Turbulence

Commentary from the desk of Brent Vandermeer

Market turbulence often causes increasing amount of concern for investors. This is completely understandable. This is especially true given the last few years of market performance.

Interestingly, many of you (my clients that is) haven’t appeared to be overly concerned the last few months (based on your questions, calls or emails to me, at least). I commend you. Not because I don’t like discussing these things with you – I absolutely do and I want you to contact me if you are concerned – but because I think this shows a high level of understanding of market cycles, of perseverance and of discipline to an investment strategy.

There’s no doubt it’s been a frustrating few months for all of us. I’ve done a lot of work to redesign the portfolios in the past year to more closely match my investment style and philosophies. I’m VERY confident in my approach and that it will work for you. That said, one of my early concerns seems to have happened – that is, a market correction while I’m in the process of moving back into good quality, dividend paying stocks. As you’ll see in this graph, the Canadian stock market has dropped 14% since the summer, only a few months into the transition:

S&P/TSX Composite Index

Source: TMX Powerstream Professional

It’s bad timing…but out of our control and I don’t believe it will matter in 5 years from now after we’ve endured many more ups and downs and delivered strong returns because the businesses we invest in are growing in value and paying us dividends while we wait.

I want you to understand though we are in a very separate period of time in regards to management style, philosophy of investment, etc. We’re now in a very good place as we own businesses I think will do well for a very long period of time (agriculture, healthcare, infrastructure, water, etc.) and the key to earning solid returns is to hold them through these choppy periods in the market. We were starting our recovery… until this downturn started in the summer…and yet this type of downturn is actually quite normal and healthy…and our strategy should be to “buckle up” and just get through it.

Since we’re now much more correlated to the market direction itself, my secondary objective is to try to limit downside participation while not capping upside capture too much. So, if the tide is going out (markets are dropping) I know we will also drop (I can’t control that…) but I want to try to find things that don’t drop as much. We then hold on tight and wait for the tide to come back again…it always does. So far this cycle, we’ve done a very good job at finding things that aren’t dropping as much. This chart shows how our model portfolio is down 2.6% over the last 9 months while the market is down 14%.

Model Portfolio

For those of you in our Fixed Income model (read: safe model) while not 100% immune from short-term losses, the interest rate on this model has been excellent – far exceeding GIC’s or high-interest savings accounts – note the 1 year return number at 4.6%:

Fixed Income Model

Lastly, I also wanted you to know I’m constantly monitoring the portfolio…and taking action in terms of switches/trades to better position it. There will actually be more trades coming – exiting and capping losses on a few positions and adding to ZLB and a new one ZLU – which are both doing really well. (Note, ZLB is actually up 0.8% over the last few months – amazing!)

So, while I dislike the downturn as much as you, I really think it’s in your best interest to take advantage of it by buying low on this dip and continuing your investment strategy. It’s hard to do so when it dips like this, but by extending your time invested in the market and my experience tells me this is what is best to do. (There is some risk of me sounding biased and self-serving, I know…but I sincerely believe this to be true).

I apologize for the length of this commentary but I really wanted to give you a good explanation and overview of what is happening in the markets and your portfolio.