I have been thinking of you all during this unprecedented health crisis. This is a frightening situation and we wish everyone good health and safety. 

 

The parallel news is, of course, the markets so I want to provide an update in light of the coronavirus and its financial impact. 

 

We have been in a global bull market since February 2009, roughly the end of the financial crisis. This remained so until approximately the third week of February 2020, when COVID-19 became a global crisis.

 

At all times, we follow and continue following a disciplined wealth management process. This process helped my clients and I navigate the 2008-09 financial crisis and we will use that same focus, skill and steadiness throughout this crisis.

 

What we did and why

Since early 2018, I have been vocal about my concerns of a market correction, given the uninterrupted bull market for 11 years.  However, equity markets, along with other markets like real estate or commodities, can continue to go up for years. You never know when that correction will start. The market usually needs a catalyst or spark to cause a major pullback.

 

We experienced one such short-lived correction in late 2018, followed by a rapid recovery in early 2019.   From that point until February 20th 2020, we enjoyed another major market move up. In 2018, we began increasing cash positions and placed portfolio insurance (put options) to act as a safety net to help protect part of the portfolio from a drop and deflect major losses.  Even as the market moved upwards in late 2019 into 2020, I kept the put protection in place, continued taking profits and reducing equity exposure even more.

 

From February 20th to March 20th, we experienced a significant drop and increased volatility in the equity markets and bond markets.

 

By having portfolio insurance (index puts) and by raising cash, we avoided much of the drop you would have experienced had you been in a traditional growth, balanced, or income and balanced portfolio. You’ve likely experienced a fraction of a drop compared to those other portfolios due to the actions my team and I enacted. 

 

To summarize, these are some of the actions we have taken to mitigate risk:

1. Systematically reducing equity exposure over the past 6 months by taking profits on equities.
2. As early as March 1, 2017, I began placing some safety net/insurance (put) protection around most clients with US$ US equity accounts and followed later with the Canadian equity portfolios.
3. No exposure to high-yield debt and floating rate debt.
4. Minimal exposure to preferred shares.
5. Kept individual stock position at purchase to below 1.50% of the portfolio.
6. Maintained a large cash position on hand to reduce risk and to buy investments at depressed prices.

Companies that we own and even some that we’ve sold are still good companies. But when everybody runs for the door at the same time, major market dislocations often happen.  As always, most of our investment focus remains on companies exhibiting many of the following characteristics:

1. Lower than average volatility
2. Strong balance sheet
3. Safe, growing dividend
4. Resilient business model

There is one more thing that is likely and that is coordinated monetary response from global central banks along with additional government spending/fiscal stimulus.

 

One of the hardest things to do in portfolio management is to sell in a rising market. One thing harder, however, is to start buying in a dropping market.  With that in mind we may purchase some good companies at depressed prices that will do well in the future. It’s just that we don’t know how they’re going to perform over the next three weeks to six months. While this market drop is unpleasant, we have significant cash to take advantage of the situation.

 

Accurately predicting a market bottom or top is impossible.  That is why we were raising cash as the markets kept going up. Now we are researching new buying opportunities or considering buying more of what we currently own as the markets are going down. Even when I use the cash to buy, it is likely I will buy a position in stages. 

 

In closing, we would like to note a few final points.

1. While we are understandably busy with everything going on, nothing is more important than connecting with you at time like this. If you have any questions, feel free to call anyone on our team. We would be pleased to speak with you.
2. While we always enjoy in-person meetings with clients, given the nature of this virus and recommendations from experts we have been advised to keep in-person interactions to a minimum until further notice. We will certainly do our best to accommodate your needs. 
3. Given the stream of news about the cancellation of schools, gatherings and events, our management team has diligently prepared contingency plans so that we may continue to serve you, our valued clients, in the event that our building or office area should close (for example, in response to an active COVID-19 case). We have taken numerous steps to ensure that our team will be able to work remotely and remain accessible to you.
4. We wish to reassure you that all portfolios continue to be monitored as before.  All transactions will continue to be completed in a timely manner.  Most requests for information or reporting can be fulfilled electronically via email or our RBC DS Online website.  We may experience some delays with requests requiring paper or physical mail. 

 

We wish you continued good health and thank you for your trust.