The so-called “bull market in everything” continued in the second quarter of 2021, as financial markets priced in the effects of reopening the economy.  Ongoing easy money interest rate policies also kept asset prices rising.  Thankfully, investment portfolios with prominent weightings given to prime grade common stocks have performed their functions to protect and grow wealth over time. 

           The question for investors is always the same: “what happens next”?  People want a definite answer, or, barring that, they at least want a definite “best guess” they can act upon. Psychologist Maria Konnikova argues in her new book, The Big Bluff, that the only good answers are “probabilistic” ones.  Good decisions involving many unknowns need to fit a range of possible scenarios, because we honestly cannot know which one will materialize.  The actual investment environment of, say, one-year from today, is accepted by us to be unknown.  For example, I might think that continued inflation is a likely product of today’s extraordinary monetary policy.  If that scenario materializes, then we would do well to hold plenty of common stock (and a bit of gold) in our portfolios, because our purchasing power will be preserved intact.  But what if we think at the very same time that current inflation could prove transitory, that economic growth could disappoint, and that expensive stocks could fall sharply in the year ahead?  Well, in that case the market values of our stock investments would temporarily decline.  We would lick our wounds and collect our dividends while we wait for the next move upward.  This strategy is the only one I know that ensures that we participate in long-term rising stock prices.

            Softchoice (SFTC on TSX) and Alleghany Corp. (Y on NYSE) are two notable recent additions to your portfolios.  Both companies exhibit characteristics that can allow them to perform well in various business environments.  Softchoice is a Toronto-based software sales and IT services firm that is Microsoft’s largest partner in Canada. Clients buy their Microsoft products from Softchoice and then pay the company to install and service their systems on an ongoing basis.  The pandemic-accelerated move to cloud computing is helping Softchoice to grow, while the IT service business has utility-like characteristics that ensure high quality earnings throughout the business cycle.  Alleghany Corp is a U.S. business insurance company.  A series of natural disasters in the past few years has made property and casualty insurers struggle to post good earnings.  The insurance sector trades currently at half the P/E ratio of the S&P 500. But fast rising insurance premiums could allow insurance earnings growth to equal those of the broader market.  What is more, if interest rates rise, Alleghany benefits from rising interest income on the premiums it collect and holds in short-term investments.  The common theme is upside and durability in a broad range of future market circumstances.
 

Mark Lloyd, Ph.D.

Vice President & Portfolio Manager