisan
Happy New Year to you and your family, may 2019 bring you health and happiness, to all you hold dear.
2018 was quite a year, and 2019 promises to be as entertaining, but with hopefully a different return outcome.
We were not happy with the results that we produced for our clients, this is clear. That being said, I believe that we delivered on the downside risk protection for which we are known for. Had the year had a few months to go, the story could have been a different one, or so the first few days of 2019 tell us.
At the end though, here is the indexes score sheet for 2018 (not your portfolio return but the broad markets):
- S&P TSX total return, down 8.89%
- S&P 500 total return, down 4.38%
- Euro Stoxx 50, down 14.34%
- Canadian bond index +1.41%
- US bond index down +0.01%
As a primer for the year ahead, I thought it would be useful for us to review the process that we take our clients through to establish their portfolios. Planning is the key. We want our clients to go through a process to help us determine what the required rate of return is on their assets. All of this in conjunction with savings rates, expenses, etc. This is how we establish each client’s benchmark, or target for each year.
The next step is portfolio construction. Fixed income is almost always (save a few clients) an allocation in portfolios. We believe that the fixed income portion serves as a constant in the portfolio. We do expect to make interesting returns from this asset class, as much as we expect this asset class to remain available to meet income needs, or market opportunities. The balance (other than a small amount in cash) is dedicated to equities. This is the allocation that we expect to provide for the lion’s share of the returns in our portfolios. Guillaume and I spend a tremendous amount of time on our selection process. We do this because we firmly believe that if we, as portfolio managers, focus on managing risk, we will earn a fair return. Conversely, if we were to focus on return, we believe that our clients’ portfolios would ultimately have more risk than required, and then you would be comfortable with. We achieve this by stressing over our selection process.
It is important to like the story behind a stock, this is true, but most important is the financials of the company, the quality of the management and established characteristics that must be present within. As Warren Buffet would say, only buy what you like and understand. Guillaume and I run through over 700 Canadian and 3200 US stocks on an ongoing basis to generate a list of stock to buy. We then run our sell criteria on them, and following this, rank the remainder based on specific criteria with weights of importance (dividend growth is more important than the yield of the dividend, for example). We then select the top 20 in Canada, top 20 in the US and top 10 international (give or take, as we limit certain sectors to not have undue exposure). We update this information on an ongoing basis, with an eye to keep turnover (tax incidence) down.
For us, there are three keys to building a successful portfolio of stocks: Rule, rule and rules.
On a quick closing note, the data is now a little more supportive of the markets, as the yield curve remains in non-recession territory, and economic date is still supportive. A number of strategists are commenting on the fact that many of the trade issues seem to be sorted (USMCA, Europe-Japan) or improving (USA-China), and as such, could lead to yet another extension of the expansion.
We remain tentative, watchful and neutral on our equity exposure.
As always, we welcome your questions and comments.
Have a great month of January.
Erik