DIARY OF A PORTFOLIO MANAGER
December 18th, 2020
I usually put these pieces together when I feel I have something to write about. It started off as a good way for me to assemble my thoughts in one place and send out once in a while. I figured people were glad to get updates on my opinions but didn’t really pay much attention. Turns out many do. Now that I know people are reading what I write, I may actually have to be interesting. No pressure there…Just kidding. For those with positive feedback the past few weeks, thank you very much.
Reflections on 2020
This was an unusual year in so many ways, with concerns spanning personal health, safety, job and business security, and financial risk. Yet, lessons from past crises served to be useful with respect to the management of your investment portfolios. More specifically, having an up to date financial plan that ensures our portfolios are constructed and managed to meet your needs and goals. In addition, we maintain a level of discipline to control emotions and look past the short-term news and noise. Lastly, being prepared to be proactive through rebalancing and identifying opportunities that arise when markets reach extreme levels of pessimism and optimism.
Thoughts for 2021
I expect 2021 to be a tale of two halves. In the early going, the virus will continue to remain a headwind to economic and earnings growth, as it has for much of this past year. As vaccines become more widely available in the developed world into the spring and summer months, we expect a gradual return to more normal levels of activity, setting the stage for a more durable economic trajectory by the end of the year. Low interest rates and aid from governments around the world, including an additional round from the U.S., should help bridge the economic gap that will exist through this period.
Interestingly, the hit to the global economy from this second wave has not been as negative as expected despite the renewed restrictions across Europe, Canada, and parts of the United States. Recent data from Europe indicates activity – both manufacturing and services – has been more resilient despite recent headwinds. Commentary from both the Bank of Canada and the Federal Reserve officials of late has suggested the respective economies have been a bit stronger than anticipated, although they acknowledged the elevated risk and disparity that exists among different parts of the economy.
In sum, the backdrop of a very low interest rate environment, significant government aid that may extend further, and a more durable economic recovery should help drive meaningful earnings growth. The challenge for investors is that markets are forward looking in nature, and already reflect much of the projected path that we foresee. As a result, while we are constructive on global stocks given improving trends, our level of enthusiasm is relatively modest.
A Tale of two markets
I came across the chart above this past week. Interesting for sure. It’s more than a Canada / U.S. comparison and more about what sectors worked and what didn’t. The Canadian stock market does not have enormous exposure to sectors like IT, Consumer Discretionary, Health Care and those are what have driven U.S. Returns the past decade. It also shows that ones exposure to US equities had a big impact on returns the past decade.
Why I like dividends
“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”
- John D. Rockefeller
This quote does seem a little bit emotionally detached from what most of us would agree is a balanced person. However, I can validate that I like dividends. Particularly dividends from shares of common stocks. Why is this? The following chart should explain quite well:
So, companies that pay dividends tend to do better overall. Companies that grow their dividends do even better. And they do so with historically lower volatility. Sounds pretty good to me. Add better tax treatment and better hedge against inflation than comparable ‘low’ risk options, I think dividend paying equities are the way to provide an income stream if your time frame is 5 years or more. You should note that anything can happen in the short term. If you need money for something in 3-6 months, I would explore other options.
Some administration
TFSAs – let’s automate what we can. We have spoken with most of you regarding the plan to fund TFSAs in 2021. If you feel that this has not been discussed, please email Jordain or Linh.
Jordain is jordain.lees@rbc.com and Linh is hailinh.nguyen@rbc.com
If we do not connect again over the next week, Happy Holidays!
J. Todd Kennedy, CIM, FCSI
Vice President and Portfolio Manager
613-566-4582