"Well, here’s another fine kettle of fish you pickled me in.” — Stan Laurel (of Laurel and Hardy, 1932)
Well, we are in a bit of a pickle at the moment. As we have seen constantly in the news - Canada, western nations, and other nations are dealing with a significant geopolitical uncertainty.
While transitioning through these changes, we continue watching the financial, geopolitical, and social implications as we stick with our diversified pension-focused investment process and adapting as conditions change. Please remember, we diversify by asset class – Fixed Income, Equities and Alternative Investments and by Geography.
Strategy Update Highlights
- We continued our defensive posture heading into the end of the year and into the beginning of 2026 by taking profits and rebalancing.
- About 20% of our Canadian and until Jan 30th, 25% of our U.S. equity exposure is insured through protective strategies designed to reduce downside risk. We will likely extend that US protection.
- U.S. interest rates are expected to move lower in 2026, while we expect Canadian rates to be on hold.
Fixed Income
Our fixed income portfolios continue with its global focus. Canadian rates are now in a holding pattern, and we expect global rates to decline more creating better opportunities outside Canada. By continuing this strategy, the fixed income portfolio not only generates steady interest income, but capital gains could meaningfully enhance overall returns. While the U.S. lowered rates 3 times in 2025, there are 1 to 2 more US interest rate cuts in 2026 depending on what research you read.
Our fixed income strategy holds ETFs, actively managed strategies, fixed income alternative investments and hedge funds.
As mentioned last quarter, in taxable accounts, we focus on having our fixed income holdings produce higher after-tax returns than traditional interest-only investments such as bonds or GICs. Several fixed income holdings pay part of their returns as capital gains — which are taxed at only half the rate of interest income. Our Globe-X Active Preferred Share Index (HPR) holding also pays a tax efficient dividend.
During the last quarter we expanded our alternative fixed income strategies in East Coast Strategic Credit Trust, RPIA, and Canso Corporate Value holdings.
Equities
We took some profits in various positions in late 2025 and continued this during the first 3 weeks of January. We pared back on our financial exposure after considerable rally in 2025, like we did in 2022.
We currently still have about 20% protection of the Canadian equity portfolio from a drop of 12% or greater and slightly more protection on the US$ equity holdings. This protection may be increased in the very near future.
There are several pushes and pulls happening in the equity markets right now. The chaotic behavior of the US administration on tariffs and geopolitical issues can cause increased volatility and risk.
I said this in the last update, and it is worth restating:” Given the current uncertainty around potential tariff levels, we continue to take a cautious stance. This uncertainty is translating into volatility across both bond and equity markets. There are already enough external factors influencing markets without the added challenge of unclear trade policy. “
We expect to see where tariffs will finally settle after the Canada-US-Mexico free trade negotiations later this year which should provide more clarity.
The offsets to risks mentioned above are the tax cuts in the US resulting in more investable cash available to companies and individuals, last year’s interest rate cuts and this year’s expected cuts could give liquidity boost to equity markets in mid-2026. Additionally, US corporate profits and balance sheets are also in pretty good shape.
Additionally, Ai returns, while volatile, boosted the US equity markets in 2025 and may continue in 2026. Our non-Ai US exposure, however, in financials and health care gave a boost to our US$ account 2025 returns.
Given the current uncertainty around potential tariff levels, we continue to take a cautious stance.
Conclusion
As always, we are watchful in managing our portfolios and will continue actively looking for opportunities in the coming quarters. We appreciate your ongoing trust and confidence. Please don’t hesitate to reach out if you need anything — we’re always available 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 licence. ©2025 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. Has anyone read this far?