Q1 2019 | Portfolio Commentary

Volume 3 | Issue 1

The Man Who Chases Two Rabbits Catches Neither
— Confucius

This was an appropriate lesson for many investors last year. It shows what can happen when you divide your focus on short-term market fluctuations versus long-term financial goals.

If you tried to time the market at the end of 2018 by selling your long-term portfolio and going to cash, the solid bounce back of the market in the first quarter of 2019 would have been humbling. Conversely, those who remained invested in our models witnessed an aggressive rally since the start of the year and have seen their portfolios fully recover from 2018 and then some.

We recently detailed in two blog articles, which you can read here and here, why trying to ‘time the market’ overwhelmingly increases the likelihood of poor returns.

As Confucius hints at, better to stay focused on chasing only one rabbit.

Q1 Recap
What a difference a quarter can make! After the steep pull back in 2018, global stock markets - led by the U.S. and Canada - snapped back in the first quarter of 2019.

Solid returns for stocks have been coupled with reduced stress levels for investors. This is perhaps best measured by the CBOE Volatility index. This index is often viewed as the market’s fear gauge, and it was 47% lower by the end of the quarter.

While global economic activity is showing some signs of slowing, we don’t view conditions as necessarily indicative of a recession in the short term, though it does remain a possibility.

How Did We Do in The First Quarter?
As detailed in a previous commentary, your portfolio was built to withstand volatility and should address both your short- and long-term income needs. We do this by holding a variety of different investments types, as well as by holding a cash wedge for clients actively taking income.

By the end of March 31st our Income model was up 7.5% and our Growth model was up 9.7% net of investment management fees.

Current Portfolio Positioning
As you know, we look beyond traditional ‘market traded’ investments to also include private investments in our portfolios.

Private investments are not traded on a market exchange, which provides several key benefits:

  • They are not priced on a daily basis, which helps keep portfolio values smoother.

  • They will not be impacted by volatile trading days on the stock market, again reducing short-term pricing fluctuations.

  • Information about private investments is not as widely disseminated as information about publicly traded investment, which increases the possibility of finding undervalued private investments that will ultimately produce good returns.

As mentioned in our previous commentary, we added another 6% allocation to our private exposure, bringing our total private exposure up to 18% (6% Antrim Balanced Mortgage Fund, 6% RISE Properties Trust and 6%
Trez Capital Prime Trust).

This is not unlike the Canadian Pension Plan who also has a growing allocation to private investments (listed below as Real Estate, Private Equities and Credit Investments).


Kicking the ‘Home Country Bias’ Habit
Everybody likes familiar things. We all have a favourite neighbourhood restaurant or watering hole. We gain a sense of comfort when we see a face we know in a crowd of strangers. This is simply the nature of who we are. It seems human nature has also driven the average Canadian investors to gravitate to the familiar when it comes to their portfolios.

Canadian stocks in aggregate make up 3.6% of the MSCI World Index, meaning Canadian stocks form 3.6% of the market value of all stocks available across the globe. Contrast that with the fact that, according to Vanguard Investments, Canadian stocks makes up nearly 60% of the equity component of the typical Canadian portfolio! In other words, a big chunk of the Canadian investing public has little to no exposure to stocks outside of Canada.

This phenomenon is known as “home country bias”. This begs the question – should Canadian investors look to increase the amount of foreign stock exposure in their portfolios?

Again, we look towards the Canadian Pension Plan to learn of their opinion on Canadian exposure. As you can see, their stock allocation moved from 64% Canadian in 2006 to only 15% Canadian stocks in 2018.

CPP Allocation .JPG

Our models mirror this allocation with 10% -15% exposure to Canadian stocks. We are keeping our exposure to Canada fairly limited at this time, as we remain concerned about the health of the Canadian consumer, their debt loads and the lack of a diversified Canadian economy.

This has proven to be the correct call when looking at the past 10 years:

  • Canadian Stock Market (S&P/TSX Composite): up 6.32%/yr

  • US Stock Market (S&P 500 in CAD): up 13.51%/yr

The past year was a good reminder about how it is normal for portfolio values to fluctuate over short time periods, sometimes in a forceful way, often with little warning. But a long-term perspective can help us see through some of the noise and focus on our long-term financial goals.

We would be happy to discuss your portfolio with you in advance of your next review meeting; please do not hesitate to contact us.


Matthew Evans, CFP®, CIM®  | Portfolio Manager
HollisWealth®, a division of iA Securities Inc.

Lorenzo Pederzani, CFA, CFP®, FCSI®  | Portfolio Manager
HollisWealth®, a division of iA Securities Inc.

 Sources us.spindices.com, 10 year price return

This information has been prepared by Lorenzo Pederzani and Matthew Evans who are  Investment Advisors/Portfolio Managers for HollisWealth® and does not necessarily reflect the opinion of HollisWealth. The information contained in this newsletter 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 Investment Advisors/Portfolio Managers 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.