Kelly-Gorham Private Wealth
Strategy Update
“The world is full enough of hurts and mischances without wars to multiply them.”
–J.R.R. Tolkien
We are deeply saddened at the unprovoked war against Ukraine. This war is a tragedy and our hearts go out to the Ukrainian people.
Strategy Update Highlights
- We have been taking profits on some equity positions, selling down some of our growth positions while completing the shift into financials and resources. Canadian equity portfolio protection is lower; however, we expect to increase it over the quarter along with US protection.
- Fixed income remains focused on shorter term and floating rate exposure. In the next 6 to 9 months, as rates rise, we will look to add medium- and longer-term exposure.
- With supply chain issues, the war in Ukraine, potential COVID geographical outbreaks/resurges, rising rates, and inflationary pressures, we expect continued volatility, especially in growth equities. We see more opportunities in dividend growth and value.
Fixed Income:
This year’s interest rate hikes from the Bank of Canada and US Federal Reserve have caused the worst start to the bond markets since the 1940s. That said, overall, our fixed income portfolio deflected much of the drop and our fixed income portfolios were still up year over year on average. As a reminder, rising interest rates can cause bond prices to drop. The next rate hike could be 0.50%. As rates rise, we may start shifting some short-term and floating rate bond fixed income to corporate and/or government fixed income
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RBC Global Asset Management’s Recession Indicator chart above still indicates that we are currently not pointing to a recession, although there is some debate about the shape of the yield curve that bears watching. With rising interest rates, supply chain issues, and the war in Ukraine, some of those indicators may move to Neutral or Recessionary but it is not likely we will be in a recession in the next quarter.
We again reduced our preferred shares exposure by selling Dynamic Preferred Share ETF (DXP). We now have a very small position in Horizons Preferred ETF (HPR). It is likely we will sell our preferred shares in the 2nd quarter of 2022.
We are now actively adding more alternative focused fixed income investments now that interest rates are rising. These investments can help us get positive fixed income portfolio returns even as rates rise.
Equities:
We will continue to see bumpy equity markets. Canadian put protection is now about 25%, which might increase. US equity protection on US$ accounts will likely be moved slightly higher. We expect we will reduce some equity exposure over the next quarter until we have a better idea of where interest rates will be.
After a very large rally, we took some small profits on our positions like iShares XEG and XME (Global Materials) indexes along with Freeport McMoran, after being up 10% to 135% since December 2020. Additionally, our US health care exposure has helped quite nicely. We are not sure how long we will continue to have resource exposure. We anticipate volatility moving forward and may add or subtract to positions as market conditions change.
As noted in our last update, we reduced growth exposure due to its expected higher volatility. We were correct as at one point the NASDAQ 100 was off over 20%. We deliberately have smaller growth positions, which reduced the overall portfolio impact from the growth’s stocks declines.
Conclusion:
With interest rates increasing, we will continue to be diligent focusing more on risk reduction this quarter. We hope everyone has a great Spring!
As always, we appreciate and value your trust. Please do not hesitate to contact us if you need anything. We are available to meet by phone, via 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?