Kelly-Gorham Private Wealth
Strategy Update
An optimist stays up until midnight to see the New Year in. A pessimist stays up to make sure the old year leaves.” —Bill Vaughn
It was a bit of both for New Years. In the short-term, I am a little pessimistic, but I feel a little more optimistic for later this year. Before I begin Gary, Chris, Jessi, Raymond and I want to wish you a Happy New Year and the all the best for 2023!
Strategy Update Highlights
- Our Portfolios still have massive flexibility with very conservatively positioned portfolios.
- Most of our fixed income are to 2-to-7-month bonds with yields to maturity over 5.20%. Our page 3 bond chart shows interest equivalent yields at various tax rates as of December 30th. We have started and expect to continue moving back into Fixed Income alternative mutual funds and ETFs as rates rise.
- We deflected a significant amount of the market drop as we dramatically lowered our equity exposure over the 12 months prior to equities dropping. We are now looking for entry points back into equities as the expected recession follows its course.
Many investors had a rough ride in 2022 with the largest global inflation increases since the early 1980’s matched by the largest interest rate increases in decades. The net result saw the worst bond/fixed income markets in decades with negative double digit fixed income returns and poor returns in global equity markets. It’s interesting that the 2022 TSX equity return of -8.97% 2022 return was relatively safe compared to fixed income’s bond index (XBB) negative -13.87% return. From 1981 to 2021 there were only a handful of years where bonds and equities had negative returns.
Interest rate increases in 2022 caused the downward asset repricing, especially growth stocks. The next 3 to 7 months equity markets and fixed income markets will likely be impacted by different factors such as earnings. Below is a sampling of various index returns year-to-date.
Fixed Income:
We are still buying bonds with very attractive returns not seen in years, but with a view to continue moving back into Fixed Income alternative mutual funds and ETFs as rates rise.
While we have rolled about $200 million dollars in direct bond holdings over the last 9 plus months, we believe there are other fixed income opportunities now appearing from various global fixed income portfolio managers taking advantage opportunities that we cannot do directly. While we received good pricing when buying $200 Million dollars of bonds, we do not get the same pricing as the bond managers managing $2 trillion in fixed income investments. They also have 24-hour trading desks. While our team works long hours, we cannot work 24 hours a day. If we believe, as we did last year, the best option is to start buying bonds directly again, we will. We are agnostic to the product we use to get the exposure. Therefore, if we believe holding bonds directly is best course of action, we will as we did in 2022. That strategy helped your portfolio perform as well as it did in 2022 compared to our benchmarks and competitors. Please remember that prices and yields move inversely – i.e., interest rate increases cause bond price drops.
Below are what bonds were paying at the end of December which is significantly higher than what interest was earlier this year. It is also significantly higher than GIC rates with the same maturities at the end of December. For taxable accounts, the after-tax interest equivalent was even higher.
Those short-term bond yields listed below are not likely to rise significantly more. For that reason and also that bond managers will now be able to generate higher returns in some areas of the fixed income market, the portfolios will now start buying back into specialized bond funds and fixed income ETFs.
Equities:
We are positioned for what we believe will be the inevitable recession early this year. As we were in the last update, we are underweight equities and overweight short-term bonds. If we experience another large equity market pull back or as our bonds begin maturing over 6.5 months, we will likely increase our equity exposure. At the end of September, we were about 33% equities in the balanced growth mandates. In December we were about 38%. Increases in equities over 3 to 8 months could increase to 42%, then to 49% and then to 57% equities along the way. Our balanced growth equity target is 63% equities. The speed of moving back into equities depends on how earnings progress and the valuations of what we are looking to invest in.
We still have a smaller allocation to growth stocks.
Again usually the best opportunities to prudently use cash when we are 3 to 6 months into a recession.
Last quarter the question was - 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. One thing we do want to do is get back to our longer term target holdings. If we wait for things to massively improve then we will miss some excellent opportunities.
Conclusion:
We wish everyone a healthy and happy 2023!
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?