Q4-2018 - Quarterly Review“A Few Interesting Tidbits”
Brent Vandermeer, CIM® FCSI®Portfolio Manager, Director Private Client Group
HollisWealth, a division of Industrial Alliance Securities Inc
Jan. 2019
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Thoughts on Passive vs. Active Investing
Source: Wall Street Journal
Index funds represent one of our most significant financial innovations. Yes, they are a fantastic, low-cost mechanism through which individuals can gain exposure to the securities markets. But as one of the early pioneers of index funds (Jack Bogle of Vanguard) wrote recently in The Wall Street Journal (subscription required), “If historical trends continue, a handful of giant institutional investors will one day hold voting control of virtually every large U.S. corporation.” Even if the Portfolio Managers of these firms are wise and noble investors, it’s still unsettling to consider the long-range impacts of Bogle’s prophecy. So while it is right to criticize the motives and inflammatory rhetoric of some index naysayers, that’s an attack on select messengers. As far as we’re concerned, the underlying warning deserves everyone’s attention, and Bogle is the world’s most credible messenger to deliver it.Further, we believe there is a limit to how big indexing (passive) can grow because at some point some one needs to determine the proper price of a company. Passive indexing just ‘takes’ a price, it doesn’t set it.
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Sector Breakdown of the S&P 500
Source: Visual Capitalist, Used With Permission, Company Reports
Note the growth, since 2008, of Information Technology, Financials and Healthcare & Consumer Discretionary.
The opposite is true of Energy, Utilities, Real Estate, Materials and Telecom.
The tide may be reversing.
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The Market is “Correcting” - Some Stocks Are In “Bear” Territory
Source: Visual Capitalist, Used With Permission, MarketWatch
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Correction or “Bear” Market?
There are some BIG names in bear territory right now. At the end of December, the list of stocks that moved into “bear” territory was growing every day, as the Dow Jones, the S&P 500 and the Nasdaq marked their worst start to December trading since 1980. Of course, this means their valuations may now appear more attractive, but the price declines have been felt by many investors.
A correction is typically defined (in its most simple way – there are better more complex determinant formulas) as a 10% drop for a stock or an index from a recent peak, while a bear market is a 20%-plus decrease. Data supplied by FactSet show that, as of the end of the quarter, 264 (53%) of S&P 500 companies are in bear markets.
The FAANG stocks all make the list of biggest bears — among the top 15 S&P 500 companies that are down 20%-plus from their 52-week highs. Some of the other big names rounding out that list: Citigroup, IBM, Wells Fargo, Bank of America, AT&T and Home Depot.Among the broad indices, the S&P Small Cap 600 is still the only one in bear-market territory — though the S&P 400 Mid Cap Index is getting closer, at ~17% down from its 52-week high.
Source: Visual Capitalist, Used With Permission, MarketWatch
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Should you have any questions or would like to speak with us, we welcome you to contact us:
Email: [email protected]
Office: 2650 Queensview Drive, Suite 110, Ottawa, Ontario, K2B 8H6
Phone: 613-722-0408 Toll Free: 1-844-220-0830
Follow us on Twitter: @VdMeerWealthLinkedIn: ca.linkedin.com/in/brentvandermeer
Search: Brent Vandermeer & Vandermeer Wealth
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Contact Us
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This information has been prepared by Brent Vandermeer who is a Portfolio Manager for HollisWealth® and does not necessarily reflect the opinion of HollisWealth®. The information contained in this presentation comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.
HollisWealth® is a division of Industrial Alliance Securities Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.
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Disclaimer
Q4-2018 - Quarterly Review“Markets”
Brent Vandermeer, CIM® FCSI®Portfolio Manager, Director Private Client Group
HollisWealth, a division of Industrial Alliance Securities Inc
Jan 2019
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Summary - 2018
Source: Manulife
2018 : A Challenging Year
2018 has been a weak year for equity markets driven by fears of slowing global growth, and speculation about the cause and timing of the next recession.
Bond market returns have generally been flat this year as short term interest rates have moved higher while longer rates rose sharply in the first half of the year, but have retreated just as sharply in recent months while credit spreads have widened.
For active investing, 2018 has also been challenging. Unrelated to the direction of markets, the challenge has been the many rotations during the year in the types of stocks that were being favored, and more recently deleveraging-driven selling where investors have sold stocks with little regard for company fundamentals.
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Summary - 2018
Source: Morningstar
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Summary - 2018
Source: Morningstar
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Summary of Markets, As of Q4 - 2018
Source: BCA Research, Vandermeer Wealth Management
Equity Markets – Financial markets suffered in December, capping their worst three-month stretch since the fourth quarter of 2008. We haven’t experienced this level of volatility in a long time so it will take some getting used to again. Cooler heads will prevail and be more successful in generating long-term returns. Fundamentals will matter again soon.
Fixed-Income Markets – Corporate spreads shot higher. This spread is the difference between corporate bond yields and government bond yields… meaning the price of corporate bonds dropped more compared to government bonds… a signal that risk taking appetites are decreasing. However, due to expectations of fewer interest rate increases next year, bond prices rose, on average, and yields dropped. This means good returns on the fixed income component of our portfolios.
U.S.-China – The trade dispute escalated during the quarter (again) and, as tariffs are enforced, the companies are faced with higher costs which has a negative impact on the bottom line of the income statement. Lower earnings results in lower stock prices. Further, this increasing uncertainty is a factor in the downward movement of markets this quarter.
Energy - Energy prices slumped during the quarter, with Brent crude trading at levels not seen since 2014.
Equity Volatility – During the quarter, when the sell-off was occurring, the VIX index (a measure of equity market volatility) was rising. Increased volatility can be nerve-wracking but it also presents us with opportunity to buy companies that are now more fairly valued.
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Summary of Markets, As of Q4 - 2018
Source: Manulife, Bloomberg
The FED – near the end of the quarter, the Fed raised rates again to 2.5%, which was largely expected… but they also indicated that 2 more raises were expected in 2019 (down from consensus of 3 earlier in 2018) and this was met with surprise from the market which continued to correct downward as it expected a halt to rate hikes given the equity market volatility we’ve seen this Fall.
o Investors were hoping for a “Powell put” (downside protection) to mark the end of the current correction. Despite what some might believe, this isn’t Chairman Powell’s mess to clean up. At some point we believe investors will return to the attractive fundamentals of the equity markets following stabilization of the global macro-economic data.
o Chairman Powell was put in a difficult position heading into this meeting. If the Fed paused it could have been seen to be pandering to political opinion. The Fed is supposed to be neutral and independent. If the Fed signaled a more dovish posture it could have been seen to be pandering to equity investors. A pause would have run counter to the recent trend of increases due to inflation’s steady rise. Inflation is still expected to be above the Fed’s target while unemployment remains at multi-decade lows, all pointing it more rate increases. We believe Powell and the FOMC did the right thing by raising rates again and suggesting that there are much fewer rate hikes to come in 2019 than there were in 2018. We believe this is good news all around.
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Summary of Markets, As Of Q4 - 2018
Source: Vandermeer Wealth Management
KEY TAKEAWAYS FOR PORTFOLIO POSITIONING:
Inflation is moderating and, with that, following what has been a disappointing year for fixed income investors, our expectations heading into 2019 are much improved.
With the Fed signaling perhaps only two more rate hikes, inflation no longer accelerating, and moderating economic growth, bond yields are less likely to see a rapid ascent. In fact, we are becoming more of the belief that 3.23% may have been the top for the US 10-Year Treasury Yield. Our thesis of the worst being behind us, 2019 returns looks much improved, and bonds likely to mark a return to their defensive characteristics appear to be supported by the Fed.
We expect that Equity investors will be rewarded with a much better environment in 2019, as well. Valuation is much more attractive today than it was at the beginning of the year. Earnings expectations are healthy for next year and with lower interest rates at the longer-end of the curve, the equity risk premium on US stocks is much improved.
We see equity upside with similar downside. Especially considering we’ve seen a 15% correction in equity markets this quarter, we’ve had a valuation correction in terms of P/E multiples in the US and around the world so while still expensive, stocks aren’t as expensive as they were. International stocks remain the most attractive.
Therefore, we recommend staying invested but bring equities back to a neutral allocation (from overweight) and increase the safety side of the portfolio (fixed income).
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Summary of Markets
Source: Vandermeer Wealth Management
Let’s look at the charts we always review at the end of each quarter…
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Market Performance: Canadian Bonds
2-Years: Down -2.2%Q4-’18: Up 1.3%
Source: TMX Powerstream, Price Only (No Yield/Dividends Included)
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Market Performance: Canada (S&P/TSX 60)
2-Years: Down -11.5%Q4-’18: Down -10.1%
Source: TMX Powerstream, Price Only (No Dividends Included)
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Market Performance: USA (S&P 500)
Source: TMX Powerstream, Price Only (No Dividends Included)
2-Years: Up +8.7%Q4-’18: Down -15.2%
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Market Performance: Global (MSCI World)
Source: TMX Powerstream
2-Years: Up +4.6%Q4-’18: Down -7.7%
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Market Performance: Oil
Source: TMX Powerstream
2-Years: Down -13.6%(Down -13.3% in CAD)
Q4-’18: Down -39.7%(Down -32.3% in CAD)
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Market Performance: Gold
Source: TMX Powerstream
Q4-’18: Up +7.5%(Up 14.9% in CAD)
2-Years: Up 10.0%(Up 11.2% in CAD)
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Market Performance Metrics
3 Months 6 Months 1-Year 3-Year 5-Year
Canadian Aggregate Bond 2.14% 0.79% 1.77% 1.67% 3.27%
US Aggregate Bond (in CAD) 1.51% 1.26% -0.45% 2.16% 2.62%
S&P/TSX 60 -8.73% -9.57% -8.19% 6.97% 4.82%
S&P 500 (in CAD) -14.17% -7.58% -6.69% 7.63% 7.56%
MSCI Europe & Far East (in CAD) -12.09% -9.68% -10.87% 2.38% 3.42%
Oil (in USD) -37.93% -34.16% -18.39% -3.61% -22.05%
Gold (in USD) 6.55% 3.29% -3.05% 6.14% 0.56%
CAD/USD -5.55% -2.61% -7.65% 0.56% -4.75%
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Should you have any questions or would like to speak with us, we welcome you to contact us:
Email: [email protected]
Office: 2650 Queensview Drive, Suite 110, Ottawa, Ontario, K2B 8H6
Phone: 613-722-0408 Toll Free: 1-844-220-0830
Follow us on Twitter: @VdMeerWealthLinkedIn: ca.linkedin.com/in/brentvandermeer
Search: Brent Vandermeer & Vandermeer Wealth
Slide 23
Contact Us
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This information has been prepared by Brent Vandermeer who is a Portfolio Manager for HollisWealth® and does not necessarily reflect the opinion of HollisWealth®. The information contained in this presentation comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.
HollisWealth® is a division of Industrial Alliance Securities Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.
Slide 24
Disclaimer
Q4-2018 - Quarterly Review“Portfolio Strategy & Performance”
Brent Vandermeer, CIM® FCSI®Portfolio Manager, Director Private Client Group
HollisWealth, a division of Industrial Alliance Securities Inc
Jan 2019
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Slide 26
Now Neutral, With Concerns
Source: SIA Charts
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Asset Allocation – Equities Remain Overweight
Source: Vandermeer Wealth Management
Back To Neutral – Reduce Equities
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Trades
Source: Vandermeer Wealth Management
Decreasing equities, increasing fixed income and increasing alternative.
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Sub-Model Allocations – Balanced Model
Source: Vandermeer Wealth Management
= On our watch list for performance concerns
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Q4 ’18 Performance – Down 5.9%
July: -3. 94%August: +1.16% Sept: -3. 17%
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1-Year (Rolling) Performance – Down 3.7%
3-Year Return: 3.4% CAGRStd. Dev: 6.4% per yearAlpha: 0.61Beta: 0.51Sharpe: 0.52
Beta = measures volatility or
systemic risk compared to the
market. The market has a
Beta of 1… We take on half the market risk yet
perform strongly.
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Sub-Model Performance
Model Portfolio 3 Months 6 Months 1-Year 3-Year 5-YearCash 0.47% 0.78% 1.29% 1.07% 1.12%
Fixed Income Model 0.03% -0.11% -0.35% 2.18% 3.04%
Canadian Equity Model -8.14% -7.88% -11.03% 2.14% 1.83%
US Equity Model -10.90% -8.13% -3.99% 0.25% 2.31%
International Equity Model -4.98% -5.52% -4.82% 4.46% 6.80%
Alternative Model 0.72% 0.32% 1.25% 5.56% 3.89%
Model Portfolio 3 Months 6 Months 1-Year 3-Year 5-YearUS Value Stock Model -11.89% -7.53% -4.41% 5.81% 7.83%
Canadian Value Stock Model -6.65% -7.54% -8.82% 6.58% 2.34%
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Main Model Performance
Model Portfolio 3 Months 6 Months 1-Year 3-Year 5-Year
100% Fixed Income Portfolio (100:0) 0.03% -0.11% -0.35% 2.18% 3.04%
Defensive Portfolio (80:20) -1.39% -1.31% -1.18% 2.34% 3.15%
Conservative Portfolio (70:30) -2.06% -1.88% -1.58% 2.44% 3.23%
Balanced Portfolio (40:60) -3.74% -3.22% -2.34% 2.65% 3.40%
Growth Portfolio (30:70) -4.56% -4.00% -3.21% 2.76% 3.50%
All-Equity Portfolio (0:100) -5.65% -4.96% -3.94% 2.82% 3.65%
North American (Value Stock) Portfolio -9.72% -7.53% -6.35% 6.14% 5.26%
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Market Performance Metrics
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Performance – Since VWM Launch (Oct 2014)
Return: 4.8% CAGRStd. Dev: 6.1% per yearAlpha: 0.39Beta: 0.43Sharpe: 0.48
Beta = measures volatility or
systemic risk compared to the
market. The market has a Beta of 1… We take on half the market risk
yet perform strongly.
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Slide 36
Remember, Markets Always Do This…
Source: Bloomberg, Edgepoint & Vandermeer Wealth Management
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Fees… yes, but the main cause? Poor timing of the market!
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Returns of the Average Investor
Source: Dalbar
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Slide 38
Emotional Investing
Source: Used with permission from Paul Keen of PIMCO Canada.
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Slide 39
Stay Invested in Quality Businesses
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Less Volatility – That’s Our Objective
Source: Connor Clark & Lunn, Vandermeer Wealth Management
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Should you have any questions or would like to speak with us, we welcome you to contact us:
Email: [email protected]
Office: 2650 Queensview Drive, Suite 110, Ottawa, Ontario, K2B 8H6
Phone: 613-722-0408 Toll Free: 1-844-220-0830
Follow us on Twitter: @VdMeerWealthLinkedIn: ca.linkedin.com/in/brentvandermeer
Search: Brent Vandermeer & Vandermeer Wealth
Slide 41
Contact Us
Click to edit Master title style
This information has been prepared by Brent Vandermeer who is a Portfolio Manager for HollisWealth® and does not necessarily reflect the opinion of HollisWealth®. The information contained in this presentation comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.
HollisWealth® is a division of Industrial Alliance Securities Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.
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Disclaimer