Q4 2018 | Portfolio Commentary

Volume 2 | Issue 4

A smooth sea never made a skilled sailor
— Franklin D. Roosevelt

Happy New Year! We hope that you enjoyed a fantastic holiday season surrounded by family and friends. 

 A market without volatility would be unnatural, like an ocean without waves. The stock market, like the open ocean, is constantly churning. In fact, it would be unnatural to go long periods without waves.

To carry on the analogy; an ocean needs waves (volatility) to stir it up and keep it healthy; so does the stock market.

For the more growth-oriented client, market waves can be exciting, providing opportunities to buy mispriced stocks; but some of our retired clients may find it a little worrisome.


2018 Recap

2018 proved to be a humbling year to all market participants.  After being dormant for so many years, volatility re-emerged to remind investors that the path to long-term gains is not always pleasant.  As we all know, nothing of value in life comes easy, and the same holds true for investing. 

It all started so well: low unemployment nudged consumer spending higher, while company profits got a boost from the US tax cuts put forth by the Trump administration. This pushed stocks to all time highs in the fall, but as 2018 wore on, investors started to fret.

The escalating US-China trade war made getting products across borders more expensive, while rising interest rates meant borrowing money was no longer as cheap. Brexit, a US Government shut down and a slowing tech industry added to the negativity.

All this led to a very challenging year for investors. 


What Does this Mean?

We are in the later stages of one of the longest economic expansions in history. Although several factors will raise the risk of recession in 2019, a slowdown in the rate of growth (led by the United States and China) is the most likely outcome.

In short, economic growth should slow but not stop.

Your Portfolio was Built for This

Think of our investment models like cruise ships; they were designed to comfortably withstand the full force of waves crashing against them. The success to navigating rough seas lies in our globally diversified, tactically managed portfolio of stocks, bonds, and private investments.

Although 2018 was challenging across the investment landscape, we are proud of the results we provided.  While most major stock and bond indices[1] finished down by double digits, our models experienced less than half of the drawdown.


Equity Markets

·         TSX (Canadian stock market) down -11.6%[2]
·         S&P500 (US stock market) down -6.3%
·         Euro Stoxx 50 (International stock market of developed countries) down -14.4%
·         FTSE 100 (UK stock market) down -12.5%
·         DAX (German stock market) down -18.3%
·         Nikkei (Japanese stock market) down -12.1%
·         Shanghai (Chinese stock market) down -24.6%


Popular Sectors/Commodities

·         Bitcoin down -70.83%
·         Canadian Marijuana stocks down -35.6%
·         Oil down -24.15%
·         Gold down -1.91%

Bond Markets

·         S&P International Corporate Bond Index down -7.0%
·         S&P Preferred Shares Index down -7.9%
·         FTSE TMX Canada Universe Bond up 1.4%


Westmount Model Portfolios:

·         Income Model: -4.9%
·         Growth Model: -5.1%

We know that you didn’t just hire us to make you money when the markets are good, but to protect your money when the markets are down. This is exactly what we did in 2018.

Our Westmount Model Portfolios have approximately 14 investment positions.  The majority of these positions have dozens, if not hundreds, of underlying investments.  If you parsed out all the individual holdings, you would see that you own both stocks and bonds in hundreds of companies and governments across the developed world.  Our portfolios are a carefully constructed ‘sampling’ of the global economy, with a preference towards more mature, stable, income-generating investments.  We have no concentrated bets, nor are we overly exposed in our own backyard (Canada).


What Worked?

Private Investments: Our portfolios are diversified beyond stocks and bonds to minimize the effects of volatility. Our two private investments (Antrim Balanced Mortgage Fund & RISE Properties Trust) provided the negative correlation we were seeking and ended the year with positive returns (see The Value of Private Investments on our Blog section).

Cash Wedge for Income Accounts:  Retirees are particular sensitive to drawdowns in their portfolio.  Therefore, we deliberately and proactively set aside cash in any income-paying accounts in preparation for such volatile periods.  This ‘cash wedge’ eliminates or greatly reduces the need to sell assets for retirement payments at a time when they may be temporarily depressed in value.  We successfully built cash wedges for many clients in early-mid 2018 prior to the pull back in the markets, greatly limiting the impact of this correction.

Stress Tested Financial Plans.  We take a proactive approach in our retirement income planning. This means using conservative assumptions on rates of return and inflation. We also stress test all retirement plans by simulating a 20% drop in portfolio values in the first year of retirement. This shows a worst-case scenario. Ultimately, we hope for the best but are prepared for the worst.

Changes Moving Forward

After a diligent research period, we are introducing the following positions in our models.

> Trez Prime Trust:

Trez Capital is one of Canada’s largest private commercial mortgage lenders with offices in Canada and the United States. Their investors range from high net worth individuals to some of Canada’s largest pension funds.

We will be utilizing their most conservative investment option, Trez Prime Trust. This is a short-term commercial mortgage strategy which participates exclusively in first mortgages secured by real property located in Canada or the United States. 

Trez will be added to both our Growth & Income models.

> Low Volatility ETFs:

We will be returning to our Low Volatility ETF strategies in both the Canadian and US market. These strategies have outperformed in prior market pull backs and should decrease the equity volatility of our portfolios.

Low volatility ETFs will be added to both our Growth & Income models.

> TD US Blue Chip:

TD US Blue Chip has been a staple in our Growth model since inception. This actively managed fund is an award-winning US equity mandate which focuses on large, stable growth-oriented US companies.

TD US Blue Chip will be added to our Income model.



We started our first quarterly commentary last year with a well-known quote from Warren Buffet stating “Only when the tide goes out do you discover who’s been swimming naked”; this turned out to be a prophetic statement to describe 2018.  

With this in mind, we are very pleased with how our portfolios protected your investments last year and that we were able to discourage most of our clients from chasing the “hot money” sectors like Cryptocurrency and Marijuana.

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


Warm Regards,

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.

[1] All returns in local currencies as of Dec 31st, 2018
[2] Sources include: us.spindices.com, www.msci.com, Bloomberg

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.