Kelly-Gorham Private Wealth
Strategy Update
“Gambling: The sure way of getting nothing for something.”
Wilson Mizner
It looks like the chickens came home to roost. Meme stocks, overpriced tech stocks, crypto, NFTs, pajama traders day trading stocks, stretched real-estate prices, and ultra-low interest rates led to a fair bit of gambling across various asset classes. The unexpected jump in inflation and the resulting unexpected large interest rate increases have laid bare many investors’ speculative picks. We are seeing rapid downward repricing of several asset classes. Once again, we see the consequences of people investing like gamblers, instead of investing with the thought and precision that we employ.
Strategy Update Highlights
- Our conservative stance is working. We have massive flexibility with very conservatively positioned portfolios.
- Our focus on short term and floating rate bonds and bond indexes deflected much of the negative impact of rising rates on our fixed income portfolio. We bought 2-to-6-month bonds with yields to maturity over 4.57%. Our bond chart in the fixed income section shows interest equivalent yields at various tax rates as of October 1st. We are now getting even higher yield to maturities.
- We deflected a significant amount of the equity market drop as we dramatically lowered our equity exposure over the last 10 months prior to the markets dropping.
Fixed Income:
The good news is that we are now buying bonds with the most attractive yields we have seen in a number of years. This is happening due to the highest inflation readings in decades causing central banks to rapidly raise interest rates in response. Global central banks are not done yet, as inflation will likely continue to moderate, albeit
slowly. The bad news is that 2022’s bond market woes will be remembered for many years. Please remember that prices and yields move inversely – i.e. interest rate increases cause bond price drops. If we begin to see a meaningful slowdown in inflation readings we might then be getting close to the end of interest rate tightening.
Below is a sampling of various index returns year-to-date. Below that I show what the bonds were paying at the end of September which is significantly higher than what interest was earlier this year and significantly higher than GIC rates at the end of September. For taxable accounts, the after-tax interest equivalent was even higher. Finally, the third chart shows how our portfolios did on an average year-to-date and over the last year.
Equities:
In my last strategy update I said that we will continue to see bumpy equity markets.
Last quarter I also said I would reduce some equity exposure until we have a better idea of where interest rates would end up. In lieu of the reduced equity, I have purchased positions in the conservative bonds mentioned in the chart above.
Again, we deliberately have a smaller allocation to growth position stocks which has reduced the overall portfolio impact from declines and volatility.
Our challenge now is to determine when to start buying as there are opportunities that have started to look quite tempting. It is likely that we will begin to edge back into the equity market as we enter into the anticipated recession. We think that we will find the best opportunities to prudently use cash when we are 3 to 6 months into a recession (which we forecast to begin in next 1 to 3 months).
On average our balanced portfolio has around a 30 to 33% weighting in equities. Our target, however, is 63%. Just like Warren Buffet, we try to be fearful when people are greedy (which we were), and be greedy when people are fearful (which we are). The question is - at what points do we use that cash? We will never pick the exact bottom just as we never pick the exact top. The pendulum swings both ways.
If we wait for things to massively improve then we will miss some excellent opportunities.
Conclusion:
We hope everyone has a great fall!
As always, we appreciate and value your trust. Please do not hesitate to contact if you need anything. We are currently available to meet by phone, WebEx, or in person.
** Here’s the fine print and there’s a lot of it…
Currency can add return when the Canadian dollar goes down but reduce returns when the Canadian dollar goes up for non-currency hedged US and international investments. Also, please remember that your US accounts report values in US dollars.
Securities or investment strategies mentioned in this newsletter may not be suitable for all investors or portfolios. The information contained in this strategy update is not intended as a recommendation directed to a particular investor or class of investors and is not intended as a recommendation in view of the particular circumstances of a specific investor, class of investors or a specific portfolio. Options, and other strategies mentioned, may not be suitable for all investors. You should not take any action with respect to any securities or investment strategy mentioned in this newsletter without first consulting your own Portfolio Manager or in order to ascertain whether the securities or investment strategy mentioned are suitable in your particular circumstances. This information is not a substitute for obtaining professional advice from your Portfolio Manager. The commentary, opinions and conclusions, if any, included in this newsletter represent the personal and subjective view of Daniel Kelly who is not employed as an analyst and do not purport to represent the views of RBC Dominion Securities Inc. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. Investment Trust Units are sold by RBC Dominion Securities Inc. There may be commissions, trailing commissions, management fees and expenses associated with Investment Trust investments. Please read the prospectus before investing. Investment Trusts are not guaranteed, their values change frequently, and past performance may not be repeated. (Keep reading, there’s only 7 more sentences to go.) This commentary is based on information that is believed to be accurate at the time of writing and is subject to change. All opinions and estimates contained in this report constitute RBC Dominion Securities Inc.’s judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Interest rates, market conditions and other investment factors are subject to change. Past performance may not be repeated. The information provided is intended only to illustrate certain historical returns and is not intended to reflect future values or returns. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ®Registered trademarks of Royal Bank of Canada. Used under license. ©2022 Royal Bank of Canada. All rights reserved
Investment portfolios are not guaranteed, and past performance is no indication of future returns. In addition to these portfolios not being a guaranteed investment, there can also be significant fluctuations in the value of the portfolio.Did anyone read this far?