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Q3 TriDelta Investment Review – TriDelta is Expanding, but What About the Market?

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Overview


We wanted to kick off the fourth quarter with some TriDelta news, by announcing the opening of TriDelta’s Edmonton office.

The office is led by Arlene Pelley, an industry veteran who is joining the firm and planting the TriDelta flag in Western Canada. Click here to learn more about Arlene’s background.

Turning from TriDelta growth to the markets, we see reason for some caution after a meaningful pullback to start October and negative returns for most equity and fixed income indices in September. Through this period, we have been holding higher levels of cash at approximately 10%-15% in the equity funds, and while we see more short term volatility this month, we will be lowering our cash position shortly as the pullback is bringing with it lower valuations and opportunities to buy good companies at cheaper prices.

What is causing the pullback and what are we doing about it

Looking at things from a purely 2018 point of view, the recent pullback has been caused by:

  • Rising interest rates – which lead to higher borrowing costs for companies, and higher returns on lower risk investment alternatives like GICs (although they remain low historically)
  • U.S.-China Trade Wars (and broader trade conflicts globally)
  • Fears of higher inflation
  • High US stock market valuations and difficulty in companies beating high earnings expectations

Of interest, the reason it is so hard to predict the exact timing of a pullback is that the factors listed above are not new. Interestingly, on the trade front, the signing of the new NAFTA deal (USMCA) should have somewhat lowered trade concerns in Canada, US and Mexico, but all of those equity markets are down since September 30. These have all been issues of concern for many months, yet for some reason early October has been the time for a meaningful pullback. It is worth noting that in a typical calendar year, equity markets experience at least two drops of 5% and one drop of 10%+, yet in the vast majority of cases, equity markets still return highly positive returns year over year.

Looking at things beyond 2018 and from more of a long term seasonal perspective, the timing of the pullback and heightened volatility is not unexpected. Also from this same seasonal perspective, the weeks ahead may bring solid investment returns.

The chart below is the VIX index, which looks at volatility in the U.S. markets. The chart shows that over the past 27 years, volatility has definitely peaked in October. Studies of the S&P/TSX in Canada have demonstrated similar high volatility levels in October.


Source: www.cboe.com/products/vix-index-volatility/vix-options-and-futures/vix-index

Of interest, high volatility does not necessarily translate into poor overall returns. In fact, for the S&P500 index in the U.S., since 1950, October has had an average monthly return of +0.78%. Historically, the two best months of the year are November +1.39% and December +1.53%. Over the past twenty years, the TSX has had the following returns over the same three months: 0.7%, 0.9% and 1.8%.

The chart below comes from equityclock.com. It looks at the TSX over the past 20 years from a seasonality perspective, meaning, when is the most and least productive times of the year to invest. Of interest, it suggests that one of the best times for new investment is around mid-October.

From a purely seasonal standpoint, it suggests that it is worth hanging on through the October volatility as there is often a strong payoff during the fourth quarter.

In addition, in both Canada and the U.S., the third quarter has historically been the worst quarter for returns while the fourth quarter has been the best.

Interest rates: one of the most talked about concerns for the stock market is the fear of rising interest rates. Over the past 30 years, there have been six periods of meaningfully rising bond yields as measured by the U.S. 10 year Treasury yield. During those periods of rising rates, the stock market actually performed very well – as the following two charts from a study for CNBC show.

The market rose big during five of those instances and only fell slightly during the one lagging period.

As the chart above shows, the S&P 500 rallied 23 percent on average in those time periods and the Dow Jones Index was up in all six periods.

The message is that rising bond yields often do not correlate directly with declines in stock market returns. It also should be noted that bond yields in the past week have been flat to declining.

When we factor in the reasons for the pullback, our expectations on earnings growth (which remain reasonably good), the history of similar pullbacks and seasonality effects, we think there are more reasons for optimism than pessimism.

In terms of TriDelta’s direction from here, we have been a little cautious on stock markets but we are feeling a little more comfortable in deploying more capital following the early to mid-October declines. We have reduced our weighting in non-North American and Emerging Market stocks in our Pension fund, and will be using some of that cash to soon add to Canadian and to a lesser extent, U.S. names.

We have been adding some money to Preferred Shares. There are many good quality preferred share issuers yielding over 5% in tax preferred income. In some cases, we even see the potential for some small capital gains opportunities to add to the 5%+ yields.

In the bond market, we have been adding to some names in the “belly of the curve”, the 5 year to 10 year maturity range. We have added recently-issued bonds from BMO and TD maturing in five and ten years respectively and currently paying in the mid-3% range. We also added a bond from first-time issuer Sysco Canada (a U.S. based food services company), with a seven-year maturity, paying 3.7%.

One of our beliefs is that there is a real possibility that the projected interest rate hikes from the Bank of Canada may not fully play out. The market is currently anticipating approximately four interest rate hikes by the Bank of Canada over the next 12 months. While we do expect a hike at the end of this month, we think additional hikes are less certain due to slowing housing activity and moderating inflation pressures. As a result, we are seeing some signs to be a little more bullish on bonds for the first time in a while.

In terms of currency, it was informative to see that the Canadian dollar climbed for only a very brief time and a relatively small amount upon the approval of the USMCA (or NAFTA for those of us who are resistant to change). We are fairly neutral on the dollar at this point, but would look to be more exposed to the Canadian dollar (i.e. sell some US$ back to CDN$) if we see our dollar get down under 76 cents.

How Did TriDelta do?

Overall, most clients had returns in the 0% to 1% range on the quarter, with more growth oriented clients having a weaker quarter based on the Growth fund’s negative return.
Looking specifically at the third quarter of 2018:

TriDelta Pension Pool 1.8%
TriDelta Growth Pool -1.8%
TriDelta Fixed Income Pool -0.4%
TriDelta High Income Balanced Pool -0.2%
Most Alternative Investments 1.7% to 2.1%

By comparison almost every equity and fixed income market outside of U.S. stock markets had a weak quarter – especially in Canadian dollar terms.

The TSX was down 1.3%.
Euro Stoxx was down 2.1% in Canadian dollars.
The UK Based FTSE was down 4.4% in Canadian dollars.
Hong Kong based Hang Seng was down 5.0% in Canadian dollars.
The Canadian Bond Universe was down 1.3%.
On the other end, the U.S. S&P500 was up over 5% in Canadian dollar terms.
The Canadian Preferred Share index was up 1.5%

These numbers do speak to the value of a portfolio that is diversified globally and by asset class. At TriDelta we talk a great deal about lowering volatility, and the third quarter of 2018 was a good example. While most of our clients were flat to slightly up on the quarter, the major individual stock markets saw returns ranging from up 5% to down 5%. By limiting the downside, we are better able to maintain our long term investment focus, and reduce the temptations to change course after markets decline.
Even with a fairly flat last quarter, most TriDelta clients are up around 5% over the past 12 months to the end of September.

Summary

By planning long term and adjusting a well-positioned investment mix a little along the way, we can avoid the pull towards major changes when people are most nervous. There is a lot of reason to believe that there are some good returns ahead between now and February, and you don’t want to miss them. This doesn’t mean that all is fine in the world and things will only go straight up. What it means is that your investment portfolios already have some pretty good shock absorbers. This should help you to avoid getting too aggressive in good times and too nervous in bad times.

We hope that you get to enjoy some spectacular fall foliage whether in Ontario, Alberta or other parts of the country, and we thank you for your continued trust.

 

TriDelta Investment Management Committee

 

Cameron Winser

VP, Equities

Ted Rechtshaffen

President and CEO

Anton Tucker

Exec VP and Portfolio Manager

Lorne Zeiler

VP, Portfolio Manager and
Wealth Advisor

Q2 TriDelta Investment Review – Global Trade: Long Term Problems or Short Term Worries

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OVERVIEW

As we languish in summer heat, we feel anguish in summer Tweets.

If there has ever been a larger global megaphone than President Trump’s Twitter account, we don’t know what it is. While we try our best to ignore most of it in order to prevent overreactions when it comes to investing, the prospect of a major shift in U.S. global trade policy could have major investment implications.

In this report we will look at the risks but focus on why we believe the heightened trade tensions are temporary and not a long term structural change to the markets. We believe that NAFTA will get resolved with some notable wins for the United States, and most other ‘trade wars’ will settle down without significant changes.

We also review how TriDelta did and what we see going forward.

Global Trade – Where it is headed and who will be the winners and losers

Changes to the global trade order may start with President Trump, but the facts on trade will determine how it all ends.

Our views on what will happen to global trade are based on two key items. The first is the facts on trade; who the U.S. trades with, the respective trade balance with each of these countries and how reliant they are on one another for trade. Secondly, we look at how reliant each country is on the United States.
The second focus helps to truly understand President Trump’s end goals and negotiation strategies. So let’s review.

The United States has five major trading partners. The EU, China, Canada, Mexico, and Japan. These five partners represent 69% of all US foreign trade, and 86% of the U.S. trade deficit.

From the list below you can see the high level details.

US Trade in 2017 – Top 5 Trading Partners (according to the International Trade Administration) in USD millions.

Rank Country/District Exports Imports Total Trade Trade Balance
World 1,546,273 2,341,963 3,888,236 -795,690
1 European Union 283,269 434,633 717,902 -151,363
2 China 129,894 505,470 635,364 -375,576
3 Canada 282,265 299,319 581,584 -17,054
4 Mexico 243,314 314,267 557,581 -70,953
5 Japan 67,605 136,481 204,086 -68,876

When it comes to Donald Trump’s approach, he wrote about his 11 winning negotiation tactics in his 1987 book The Art of the Deal.

His first one was:
Think big

“I like thinking big. I always have. To me it’s very simple: if you’re going to be thinking anyway, you might as well think big.”

He has said consistently that he believes that the U.S. has been taken advantage of on trade and that he will put a stop to that. If he is going to do that he will focus on his biggest trading partners and he will start by asking for everything.

Another key item on Trump’s list is pretty common for most negotiations. He wants to find points of leverage and during negotiations to act as cool as possible – showing no interest or worry about resolving matters.

Use your leverage

“The worst thing you can possibly do in a deal is seem desperate to make it. That makes the other guy smell blood, and then you’re dead.”

If the U.S. wants leverage from its trading partners, the two easiest countries on the top 5 list would be Mexico and Canada. For Mexico, 81.0% of its exports go to the U.S.. For Canada, the number is 76.4%. Mexico and Canada need the U.S. in a big way.

On the flip side, the percentage of U.S. exports going to Canada is 18% and it is 16% for Mexico.

Percentage of a countries exports that go to the United States:

Mexico 81.0%
Canada 76.4%
Japan 20.2%
China 18.2%
India 16.0%

Another of Trump’s tactics is:
Get the word out

“One thing I’ve learned about the press is that they’re always hungry for a good story, and the more sensational the better…The point is that if you are a little different, a little outrageous, or if you do things that are bold or controversial, the press is going to write about you.”
Clearly, Trump can use the media to get his side of the story out in a loud and large way. For us it remains important not to put too much stock in individual comments that Trump makes when it comes to trade issues. He will say anything to keep the focus on him and his issues.

Fight back

“In most cases I’m very easy to get along with. I’m very good to people who are good to me. But when people treat me badly or unfairly or try to take advantage of me, my general attitude, all my life, has been to fight back very hard.”
This can certainly explain his reaction to Trudeau and others. It is par for the course with Trump, and while the personal attacks are unseemly, they are not likely to lead anywhere as long as there is real negotiation leverage to fall back on.

This now brings us to China. For China, the U.S. is its largest trading partner, and represents 18% of exports and 9% of imports, but as you can see from these numbers, the Chinese economy is fairly diverse and not overly reliant on the U.S. In fact, 80% of China’s GDP is from domestic consumption. Purely based on the numbers, the United States doesn’t have nearly as much leverage with China as it has with Canada and Mexico. To top it off, China is the largest foreign holder of U.S. debt at over $1.5 trillion. Needless to say, the United States needs to be careful in its negotiations with China.

Basically, we see NAFTA as something that will end up being resolved, likely with some clear wins for the United States. The threats, loud complaints, and the personal attacks do not worry us. They are all on the Trump negotiating tactic list. If we had to guess, one potential loser from a NAFTA agreement will be the Dairy Industry in Canada as it has been the centerpiece of many Trump attacks and one that he will most want to raise as a sign of victory. Keep in mind that many Canadians themselves criticize the structure, high costs and unfairness of the Canadian dairy industry.

At the end of the day, Canada and Mexico are negotiating from a point of weakness and ultimately may give more than they want in order to get a deal done. But it should be noted that despite no tax cuts in Canada and with the uncertainty of trade, Canadian GDP growth is expected to be quite strong in the second half of the year.

When it comes to China and trade imbalances, the United States simply does not have the leverage to win this trade war. Where Canada and Mexico need the U.S. more than the other way around, that simply isn’t the case with China. If only 20% of China’s GDP are exports, and the U.S. is 18% of its exports, that means the U.S. market represents only 3.6% of China’s GDP. Because he holds the loudest megaphone, Trump can still claim victories along the way, but when it comes to China, the U.S. is fighting a battle that they won’t win. The one exception is in technology and intellectual property as is evidenced by the action against Chinese giant Tencent. China is reliant on US technology, particularly semiconductors, to fuel its growth and this is an area where concessions can be earned.

We think their discussions with the EU may be a little more productive, but will most likely end up closer to status quo than see any major wins for either side.

This leads to one of Trumps final negotiation tactics:
Maximize the options

“I never get too attached to one deal or one approach. I keep a lot of balls in the air, because most deals fall out, no matter how promising they seem at first.”
This tells us that while Trump may go after every big region to try and negotiate a better deal, he recognizes that he won’t win them all. From an investment risk perspective, it means that we should be less worried about Trump fighting five different trade wars at once. Once he has a big win he can ‘Trump-et’, the others may fade.

TriDelta’s View of the Risk of Global Trade Wars

In summary, we believe that NAFTA will get resolved and Trump will claim a big trade victory, but it should only negatively impact a few select sectors. He can use this as proof that he is a good negotiator and that he is winning points for America. This may take pressure off of him on other global trade deals that the U.S. can’t win to any great extent.

While trade tensions may cause turmoil, we do not believe it will bring on impending market doom.

How Did TriDelta do in Q2 and over the first half of the year?

The TriDelta Growth Fund has had a strong run. It was up 3.0% in Q2 and up 5.6% over the first six months of 2018.

The TriDelta Pension Fund which focuses on dividend growing stocks and is a lower volatility fund, has seen slower growth after a couple of very good years. It was up 2.2% in Q2 and up 2.8% over the first six months.
The TriDelta Fixed Income Fund was up 0.4% in Q2 and 1.1% in the first six months.

The TriDelta High Income Balanced Fund was up 3.2% in Q2 and 3.3% in the first six months of the year.

Overall most clients are up between 1.5% and 4% year to date depending on their asset mix.

By comparison, the TSX was up 1.9% in the first half of the year, the Canadian Bond Universe was up 0.6% year to date to June 30th, while the S&P 500 in Canadian dollars was up 7.7%. Global equities outside of the U.S. have been mostly negative this year.

We continue to be pleased with how our portfolios have been able to smooth out much of the market volatility that we have seen over the past 6 months. Most clients experienced losses of less than 1% in February when the S&P500 experienced a short term loss of 13%. At TriDelta, the more we can avoid those declines in the first place, it makes it easier to stick to and achieve the long term plans. By reducing volatility, stress is reduced, and more rational investment decisions can be made.

Central Banks, Interest Rates and Bond Markets

Central Banks

Bank of Canada governor Stephen Poloz, with his extensive background in trade-related issues and global trade contacts from his prior post at the Export Development Corporation, is perhaps best suited of all the embroiled nations’ bankers to assess what the escalating trade war with United States means. The announced tariffs on metals and other goods between the two nations implies that consumer prices are set to rise in the coming months. As the anticipated “loser” in any trade battle with the US, the very real prospect of a weaker Canadian dollar could also be the source of further inflationary pressure as buying foreign goods becomes relatively more expensive. Typically, a central bank will raise interest rates to keep inflation at a comfortable level. In the past, however, the Bank of Canada has recognized that certain types of inflation are not responsive to adjustments in its overnight rate and is likely to regard tariff- and currency-related price increases as a one-time “supply shock”. Furthermore, as a relatively small and open economy that derives 25 percent of its economic activity from exports to the U.S., Poloz must also contemplate a downgrade to near-term growth estimates and be less likely to raise rates at the margin as a result.

The conundrum faced by the U.S. Federal Reserve is somewhat more complicated. With unemployment at a 20 year low, the economy expanding at a nearly four percent annualized rate in the current quarter, more fiscal tailwinds on the way and some inflation measures already at the high end of its comfort zone, the Fed has signaled its intention to continue to gradually raise interest rates.

Although the Congress is divided on the evolving tariff policy, it has shown a proclivity to tax cuts and spending and could opt for more of the same to cushion any economic drag – particularly as they are a few months away from what promises to be a hotly-contested mid-term federal election.

Bond Market Response

Understandably, risk appetite in fixed income markets diminished as the second quarter drew to a close. Nevertheless, corporate bonds in North America managed to approximately return their running yield (meaning little change on bond prices). Government bonds themselves, after a mid-quarter test of the three percent yield level on US government ten-year bonds, retraced their path to settle down slightly for the quarter. We anticipate some more volatility while the trade representatives work begrudgingly towards compromises that are politically palatable in their respective countries. Risks to that view include a meaningful increase in inflation expectations amongst US consumers, which might prompt the Federal Reserve to raise rates more aggressively. There is also the potential for China state-owned entities to sell US treasury bonds in large quantities as a means of retaliating against tariff action and defending its own currency, which has come under pressure in recent weeks.

Stock Markets

In the stock markets, given our belief that heightened trade tensions are temporary and not a long term structural change to the markets, we believe that there will likely be some relief rallies as trade news improves.

Despite this view, we stand ready to react if things do continue to escalate. We would increase cash and sell calls into higher volatility in order to generate income. This speaks to good investment management in general. You develop a core thesis and manage to that expectation, however, you always acknowledge that things change and you need to be ready to quickly change your investment approach as the facts come in.

As far as individual names or sectors are concerned, TriDelta has a disciplined process that starts with equity screens that focus on selecting companies with attributes that outperform over time. The increase in tariffs can artificially impact earnings (positive or negative). As a result, when we look at key factors such as earnings estimate changes, growth in earnings and earnings based valuation metrics, more scrutiny is needed when evaluating a company to determine if recent increases or decreases in these key variables are affected by the addition or removal of tariffs.

These are the key items and thinking that is keeping us busy on the investment management front.

SUMMARY

The biggest megaphone doesn’t mean the most important news. Today, global trade wars and threats are the loudest stories, yet by studying the situation a little deeper, we believe that we can be a step ahead of these issues as they develop.

We hope that you have a great rest of the summer, and we thank you for your continued trust.

 

TriDelta Investment Management Committee

 

Cameron Winser

VP, Equities

Ted Rechtshaffen

President and CEO

Anton Tucker

Exec VP and Portfolio Manager

Lorne Zeiler

VP, Portfolio Manager and
Wealth Advisor

Q4 TriDelta Investment Review – From Great to OK – Moving from 2017 to 2018

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2017 – the year without a stock market correction

The Ebola Virus, Greek Crisis, Debt Ceiling, Refugee Crisis, Global Warming, Brexit, Trump, North Korea…there is always something scary for the media to report and make us nervous. Usually, these headlines frighten investment markets. For some reason, 2017 didn’t see this. In many major markets, there was not one decline of 5% during the year, and outside of Canada’s 6% stock market growth (which was among the weakest in the World), most stock markets saw returns well in excess of 12%.

Like a sports team that makes it through a season with no major injuries, 2017 was one of those years. To count on that happening again is to bet against history. The question isn’t so much what will cause greater volatility, as much as when. The next question is whether we should really fear volatility, especially if markets end up alright in the end?

How Did TriDelta do in 2017?

While those holding individual stocks and bonds would see bigger differences in portfolio returns, our TriDelta funds provide a good overall picture of our investment performance. These returns are before fees:

TriDelta Growth Equity Fund 13.3%
TriDelta Pension Equity Fund 12.5%
TriDelta High Income Balanced Fund 10.0% (the four year return on the fund is 9.2%)
TriDelta Fixed Income Fund 6.5% (this was among the top 1% of Canadian Bond Funds)

Our lower exposure to Canada helped the funds meaningfully outperform the TSX return of 6.0%.

The 6% yield on the High Income Balanced Fund, along with some stock exposure provided solid returns.

The outperformance on the Fixed Income Fund was largely due to strong active management. Our portfolio manager anticipated when to shift from shorter dated to longer dated bonds and from corporate to government exposure. Returns were also helped by some small Preferred Share exposure and opportunistic currency decisions.

Without further ado…

Our Investment View for 2018

Valuations are high, particularly in the U.S., which often indicates low or negative equity market returns, but we have searched for signs and signals of a market pullback, and we are not seeing it in the near term.

This doesn’t mean that it won’t happen during the course of the year, it most surely will. Yet, for the early part of 2018, we remain bullish on stocks.

We believe the following:

*Stocks will remain positive but returns will be better outside of North America. Geographically, the U.S. market appears to be further along the cycle than markets in Europe and Japan and much further along than Emerging Markets. This is based on higher valuations, Central Banks’ raising interest rates, and Consumer Confidence Indices.

As a result, we see Non-North American markets benefiting more in 2018, due to the same low interest rates and quantitative easing that helped the U.S. in 2017.

*Interest rates will not rise as much as expected. While it looks very likely that Canada will raise interest rates this month, and the U.S. will likely raise rates in March, both central banks will be cautious about further rate hikes. Of interest, if the market is expecting 3 rate hikes, and there are only 1 or 2, the bond market is likely to perform better than expected. In Europe and Emerging Markets, some decrease in quantitative easing is expected, but little in the way of actual rate increases will be seen in 2018.

*Marijuana stocks and cryptocurrencies will see major declines in 2018 (from January 9th). This is based on the simple fact that Marijuana stocks are at valuations today that are priced beyond perfection for most companies and cryptocurrencies have yet to see the wrath of the IRS or other major Government agencies. In addition, they use an enormous amount of energy and often originate from poorly regulated countries. Government actions will be coming very soon under the guise of regulatory stability and countering tax evasion, and we expect most cryptocurrencies to see a bubble burst during the year.

*The Canadian Dollar will continue to surprise, but should decrease overall. The difficulty in predicting currency is that there are many important moving parts globally and locally. In the case of Canada and the U.S., NAFTA, the price of Oil, interest rates, and US$ repatriation will all be key drivers of currency changes and will result in several shifts during the year. We believe that interest rates will start to play a lesser role in the currency than it has in the past few years, as the other factors mentioned increase in relative importance.

We expect that the lowering of U.S. Corporate tax rates will drive some Corporate M&A activity. This may result in more Head Offices moving back to the U.S. and shifting dollars and taxes along with it. This will be an important strength contributor for the U.S. dollar in 2018.

*Toronto and Vancouver Real Estate Markets will be more stable….but still grow. Despite changes to mortgage rules, China’s flow of foreign funds, and Canadians comfort with high debt, the main thing that will truly pull back residential house prices is meaningfully higher interest rates. Increases in rates and tighter mortgage rules will help to restrain rapid growth, but until we start to see 5%+ five year fixed mortgage rates (you can still find low 3% rates), we won’t see a significant pullback. We may be a couple of years away (or longer) from seeing those rates.

*Alternative Income Investments should boost returns in 2018. We continue to look at and occasionally add investment options that we believe will provide returns of 6% to 10% most years, have a very low volatility, and little connection to stock market returns. These investments are similar to those that are a key part of portfolios that make up the Canada Pension Plan, Ontario Teachers’ Pension Plan and the Harvard Endowment Plan.

Compared to a world of only stocks and bonds, these alternative investments can help lower overall portfolio risk, add to returns and generate income. The downside is that these are Private Investments, not fully available to all investors, and liquidity is lower than for public investments (stocks and bonds).

One TriDelta advantage is that due to our strength in this area we have been able to negotiate institutional rates, resulting in lower costs for our clients from certain providers.

*Preferred Shares will see more normalized returns but remain an important part of the mix. After a year which saw Preferred Shares gain 13%, we see more typical 4% to 7% returns out of this asset class in 2018. The advantages of Preferred Shares are the tax benefit of Canadian Dividends (many retirees and middle income Canadians pay a tax rate of 10% or less), as well as the ability to benefit from both rising and falling interest rates – depending on whether you own fixed rate or rate reset preferred shares. This flexibility provides an important distinction from bonds.

As a result of these beliefs, we enter 2018 with the following tactical asset allocation.

Based on these factors, we are increasing our exposure outside North America – both to Developed and Emerging Markets. We are decreasing our exposure to the U.S. market, and maintaining an underweight to Canadian markets.

SUMMARY

Early 2018 will likely see the continuation of the strong stock markets that we saw in 2017. At some point, however, we expect to see the U.S. market buckle a little. The catalyst could come from increased pressure of a mid-term U.S. election that may shift control of the House and Senate from Republican to Democrat hands. Traditionally, a Republican President and Democrat House and Senate have not been ideal for stock markets.

When technical market indicators suggest reducing risk, we will ease back on stock weightings. By maintaining strong portfolio diversification from Alternative Investments, Preferred Shares and active Bond management, we will aim to reduce volatility for clients. Our best guess is that most clients will see positive, but lower returns in 2018 than 2017.

Lower volatility, a long term plan, tax efficiency and financial peace of mind are the hallmarks of TriDelta.

We will do our best to continue to deliver that to our clients in 2018 and for the long term.

All the best to our readers for a healthy and prosperous year ahead.

TriDelta Investment Management Committee

 

Cameron Winser

VP, Equities

Edward Jong

VP, Fixed Income

Ted Rechtshaffen

President and CEO

Anton Tucker

Exec VP and Portfolio Manager

Lorne Zeiler

VP, Portfolio Manager and
Wealth Advisor

Q3 TriDelta Investment Review

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How did Markets do?

The 3rd Quarter report would have had a different feel if it was written in early September.  At that point Bonds were down, Canadian stocks were down, and with a strong rise in the Canadian dollar, US stocks were down in Canadian dollar terms.

Fortunately the quarter ended on September 30th, with Bonds recovering some of their losses and stock markets globally and locally all ending up stronger.

The Canadian dollar, however, had a negative impact on U.S. dollar based investment returns, as the Canadian dollar ended up 4% on the quarter (after posting a 2.8% gain in Q2).

The TSX was up 3.7%, but the U.S. S&P500 in Canadian dollar terms was actually down 0.1%.

Other Non-North American stock markets were strong, in particular Emerging Markets, which were up 8.3% (4.3% after the Canadian currency impact).

The FTSE Bond Universe (previously the DEX Bond Universe) was down 1.8% on the quarter, in large part based on sooner than expected interest rate hikes in Canada.

How did TriDelta do?

The third quarter of 2017 was a mixed bag.  Most growth oriented clients ended the quarter up in the area of 1% to 1.5%.  Most conservative clients ended the quarter closer to flat. 

The difference was twofold.  Growth stocks outperformed Value and more conservative clients had higher exposure to Bonds as well.  Currency negatively impacted all clients.

Our TriDelta Growth Fund had a 2.2% return on the quarter.

Our TriDelta Pension Fund was down 0.1% after a strong first half of the year.

Our TriDelta Fixed Income (Bond) Fund was down 0.2%, but that was in a quarter when the Bond Universe was down almost 2%.  Overall, while the Bond market has done poorly, TriDelta has meaningfully outperformed.

Our TriDelta High Income Balanced Fund was down 0.5%, largely due to its high Bond exposure.

Our Preferred share portfolio continued to do well, led by rate reset Preferred shares, with a 2.1% gain on the quarter.

Most of our Alternative Income strategies continued to do what they are supposed to do, which is provide consistent annual income and growth of 6% to 10% a year, regardless of stock or bond market performance.  This translated into a 1.5% to 2.5% return on the quarter.

Our current view of the world ahead
  1. Interest Rates – Canada has raised rates twice in Q3, and while some believe that another rate increase is coming by year end, we do not believe it will happen. To some degree these rate increases have come from greater confidence in Canada’s economy.  We believe there will not be another Canadian rate increase for several months for four reasons:
    1. 4%+ GDP Growth Numbers are unsustainable and will be coming down, removing some of the support for future rate hikes.
    2. NAFTA uncertainty will take some confidence away from the Bank of Canada.
    3. Canada is a real estate economy these days, and the Bank of Canada and others do not want to risk a real estate decline by raising rates too fast or too soon.
    4. Oil appears to be in oversupply at the moment, especially with the flexibility of fracking production. We believe this limits Canadian dollar upside through price increases.

    The implication of this is that a lack of rate increases should help Canadian bond returns to be stronger this quarter.  No further interest rate increase should also support high dividend yielding Utilities and REITS, but may be a little bit negative for Banks and Insurers. 

    We do expect the U.S. Fed will be raising rates again before year end, and likely again in the first quarter of 2018.  This will impact our U.S. bond positions and will likely have the opposite impact on certain stock sectors that we discussed above.

  2. Canadian Dollar – The Canadian dollar moved from 72.5 cents to 82.5 cents over a period of less than 4 months. In the past month, the Canadian dollar has declined back under 80 cents.

    As per the interest rate discussion, we believe the Canadian dollar will likely lose more ground this quarter.  Rising rates in the U.S. coupled with flat rates in Canada will be the biggest driver.

    NAFTA discussions that have pushed the Mexican peso meaningfully lower, have had little impact on the Canadian dollar thus far, but we believe it will have some negative impact.  However, these discussions could drag well into 2018.

    A last note relates to U.S. Tax changes.  If there is some headway on these Corporate Tax changes in the U.S., we believe it will lead to a sizable repatriation of U.S. Corporate dollars from foreign subsidiaries back to the United States which could translate into special dividends, share buybacks or acquisitions.  This will also strengthen the U.S. dollar.

  3. Stock Markets – We have recently lowered our cash weightings in favour of adding some money to Canadian and International Markets. While we believe that the U.S. economy and corporate earnings remain solid, we will not be adding significantly to a market that has high valuations and is showing signs of being in the latter stages of its long bull market run.

    Canada, Europe, Japan and Emerging Markets all have lower valuations and have certain sectors which are trading below their long term historical averages.  Despite expected increases in interest rates in the United States, we believe that rates will remain very low in these other markets, which will continue to provide a backdrop supportive of stocks.

  4. Preferred Shares – For the past 18 months, Canadian Preferred shares have been an excellent investment, particularly Rate Reset Preferred Shares that have gone up alongside higher bond yields. While we believe that Fixed Rate Preferred Shares may outperform in the period ahead, both Fixed Rate and Rate Reset Preferred Shares continue to provide strong tax preferred dividend yields of 4.5% to 5.5% from some of the strongest companies in Canada. 
  5. Alternative Investments – TriDelta continues to like these high yielding investments that are not correlated (don’t move up and down) with stock markets. Our expertise in this area is allowing us to be exposed to more innovative investments and in some cases receive lower fees than most others in the industry.  This should lead to higher returns for our clients.

    It is worth reminding clients that these investments are less liquid than stocks and bonds.  There is a possibility that during periods of market disruption these investments could be ‘gated’, meaning that withdrawals are restricted until they can be done without hurting the underlying investments.  This is the reason that, even though we are very positive on these types of investments, we like to maintain at least 70% of a portfolio in more liquid securities.

  6.  

    Spotlight – TriDelta’s Top Performing Fixed Income Fund

    Edward Jong, the Portfolio Manager for TriDelta’s Fixed Income Fund, likes to say that there is an ability to make money in Bonds in declining, flat or rising interest rate environments.

    He has worked through all scenarios in his 25 years managing Fixed Income investments, although it would be safe to say that declining interest rates have been the predominant direction during his career.

    Over the past year, Edward’s active approach has led to a 3.6% return.  On its own, that return isn’t overly exciting, but in comparison to the -3.1% return of the benchmark (BMO Aggregate Bond ETF), it is a 6.7% ‘beat’.  As a result, the fund ranked in the top 3% of all Canadian Fixed Income funds in the past year.

    Clients who transitioned to the fund on day 1 (May 2016), are up 8% over the past 17 months – during a time of rising interest rates.

    The fund takes an active approach and that can be seen in the various tools that are used to generate this performance.

    Two months ago the fund had:

    *A shorter duration than the index, meaning that it had a higher exposure to bonds with a short term to maturity, and a lower weighting in long term bonds.  This was done to reduce the funds exposure to the expected interest rate increases.

    *The fund had significant exposure to Corporate bonds and little to Government bonds.  This was reflective of our view that the overall economy was strong, and that the higher yields on Corporate bonds would come with a relatively low level of risk.

    *The fund had some exposure to higher yielding names – again reflecting a comfort in both the names and the overall economic environment.

    *We owned some Preferred shares in the fund as they provided higher yields and Rate Resets actually benefit when interest rates are increased.

    *We owned some U.S. $ bonds, but had a partial currency hedge in place to lessen our U.S. dollar exposure.

    Today, two areas of the fund have changed:

    *Due to our view that Canada will not be raising rates in the coming few months (while the market still believes this is a reasonable possibility), we have extended duration on the fund, essentially selling some short term bonds and replacing them with longer term bonds.

    *We have removed the U.S. dollar currency hedge, and are exposed to currency fluctuations on our U.S. holdings.  We believe that the Canadian dollar will decline, and it will improve our overall returns.

    The bottom line is that in this low yield environment with flat to rising interest rates, it is this active approach to the market that enables our clients to significantly outperform on the Fixed Income portion of their portfolios.

    Summary

    The current mood is steady as she goes, while keeping a firm hand on the tiller.

    The level of stock market volatility over much of the year has been ‘unseasonably’ low.  In fact, in the United States, the largest market decline this year at any point has been just 3%.  Almost every year you will see a decline at some point of at least 5% to 10%.  That is normal.  What we have seen this year is not.

    While we are confident in markets overall, we should also keep in mind that there will likely be a decline in stock markets of 5% to 10% in the months to come.  We should mentally prepare for it.  The good news is that when this happens, a diversified portfolio of Bonds, Alternative Investment Solutions, Preferred Shares and maybe cash, help protect your capital and lower your risk. 

    In cases, where your stock weightings have grown beyond their traditional weights, we will be working to rebalance portfolios by taking a little profit over the coming weeks.  Consider it to be our TriDelta version of the Squirrel busy putting some nuts away for the long winter.

    All the best and our continued appreciation for putting your trust in us.

    TriDelta Investment Management Committee

     

    Cameron Winser

    VP, Equities

    Edward Jong

    VP, Fixed Income

    Ted Rechtshaffen

    President and CEO

    Anton Tucker

    Exec VP and Portfolio Manager

    Lorne Zeiler

    VP, Portfolio Manager and
    Wealth Advisor

Q2 TriDelta Investment Review – What a Rising Interest Rate World Means

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Are Central Banks Starting to Hit the Brakes?

On July 12th, the Bank of Canada raised interest rates for the first time in seven years.  While the pace of interest rate increases in Canada is likely to be slow and very gradual (0.25% increases at a time), it does reflect a significant change for the investment landscape, as it seems most major central banks are either raising or at least considering raising interest rates.  Low and in some cases negative interest rates have been a central feature of the world economy since the financial crisis of 2008.  This change in stance by the central banks could have significant implications on the world economy, investments and in particular our clients’ investment portfolios.  In this quarterly report, in addition to a discussion of the past quarter, we will focus on what central banks do, why they matter and our views of the effects of the likely interest rate increases.

The Highlights – Generally Positive Performance in a Lacklustre to Negative Market

Following a strong first quarter, most world equity markets retreated from their highs during Q2.  While market watchers may have rejoiced over US TV networks talking about all-time highs for US stocks throughout Q2, the reality for most markets was quite different.  The TSX declined by 2.3%, Europe declined by 1.7% and the US market was up only 0.2% in Canadian dollar terms (it gained 2.9% in USD).   Most of the drag came in the final few weeks of June when central bankers globally took a more hawkish tone with the Bank of England and the European Central Bank (ECB) both talking of potentially higher rates and less accommodative monetary policy in the near future.  In particular, Mario Draghi of the ECB proclaimed that deflationary issues in the Eurozone were over.  The US Federal Reserve reconfirmed that it plans to continue gradually raising interest rates and discussed reducing its balance sheet.  The Bank of Canada, gave hints of raising rates as well (this was confirmed with a 0.25% rise on July 12 – the first increase in seven years).  The Canadian dollar rallied against other currencies, particularly the USD as a result. 

On a political front, the Centrist, Emmanuel Macron won the presidency in France and his party then won a majority in the legislature.  His victory has already resulted in substantial increases in consumer confidence in France and throughout Europe with expectations that he will usher in pro-business reforms, such as tax cuts and needed labour policy reform, as well as pushing for greater integration in Europe.  In the US, the Trump bump has diminished significantly with most analysts expecting the promised tax reform and cuts and / or infrastructure spending will not happen in 2017, if at all, as the Republican congress is not fully united and the President continues to be under pressure.  Geopolitical concerns remain, including North Korea’s launch of more advanced ICBM missiles and continued military campaigns in the Middle East, but none of these concerns seem to be impacting equity or fixed income markets for the time being.

TriDelta’s Results

Overall, most of our clients earned positive returns for the quarter as our Fixed Income pool was up 1.4%, preferred shares were positive and the Pension Equity Pool was up 1.6%.  The Fixed Income pool benefitted from holding bonds with shorter durations / terms to maturity and its 5% weight to rate reset preferred shares.  These securities typically go up in value when bond yields increase.  The TriDelta Pension Equity Pool gained from its overweight position in US health care and limited commodity exposure in Canada.  Our Growth Equity Pool and High Income Balanced Fund were both down about 0.5% with losses concentrated in June. 

Our short list of recommended alternative investment funds focused on private credit, factoring, and real estate benefitted client returns in Q2 averaging about 2% for the quarter. 

Actions that we had taken at the end of Q1, which we described in the last quarterly report, helped protect performance as we took a more conservative tone by:

  • adding to cash
  • reducing our US equity overweight position
  • reducing the duration / term to maturity of our bond portfolios.

For the quarter ahead we remain cautious, but opportunistic.  Bond yields may rise a bit further in the coming weeks, but this could give us an opportunity to buy longer dated bonds at much more attractive yields.  With interest rates likely increasing in the US, Canada, the UK and potentially in Europe, equity markets will be much more reliant on companies increasing their earnings to generate positive returns.  The good news is that earnings in the US are expected to grow by about 8% this quarter and by over 20% for the year; European equities are expecting similar earnings growth as well.  In Canada, earnings growth is expected to be closer to 30%, albeit from depressed levels due to the drop in commodity prices in 2015-2016. This is offset by the fact that equity valuations remain high, so strong earnings and beating analyst expectations will be necessary for the markets to move up in the short-term.  Consequently, the changes that we put in place at the end of Q1 are still in place going into Q3, as we look for better opportunities to deploy capital. 

Central Banks – What They Do?

Central Banks, such as the Bank of Canada, the US Federal Reserve and the European Central Bank, implement monetary policy to help control money supply.  Most central banks attempt to keep inflation within a target range by either restricting or increasing money supply, primarily by setting the overnight interest rate.   Some central banks, in particular, the US Federal Reserve, also have an agenda of using monetary policy to encourage full employment.  Since 2008, the role of central banks expanded enormously as they provided emergency funding, lowered interest rates to zero percent and in some cases negative yields to encourage banks to lend, consumers and corporations to borrow to help kick-start the global economy while limiting the economic damage from the financial crisis.  Central banks also attempted to stimulate the economy through quantitative easing, which is explicitly buying longer dated government, mortgage and in some cases corporate bonds in an attempt to lower longer-term interest rates and flatten the yield curve, e.g. if a corporation knows that rates will remain low for 5-10 years, they may be more interested in borrowing funds to expand production or for a longer-term project, which leads to more jobs, more consumer spending and economic growth. 

Why They Matter

These very low interest rates became the norm for nearly all major economies and they have had significant impacts on both the economy and the financial markets.   These lower rates helped support fixed income (bonds) and stock returns in a variety of ways.  

1) Bonds – when interest rates decline, longer dated bonds are more valuable because investors earn a much higher return relative to short-term cash investments.  As a result, more investors buy bonds, their prices go up while their yields decline.  As an example, a 10 year Government of Canada bond yielded approximately 3.7% in September 2008, prior to the financial crisis.  For the next 8 years yields declined so that the  10 year Government of Canada bond was yielding less than 1.0% by mid-year 2016.  These bonds are currently yielding about 1.8%.  Easy monetary policy is a large part of the reason that bond investors have earned average returns of 4.5-5.0% per annum since 2008. 

2) Corporate Earnings – easy monetary policy meant that it cost less for companies to borrow.  Consequently, smart CEOs and CFOs issued a lot more debt over the past 8 years to make accretive acquisitions and expand production as well as using the funds to buy back stock and increase dividends.  All of these measures have resulted in higher earnings per share for companies and higher returns for investors. 

3) Stock Valuations – investors constantly have to decide where to invest their money to earn the highest return relative to their risk tolerance.  The easy monetary policy over the past 8+ years has made stocks more attractive.  When your options are very low rates on GICs and bonds, investors have been putting more money into the stock market.  In fact, many investors earned higher levels of income by buying dividend paying stocks than they could on bonds and they had the opportunity for capital appreciation.  As a result, stock prices continued to climb from their lows in 2009, with the exception of a few corrections along the way, and stock valuations, the multiple that investors are willing to pay of a company’s projected cash flow and earnings, are presently at much higher than historical levels. 

What Impact Will Higher Interest Rates Have?

While most major economies are now increasing or at least no longer cutting interest rates, what is still to be determined is the pace and total level of these increases.   It is also uncertain as to what impact they will have on financial markets, but our thoughts are below:

1) Bonds – Higher interest rates typically are a negative for bond holders.  Bond prices drop as yields increase.  The offset has been that the credit spread, which is the additional yield you earn by owning a corporate bond vs. government bonds, tends to shrink, meaning that corporate bond holders earn higher returns.  Presently, credit spreads are tighter than average, so the upside from spread compression will be limited.  Our view is that passive bond investors should expect to earn the current yield of the bond index, which is approximately 2.5%, but with some volatility. 

We actively manage our bond portfolios, adjusting duration, sectors, credit quality, and taking advantage of special opportunities, such as preferred shares, to enhance yield and overall return.  While we presently have a cautious stance, we will take advantage of longer dated bonds when yields are at more attractive levels or investor sentiment changes, as well, we will continue to look out for opportunities to extract additional returns from high yield bonds, USD pay bonds and preferred shares.  We believe that through active management and being nimble, additional returns can be earned in this asset class.

2) Corporate Earnings – Economic growth accelerated globally in the past year, particularly with Europe, Japan and most Asian emerging markets advancing at much faster paces.  As a result, business and investor sentiment have been going up (although recently declining moderately in the US), purchasing manager indices have been rising and consumer spending has also increased.  Consequently, while companies will be paying more for their debt, higher revenues may more than offset any of these increases.  In addition, if operating margins continue to improve in Europe and Asia to levels similar to those enjoyed by US companies, corporate earnings could increase further. 

3) Stock Valuations – Valuations are likely to decline as a result of central banks tightening the money supply, but higher corporate earnings may be able to more than offset this decline.  In the US market for example, stocks currently trade at a price multiple of 21.5 times earnings, but with earnings expected to grow 20%+ over the next 12 months, the forward earnings multiple is closer to 17.6 times, which is much closer in line with the historical average of about 15-17 times earnings.  The TSX is currently trading at about 21 times earnings, but if the earnings forecast over the next 12 months is correct, then it is trading at less than 16 times those projected earnings, a level more consistent with its historical average.   Europe, Japan and emerging markets are presently trading at valuations similar to their historical averages, so if growth continues at its forecasted rate, they will actually be trading at a discount.  Therefore, even with higher interest rates, equity markets can still provide positive returns if earnings increase at the anticipated rates and could generate stronger returns if corporate earnings beat analyst expectations.

Consequently, changes in central bank policy are important for us to monitor and anticipating those changes plays a role in our asset allocation and security selection decisions. 

In closing, we think that the central bank slowly and gradually raising interest rates is warranted given the improving economic fundamentals.  Stock markets should be able to absorb these changes as projected economic growth should lead to solid corporate earnings growth.  There is likely to be some volatility along the way, especially if policy changes are misunderstood by the market.  Companies meeting or exceeding projected earnings will become even more important without the support of the accommodative monetary policy of the past eight years. 

We have positioned our portfolios defensively looking to take advantage of potential volatility, while protecting client capital.  We believe that our patience will ultimately be rewarded with some solid buying opportunities.

Wishing all our clients and their families a relaxing, warm and sunny summer.

  

TriDelta Investment Management Committee

 

Cameron Winser

VP, Equities

Edward Jong

VP, Fixed Income

Ted Rechtshaffen

President and CEO

Anton Tucker

Exec VP and Portfolio Manager

Lorne Zeiler

VP, Portfolio Manager and
Wealth Advisor

Q1 TriDelta Investment Review – What a great start to the year!

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The Highlights

After a great first quarter for our clients, stemming from high exposure to U.S. stocks, preferred shares, and high yield bonds, our investment direction is shifting slightly.

We’re witnessing some exhaustion in U.S. stocks, signs of some greater opportunity in Canada and Developed Markets outside of the United States.   We’re reducing our high yield bond weighting as those valuations have become expensive.

We remain positive on Alternative Investments and we are comfortable with Preferred Shares.  Our bond portfolios are leaning more defensive after strongly benefitting from a more aggressive approach over the past 6 months.

The net effect is that there are still some good investment opportunities heading into the summer, but for U.S. stocks at least, we are pulling back from our heavily overweight position.  The U.S. market has been leading the way globally over the past three years, and this has led to higher valuations in the U.S. than most other markets. 

In terms of Canadian stocks, we have been very underweight for a few quarters, and will likely be adding to our current positions this quarter.  This is based on surprisingly positive economic numbers, and a belief that there is some upside in energy related stocks from here.

We will also be increasing our cash holdings as a tactical defensive move – as we watch Trump try to get the support of the Republican Congress, tensions with Russia over Syria and North Korea, and the latest EU developments.

In the quarter, the TSX was up 1.7%, while the U.S., Europe and Japan were up 4%+ in Canadian dollars.

Preferred shares were very strong, with the TSX Preferred Share index up over 7%.

Canadian bonds were up just over 1%, although High Yield Bonds were up over 2%.

The key positive fundamental trend is global reflation and better growth, particularly in Europe and Emerging Markets.  Overall, this should be positive for stocks.

The key political issue is whether the U.S. can drive ahead with meaningfully lower corporate tax rates and infrastructure spending.  If they can make this a reality in the coming months, it will provide a further lift to U.S. stocks.  Our fear is that there are enough signs to suggest that this expected change will take longer to come to life (and could be more watered down) than the market had hoped.

How did TriDelta do?

Q1 2017 was one of our best ever.  Most clients ended the quarter up between 3% and 5%.  Those with higher returns tended to have more exposure to Preferred Shares, as our portfolio was up over 10%, and were also invested in our Pension portfolios which had stock returns of over 6%.

Our TriDelta Growth Fund had a healthy 4% return on the quarter.

While the Canadian bond universe was up only 1%, our TriDelta Fixed Income Fund was up 3%.

The TriDelta High Income Balanced fund continued its strong result – the Fund has had 14 consecutive positive months.  It was up over 4% on the quarter, and up over 20% over the past year.  This 5 star rated fund (Globe Fund), is meant to provide a much higher yield than bonds (currently a 5.1% yield), and stock like returns, but with lower volatility than stocks.  The fund has now moved from monthly to daily pricing.  This means that it can be purchased or sold on any market day, greatly enhancing liquidity.

Most of our Alternative Income strategies continued to do what they are supposed to do, which is provide consistent annual income and growth of 6% to 10% a year.  Unfortunately, in a quarter as strong as Q1, those 1.5% to 2.5% returns on Alternative Income felt underwhelming. 

Overall, it was a great start to 2017.

What investment shifts are coming and why?

At the risk of oversimplifying things, here is the synopsis:

*The U.S. equity market has been too good of late, and with higher than average valuations, we believe there is less upside from here, especially if corporate tax changes don’t come soon or as fully as the market expects.  We accurately timed an overweight position in the U.S., but will now be trimming our positions back to a more neutral or slightly under neutral weighting.

*The Canadian equity market has been underperforming most other markets over the past 9 months, and we have been highly underweight Canada vs. our benchmark.  We will now be increasing our weight a little in Canada, mostly driven off better than expected economic numbers.  While we are aware of the residential real estate risks, until mortgage rates meaningfully rise we believe the general rise in real estate values will continue.  We also believe that oil prices seem range bound in the $50 to $60 zone, but have some room and support to rise within that range, from today’s prices.

*We will be slightly increasing our weighting in developed global markets.  This is largely a shift from the U.S. where stock valuations are much higher than long term averages, to markets that are currently trading at or a little below long term averages. 

*An eventual rate hike from the Bank of Canada is unavoidable if the Canadian economy continues to improve, but for now, the lack of any move by the Bank of Canada will keep short term bond yields largely unchanged.

*For fixed income, we are keeping our powder a little dry with lower bond durations/terms to maturity.  We are doing this as we see longer term bond yields increasing from current levels. 

With yields starting off near the lower portion of the trading range, our defensive duration posture will allow for a more opportunistic investment in the longer end of the yield curve once interest rates work its way higher. Ultimately, the force of Canada’s gradually improving economic situation will convince the Bank of Canada Governor that an eventual rate hike is unavoidable.

*We will likely boost cash positions tactically for a short period as we take some profits and wait out a couple of areas of concern.  As discussed, one area is the ability or inability of Trump to push through major Corporate Tax cuts.  The expected cuts have been a meaningful driver of U.S. market growth, and any delays will be seen negatively by the markets.  Another concern is Syria and events in North Korea and the impact on U.S.-Russian Relations.  A final worry relates to E.U. solidarity or lack thereof, which will be tested in national elections.

*Canadian Dollar/U.S. Dollar – We have been seeing weakness in the Canadian dollar for quite some time, and while it has declined a little, it has mostly maintained its value of late.  While we do see room for declines if NAFTA changes hurt Canadian trade, we also see some economic strength in Canada, strength on the oil front and a lack of willingness to restrict foreign buyers of real estate.  As a result, our current view is a relatively range bound Canada/US dollar trade.

 

Summary

The news requires a headline every day, but how many of those headlines should really change the management of your investments?  Mostly we focus on earnings, valuations, and interest rates to drive the portfolio decisions.  This quarter sees some changes in our thinking – but likely the only headline that played into our investment thinking was Trump’s inability to pass a new Health Care bill. 

The best ways to build long term wealth and income are buying quality assets at reasonable prices, diversifying your holdings, being patient when valuations are not in your favour, and having the fortitude to switch when prices become more attractive.

We hope everyone will be able to fully enjoy the splendors of spring.

  

TriDelta Investment Management Committee

 

Cameron Winser

VP, Equities

Edward Jong

VP, Fixed Income

Ted Rechtshaffen

President and CEO

Anton Tucker

Exec VP and Portfolio Manager

Lorne Zeiler

VP, Portfolio Manager and
Wealth Advisor

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