Kelly-Gorham Private Wealth
Strategy Update
History has always been a series of pendulum swings, but the individual doesn't have to get caught in that. Robert Johnson
I wanted to send a brief note to you regarding the recent equity and bond market volatility.
This volatility comes as no surprise and for a year to a year and a half, I’ve been cautioning about a market pull back based on factors other than solely profit taking.
After an almost 41-year long uninterrupted downward trend for inflation and interest rates, we now have higher inflation and rapidly-rising interest rates. This will continue to cause some issues in the short run. There is also the war, oil shock, pandemic, and supply chain issues compounding some of this as well.
We pre-positioned our equity and fixed income portfolios for this shift and as such, we are off a fraction of the average balanced growth portfolio drop. As I write this, year-to-date the NASDAQ is -22.8%, S&P500 -13.91%, Dow Industrial -9.92% and Toronto TSX Composite -3.05%. Bond markets have not done well either with the iShares Canadian bond index (XBB) -12.58%, iShares US Aggregate Bond Index (AGG) -10.94% year to date. The US 20year treasury index (TLT) is -23.29% year to date. Also for Balanced portfolios, iShares (BAL) balanced index is -11.23 % and the Vanguard Balanced index (VBAL) are also -10.57% Year to date.
As of yesterday, our unaudited average year to date balanced growth portfolio return was down -3.06% with some
portfolios being slightly higher and some being slightly lower. (We roughly calculate this by adding the total value every balanced portfolio and then calculating the weighted average return.) While I have always said there are no guarantees, I have stressed since 1996, that we focus on risk reduction. We have succeeded in avoiding much of the drops compared to various benchmarks in every down turn – 1998, 2000, 2008/09, 2011, 2015, 2018, 2020 and so far this year we are succeeding at doing it again.
How did we do it this year? Well, in general we telegraph what we are doing when we send out regular strategy updates. While you may not see much change from quarter to quarter, over multiple quarters you will. For example, in our equity holdings, we had dramatically lowered our technology exposure since late 2020, replacing much of that will exposure to some more value, resource and dividend oriented exposure. Now, in our fixed income portfolios, we lowered the average maturities and sold off all of our preferred shares. We made a 35% to 40% return, before dividends, on our preferred share exposure on our purchases from April, May and June of 2020. At that time, they represented tremendous opportunity based on their value. As these preferred share values increased, we then sold them off in various tranches. I sold the last preferred share tranche near the end of April 2022.
Doing all this does not mean you are never down and there may be a time when we are down much more than the markets are down. What this does mean is that we have flexibility to make measured decisions and not be under pressure to recover.
Conclusion:
Going forward, we will use this flexibility to selectively buy (and, yes, sell) fixed income, cash, equities, and alternative investments based on their investment merits. We are in a marathon and not a sprint where a clearly defined strategy and process matters.
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?