Kelly-Gorham Private Wealth
Strategy Update
“The best measure of a man's honesty isn't his income tax return. It's the zero adjust on his bathroom scale.” Arthur C. Clarke
Regarding income tax returns, you will soon start receiving your 2021 tax slips. 2022 has brought a lot to think about already: interest rates, increasing corporate earnings, Omicron variant, and China’s real estate bubble and inflation, to name a few.
Strategy Update Highlights
- We continued reallocating cash and shifting equities into financials and resources. Canadian equity portfolio protection is lower; however, I expect to increase it over the quarter. The US protection remained the same.
- Fixed income exposure remains on the lower end, along with shorter maturities and floating rate exposure. That, together with preferred shares, gave us great 2021 fixed income returns in a tough fixed income environment.
- We expect to experience market pullbacks and rallies throughout 2022, especially in the first half of the year. This is dependent on where interest rates settle out, corporate earnings growth, COVID impacts, and inflationary pressures.
Fixed Income:
With the US FED set to raise interest rates, bond buy backs ending by mid-2022 and with Canadian rates also set to rise, we are seeing a volatile bond market. Please remember that, as interest rates rise, it can cause bond prices to drop.
Interest rate increases tend to reduce real estate sales. The Canadian housing market is at historic highs, while the US housing market is not as overvalued. Interest rate hikes can also cool down increasing costs in many sectors like energy, durable goods, and building materials.
We were very pleased that our fixed income portfolio’s positive return outperformed the bond market’s negative 2021 return.
We again reduced our preferred shares exposure using Horizons Preferred Share ETF (HPR) and Dynamic Preferred Share ETF (DXP). Last quarter, I wrote that over the past eight or nine years we usually sold out the entire preferred share positions after rallies. We held on as I noted that recently, companies were calling/buying back preferred shares causing decreased supply and increase preferred share prices. Now, however, we anticipate selling out our preferred shares entirely or holding a very small position.
We have increased exposure to floating rate and shorter-term fixed income to buffer the impact of rising rates.
We are seeking to add more long-short fixed income alternative investments as interest rates rise. These investments can help us get a positive fixed income portfolio return even as rates rise.
Equities:
We will continue to see bumpy equity markets. Canadian put protection is now about 25%, which might increase. US protection on US$ accounts is also about 25%.
We reduced our exposure to the interest-sensitive utility sector as inflation picked up and central banks signaled a reduction in monetary support. As oil and gas commodity prices soar, it has sent oil and gas equities rallying even higher.
Financials benefited from the anticipated rate hikes along with the increase in the 10-year yields. TD, BMO, RY and GSY have all rallied dramatically. We do think the financial sector will remain strong. While we may add more positions, we can also trim down positions if they rally significantly or they become over weight.
We are seeing more volatility in the technology sector and other growth stocks. We expect this to continue into the first half of 2022. It is for this reason we took profits and sold off the NASDAQ 100 QQQ index in late December 2021.
The resource rally continues with increased commodity demand along with some supply limitations. Our resource exposure performed very well over the past year with iShares indexes XEG and XME, Louisiana Pacific, and Freeport McMorran being up 21% to 83% over the past year depending when we bought the positions. Portfolios had essentially no resource exposure from late 2014 until December 2020 as the fundamentals completely broke down. I am not sure how long we will continue to have resource exposure, but it will likely be volatile moving forward.
Conclusion:
We wish everyone a happy and healthy 2022!
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 or via WebEx.
** 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?