q4-2018 - quarterly review - crosspoint financial...q4-2018 - quarterly review “a few interesting...

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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Slide 2

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.

https://wescottcapital.us12.list-manage.com/track/click?u=e9359165ecc59d3f02a12d26a&id=0b34fe0cce&e=0f5dc46478


Slide 3

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.


Slide 4

The Market is “Correcting” - Some Stocks Are In “Bear” Territory

Source: Visual Capitalist, Used With Permission, MarketWatch


Slide 5

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


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 6

Contact Us


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 7

Disclaimer

Q4-2018 - Quarterly Review“Markets”



Jan 2019


Slide 9

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.


Slide 10

Summary - 2018

Source: Morningstar


Slide 11

Summary - 2018

Source: Morningstar


Slide 12

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.


Slide 13

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.


Slide 14

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).


Slide 15

Summary of Markets


Let’s look at the charts we always review at the end of each quarter…


Slide 16

Market Performance: Canadian Bonds

2-Years: Down -2.2%Q4-’18: Up 1.3%

Source: TMX Powerstream, Price Only (No Yield/Dividends Included)


Slide 17

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)


Slide 18

Market Performance: USA (S&P 500)

Source: TMX Powerstream, Price Only (No Dividends Included)

2-Years: Up +8.7%Q4-’18: Down -15.2%


Slide 19

Market Performance: Global (MSCI World)

Source: TMX Powerstream

2-Years: Up +4.6%Q4-’18: Down -7.7%


Slide 20

Market Performance: Oil


2-Years: Down -13.6%(Down -13.3% in CAD)

Q4-’18: Down -39.7%(Down -32.3% in CAD)


Slide 21

Market Performance: Gold


Q4-’18: Up +7.5%(Up 14.9% in CAD)

2-Years: Up 10.0%(Up 11.2% in CAD)


Slide 22

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%





Phone: 613-722-0408 Toll Free: 1-844-220-0830



Slide 23

Contact Us




Slide 24

Disclaimer

Q4-2018 - Quarterly Review“Portfolio Strategy & Performance”



Jan 2019


Slide 26

Now Neutral, With Concerns

Source: SIA Charts


Slide 27

Asset Allocation – Equities Remain Overweight


Back To Neutral – Reduce Equities


Slide 28

Trades


Decreasing equities, increasing fixed income and increasing alternative.


Slide 29

Sub-Model Allocations – Balanced Model


= On our watch list for performance concerns


Slide 30

Q4 ’18 Performance – Down 5.9%

July: -3. 94%August: +1.16% Sept: -3. 17%


Slide 31

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.


Slide 32

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%


Slide 33

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%


Slide 34

Market Performance Metrics


Slide 35

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.


Slide 36

Remember, Markets Always Do This…

Source: Bloomberg, Edgepoint & Vandermeer Wealth Management


Fees… yes, but the main cause? Poor timing of the market!

Slide 37

Returns of the Average Investor

Source: Dalbar


Slide 38

Emotional Investing

Source: Used with permission from Paul Keen of PIMCO Canada.


Slide 39

Stay Invested in Quality Businesses


Slide 40

Less Volatility – That’s Our Objective

Source: Connor Clark & Lunn, Vandermeer Wealth Management





Phone: 613-722-0408 Toll Free: 1-844-220-0830



Slide 41

Contact Us




Slide 42

Disclaimer

q4-2018 - quarterly review - crosspoint financial...q4-2018 - quarterly review “a few interesting...

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