investment portfolio growth

Solid Returns & Low Volatility: Alitis is Different from the Rest

Alitis Investment Counsel is a boutique wealth management firm based out of beautiful Vancouver Island, that’s dedicated to doing things a little differently.

stack of coins with wooden house

Alitis – What is Private Debt?

At Alitis we include a variety of asset classes within a client’s portfolio with the goal of reducing risk to provide better risk-adjusted returns.

Ryan Patterson

Ryan Patterson Joins the Alitis Team

Alitis is excited to welcome Ryan Patterson to our team.

As the Senior Real Estate Strategist, Ryan’s focus is on the analysis and review of potential real estate investments as well as the ongoing monitoring of current holdings. As Alitis continues to grow our real estate division and expand our portfolio, Ryan will continue to work with our current as well as potential future partners to maintain a successful long term real estate strategy.

Ryan joins the team at Alitis from an appraisal background, having spent the last five and a half years as an associate appraiser specializing in market rental analysis, feasibility studies, multi-family and commercial real estate valuations, including portfolio assessment reviews for large holdings of private and public organizations. Prior to being an associate appraiser, Ryan had spent his career in the business world, working on building, growing and restructuring businesses in a variety of different industries.

Ryan has completed his Bachelor of Commerce (B.Comm) degree with a focus on International Business as well as post-secondary courses in Real Estate through UBC’s Sauder School of Business. Ryan was born and raised in Victoria, B.C., and though he has lived all over North America, he has always called Vancouver Island home.

We would love to hear from you – fill out the form below to learn more about the real estate strategy offered at Alitis.

Send us mail

 

Disclaimers and Disclosures – Alitis Investment Counsel Inc. (“Alitis”)

This is provided for informational purposes only and does not constitute an offer or solicitation to buy or sell any securities discussed herein to anyone in any jurisdiction where such offer or solicitation would be prohibited.

Opinions expressed should not be relied upon as investment advice. This does not take into account the investment objectives, risk tolerance, financial situation or specific needs of any particular person. Each person’s investment objectives, risk tolerance, financial situation and specific needs should be evaluated before making any investment decision. This may contain economic analysis and opinions, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. All opinions expressed herein constitute judgements as of the date of this post and are subject to change without notice.

© 2022 Alitis Investment Counsel Inc. All rights reserved. Unauthorized use, distribution, duplication or disclosure, in whole or in part, or in any form or manner, without the prior written permission of Alitis is prohibited by law.

stock portfolio progress

Alitis Investment Update: Inflation, Rising Interest Rates, Recession?

 

Alitis Income & Growth Pool: One of the Top Funds in Canada in 2022

At Alitis, we stay focused on our investment strategy and not worry about how everyone else is doing. Our diverse asset model and investment approach tends to perform well when traditional funds are struggling, so we thought it would be interesting to show you how our largest fund, the Alitis Income & Growth Pool, has fared relative to other balanced funds so far this year. We were very pleased with the results.

The foundation of our investment approach is to reduce risk by utilizing a variety of different of asset classes and alternative investments. The Alitis Income & Growth Pool utilizes all the asset classes and approaches available at Alitis, including stocks, bonds, private equity, private debt, real estate, mortgage investments, private infrastructure, and various hedging strategies.

This fund a good proxy for how well our approach is doing relative to other investments in Canada. Performance to the end of April for the Alitis Income & Growth Pool was:

Year-to-Date 1 Year 3 Years 5 Years 10 Years Since Inception
Class D Units 0.04% 5.13% 7.32% 6.90% 6.69% 6.49%
Class E Units -0.34% 3.94% 6.16% 5.72% 5.52% 5.33%

The Year-to-Date returns are particularly noteworthy. While these returns may not appear to be the greatest, compared to the broader investment landscape in Canada, these returns are extremely good! The Alitis Income & Growth Pool is categorized as “Global Neutral Balanced” and, according to Fundata Canada, there were 1470 funds (including different classes of the same fund) in this category with year-to-date returns. Within this category over this period, the Alitis Income & Growth Pool ranked as follows:

  • Class D Units: #23 (Top 1%)
  • Class E Units: #34 (Top 2%)

If we assess the fund against all the categories with “Balanced” in the name1 , we find that there are 11,024 funds, with the Alitis Income & Growth Pool ranked as follows:

  • Class D Units: #63 (Top 1%)
  • Class E Units: #102 (Top 1%)

Obviously, it has been a challenge to generate positive returns in these unprecedented macroeconomic conditions since only 74 of those 11,024 balanced funds have had a positive return this year.

Inflation

Inflation, and its impact throughout the economy, is the primary concern in the financial world. This fear is likely heightened because many of us have never experienced inflation as it has been muted for so long. The COVID lockdowns accompanied by massive government stimulus to keep money in people’s hands created an environment where less was being produced while more money was flowing around. This excess money has led to demand exceeding supply, resulting in the current inflationary environment.

Inflation Rates Over the Last 5 Years (% change year over year)2

inflation rates last 5 years

The current inflation rates for Canada and the US are substantially higher than they were before COVID which has led to significant turmoil in the stock and bond markets so far this year. Now, governments are starting to withdraw the COVID stimulus, and the economy is returning to normal so it is likely that the imbalances which caused this surge in inflation will fade away. Perhaps the recent decline in annual inflation in the US (see chart above) will mark the turning point.

Looking to the future, the market in the US is presently expecting inflation over the next 10 years to be in the 2.5% to 3.0% range. These expectations, which change over time as information becomes available, are calculated by taking the difference in yield between a regular 10-year US Government Bond and a 10-year US Government Inflation Protected Bond.

Expected US Inflation Over the Next 10 Years3

US inflation next 10 years

The market is expecting US inflation to moderate from its current rate for the expectations shown in this chart to come to fruition. However, it does appear that inflation is likely to remain somewhat higher than it was pre-pandemic.

Will There be a Recession?

There is a high likelihood of a recession happening in the next year or two. The high levels of inflation combined with the ending of government stimulus will put a damper on economies around the world. However, different countries will react differently. Canada has an economy with far more exposure to oil, gas, and other resources, which tend to fare well in an inflationary environment. There is a good chance that Canada may fare better through a recession compared to other countries.

The Canadian economy is doing quite well currently, so a recession may cool it off and bring it back to a level that we are used to. For example, unemployment in Canada – currently at 5.3% – is “the lowest rate on record since comparable data became available in 1976” according to Statistics Canada4.

From an investment perspective, the likelihood of a recession (with some inflation for a while) will change the outlook for different asset classes, as outlined below:

Fixed Income

The first months of 2022 have simply been awful for fixed income. Bonds do not like rising inflation, nor do they like rising interest rates, and both have been present during this time. However, one needs to look forward and, as mentioned above, it does appear that inflation may be peaking and inflation expectations stabilizing. This would be a much better environment for bonds. If a recession does arise, that would be even better for bonds as the existing pressures related to potential inflation and increases in interest rates would ease.

One sign that is pointing to a normalization of the fixed income market is that for the first time since COVID struck, the yield on 10-year US Government Bonds is greater than the expected rate of inflation over the next ten years. That is, bond investors now expect to make money after inflation which should take some of the pressure off further increases in yields.

US 10 Year Bond Yield vs Expected Inflation5

10 year bond yield vs. expected inflation

Overall, we expect the outlook for fixed income to be reasonable over the upcoming year, and certainly much better than what has been experienced so far in 2022.

Mortgages

We expect private mortgage investments to continue to perform well in the current environment. Inflation and higher interest rates will have limited impact on the mortgage portfolio as it has a short-term to maturity. This allows the capital to have a quicker turnaround and be lent at a higher rate upon maturity. Additionally, a number of the underlying mortgages are floating rate, which means that each time the Bank of Canada raises interest rates, the rate earned increases.

Should there be a recession, banks would likely tighten their lending standards. If this occurs, more borrowers would be looking for financing from non-traditional lenders. As such, the mortgage lenders we deal with should be able to get better quality borrowers or have the ability to charge higher rates or possibly both. A good thing for our mortgage investments!

Publicly-traded mortgage investments are looking to be another bright spot. Throughout last year to earlier in 2022, we had shifted away from publicly-traded mortgages as their prices increased and yields decreased. The recent troubles in the stock markets have added to the headwinds these investments face with the price being pushed down on a few. As the price goes down, the yield goes up which makes them attractive and as such, we will be monitoring price movements for attractive entry points. This trading strategy for publicly-traded mortgages investments has added considerable value over the years.

Real Estate

Real estate has obviously been a great asset class to have been invested in over the last number of years and we expect it to continue to produce good returns, but at a lower rate. The current economic situation provides some headwinds for real estate but also creates some opportunities:

The Headwinds

  • Inflation: Inflation affects real estate by raising the cost of operating existing buildings as well as raising the cost of materials in constructing new buildings. If the rents charged keep up with inflation, then property values should remain stable as higher net operating income is likely offset by rising capitalization rates.
  • Higher interest rates: Interest charges on mortgages is usually the largest single cost when owning a property. With interest rates having risen, and perhaps rising further, the cost of borrowing will increase as mortgages are renewed or properties are financed. While this does not directly affect property valuation, it will reduce the cash flow generated which may impact investors.

The Opportunities

  • Immigration: On the positive side, 401,000 immigrants came to Canada in 20216 and the Government of Canada is expected to increase immigration levels over the next few years, as outlined below:

Canadian immigration targets

Canada’s population is currently about 38.5 million8, so these new immigrants would increase our country’s population by about 3.5%. These people will need to be housed (and work) somewhere, which bodes well for the real estate market in general.

  • Price of Real Estate: High real estate costs do not change the demand for real estate. Rather, it simply shifts the demand to different types of real estate. People will gravitate towards the type of real estate they can afford, which may be towards renting or simply buying a smaller property such as a condo or townhouse.  Overall, we expect that the real estate sectors in which we primarily invest (multi-family apartments, for-sale condo/townhouses) to fare well in this environment as that is likely where new immigrants and new home buyers will gravitate. The headwinds noted above will have the effect of lowering potential returns, but we expect the real estate we target to perform solidly.

Stocks

The decline in some stock markets this year has garnered much media attention. However, most significant declines have occurred in tech-oriented companies that were lauded only a year ago as having substantial growth potential over the long term. Unfortunately, interest rates have risen, there is still a war in Ukraine, and the economic outlook has dimmed. This new reality has changed the growth prospects for these tech-oriented companies with their prices being knocked down substantially this year.

The chart below shows how the MSCI World Index, representing the developed world, has performed so far in 2022, along with the growth and value sides of this index. The MSCI World Growth Index is comprised of those companies that exhibit higher Price/Earnings ratios, lower dividend payouts, etc. That is, mostly the expensive, tech-oriented companies mentioned above. The MSCI World Value Index is the opposite side of the market – those that have higher dividends and lower Price/Earnings ratios – that are much cheaper to buy. As can be seen in the chart, the expensive growth stocks have performed dismally whereas the cheaper value stocks, while still down, have fared much better:

MSCI World Indices by Style (US$)9

MSCI world indices by style

Thankfully, Alitis has avoided much of this pain as we have focused on those cheaper, value stocks rather than on the expensive, growth stocks. The valuation of these growth companies has not made much sense for some time, so our strategy has been to be heavily biased towards the value side of the market, to invest in private equity in order to avoid market fluctuations, and to utilize some hedged strategies to mitigate market volatility.

As for the future, it is likely that the current challenging stock market environment will continue for some time. At Alitis, we will follow our strategy of focusing on value, private equity, and hedged investments while trying to avoid those stocks that could be under further downward pressure as expected economic conditions get priced into the market.

Summary

Inflation has created significant changes in our economic environment due the necessary policies undertaken during the pandemic. These changes have spilled into the investment world in the form of higher interest rates, likely tighter margins, and lower growth rates in the future. An economic recession may also be in the cards.

It is in times like these when diversification matters most, and at Alitis, our use of different asset types – real estate, mortgage, private debt, private equity, hedging strategies, etc. – has enabled our clients’ portfolios to perform relatively well so far in 2022. The performance of the Alitis Income & Growth Pool compared to other balanced funds provides a testament to the value of our investment philosophy. The economic outlook is not as rosy as it was a year ago, but Alitis’ diversified approach should help investors to win in the long-term by minimizing substantial losses in the short-term.


Notes

1 Fund categories included are Canadian Fixed Income Balanced, Canadian Neutral Balanced, Canadian Equity Balanced, Global Fixed Income Balanced, Global Neutral Balanced, Global Equity Balanced, Tactical Balanced. Funds include different classes of the same fund according to data from Fundata Canada (https://www.fundata.com/)

2 US inflation from Federal Reserve Economic Data (https://fred.stlouisfed.org/series/CPIAUCSL), Canadian inflations from Statistics Canada (https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1810000401)

3 US expected 10 year inflation from Federal Reserve Economic Data (https://fred.stlouisfed.org/series/T10YIE)

4 Labour Force Survey from Statistics Canada (https://www150.statcan.gc.ca/n1/daily-quotidien/220408/dq220408a-eng.htm)

5 US 10-Year Government Bond rates from Federal Reserve Economic Data (https://fred.stlouisfed.org/series/DGS10)

6 2021 Immigration to Canada from news release from Immigration, Refugees and Citizenship Canada (https://www.canada.ca/en/immigration-refugees-citizenship/news/2021/12/canada-welcomes-the-most-immigrants-in-a-single-year-in-its-history.html)

7 Immigration targets from Immigration Levels Plan from Immigration, Refugees and Citizenship Canada (https://www.canada.ca/en/immigration-refugees-citizenship/news/notices/supplementary-immigration-levels-2022-2024.html)

8 Population estimate from Statistics Canada (https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1710000901)

9 Growth & Value indices from MSCI (https://www.msci.com/end-of-day-data-search)

 

Disclaimer and Disclosures – Alitis Investment Counsel Inc. (“Alitis”)

This article is provided for informational purposes only and does not constitute an offer or solicitation to buy or sell any securities discussed herein to anyone in any jurisdiction where such offer or solicitation would be prohibited.

Opinions expressed in this article should not be relied upon as investment advice. This article does not take into account the investment objectives, risk tolerance, financial situation or specific needs of any particular person. Each person’s investment objectives, risk tolerance, financial situation and specific needs should be evaluated before making any investment decision. This article may contain economic analysis and opinions, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. All opinions expressed herein constitute judgements as of the date of this article and are subject to change without notice.

Unless otherwise noted, the indicated rates of return are the historical annual compounded returns for the period indicated, including changes in security value and the reinvestment of all distributions and do not take into account income taxes payable by any securityholder that would have reduced returns. The investments are not guaranteed; their values change frequently and past performance may not be repeated.  Unless otherwise noted, risk refers to the annualized standard deviation of returns for the period indicated.

The information contained in this article has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. Alitis assumes no duty to update any information or opinion contained in this article.

© 2022 Alitis Investment Counsel Inc. All rights reserved. Unauthorized use, distribution, duplication or disclosure, in whole or in part, or in any form or manner, without the prior written permission of Alitis is prohibited by law.

 

Emily Hofmann interview

Meet Emily Hofmann

Emily Hofmann is a Portfolio Manager at Alitis Investment Counsel who excels at problem solving. She loves boating, too!

Community Spotlight – Campbell River Salmon Foundation

Community Spotlight – Campbell River Salmon Foundation

Campbell River, sometimes referred to as the “Salmon Capital of the World”, is one of the top recreational fishing locations on the West Coast.

The Campbell River Salmon Foundation is an important community organization that provides funding for salmon enhancement projects in the region to enhance the local fish stocks which not only supports the environment, but also the local economy.

As with many not-for-profit organizations, the COVID-19 pandemic has significantly impacted the Campbell River Salmon Foundation’s fundraising efforts.

Alitis recently interviewed Kent Moeller the President and one of the founding Directors of the CRSF to find out more about the organization and how the community can support them as we make our way out of the pandemic.

How long have you been involved with the CRSF, and what made it a good fit for you?

The CRSF was incorporated on June 22, 2007, and I was one of the founding Directors.  Growing up in Campbell River, I was an avid young fisherman.  Now, in my professional life, I also see the economic benefits of salmon in our community.  I see the CRSF as my chance to give back not only to salmon and the environment but to the town that has given me so much.

Why is the CRSF important to the Campbell River area and surrounding communities?

CRSF is focused on salmon enhancement and education and is solely focused on our local area.  Our territory of interest ranges from the Oyster River in the south to the Salmon River in the north as well as the adjacent mainland coast.  It is vitally important to us that money raised in our community is spent in our community.

What types of projects does the CRSF fund?

We fund various causes relating to salmon enhancement including the restoration of spawning channels, stream biodiversity and health, estuary enhancement, scientific research, and public education.

Is there a particular project that stands out to you during your time at CRSF? If so, what was it, and what made it memorable for you?

We have expanded access up the Quinsam River allowing salmon access to spawning and rearing grounds.  We have focused and pressured BC Hydro to remove their Salmon River Diversion Dam which has allowed more than 10 km of fish rearing habitat to become accessible.  We have removed an old derelict vessel that washed ashore on sensitive habitat.

How has COVID-19 impacted your organization?

COVID-19 has had a devastating impact on our annual fundraiser.  We have been forced to cancel our annual gala dinner/auction which is held the third Saturday in March every year for the last three years.  The dinner nets us over $100,000 each year so the loss of this event has limited our ability to fund salmon enhancement projects.

How can community members get involved with the CRSF?

We are always looking for qualified Board members and community members to volunteer at our annual Gala dinner.  We are also hopeful that community members can help us identify salmon enhancement opportunities within our community.  And, as always, people can donate to us via our website.

If you would like to learn more about the Campbell River Salmon Foundation, or donate to one of their critically important projects, check out their website: Campbell River Salmon Foundation

 

Disclaimer and Disclosures – Alitis Investment Counsel Inc. (“Alitis”)

This article is provided for informational purposes only and does not constitute an offer or solicitation to buy or sell any securities discussed herein to anyone in any jurisdiction where such offer or solicitation would be prohibited.

Opinions expressed in this article should not be relied upon as investment advice. This article does not take into account the investment objectives, risk tolerance, financial situation or specific needs of any particular person. Each person’s investment objectives, risk tolerance, financial situation and specific needs should be evaluated before making any investment decision. This article may contain economic analysis and opinions, including future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. All opinions expressed herein constitute judgements as of the date of this article and are subject to change without notice.

The information contained in this article has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. Alitis assumes no duty to update any information or opinion contained in this article.

© 2022 Alitis Investment Counsel Inc. All rights reserved. Unauthorized use, distribution, duplication or disclosure, in whole or in part, or in any form or manner, without the prior written permission of Alitis is prohibited by law.

Todd Blaseckie

Meet Todd Blaseckie

Todd is a Portfolio Manager at Alitis Investment Counsel with over 20 years’ experience in the financial services industry.

Investment Update: War in Ukraine and its Implications

Monday, March 7, 2022

The Big Picture

As everyone is likely aware, war broke out 12 days ago when Russia invaded Ukraine.  This aggression is the latest Russian action against Ukraine – something that started in 2014 with the annexation of Crimea and its support of an independence movement in Eastern Ukraine.  However, this current incursion, and in particular the attack on a nuclear power plant last week, have dramatically changed not only the investment landscape, but also the landscape for the world in general.

We received a rather uncomfortable report from BCA Research on Friday that provided their take on the events in Ukraine.  BCA may be pessimistic, but they assigned a small chance of this conflict escalating to a much broader and more dangerous war.  However, they also stated that this was irrelevant to how one’s portfolio should be constructed because if a nuclear bomb is headed your way, the make-up of your portfolio does not really matter.  Very distressing commentary, but also calming in a way as it guides you towards concerning yourself with the things you can control rather than worrying about the things you cannot.  In BCA’s assessment, they view stocks as being the place to be over the next year, but there will be some rough patches over the next 3 months.  (Source: BCA Research, Rising Risk Of A Nuclear Apocalypse, March 4, 2022)

Impact on the Financial Markets

If we ignore the unthinkable outlined above and focus on the financial perspective, the reaction since the invasion has been a shift to investments and locations that are viewed as being safe.  At a very high level, this means:

  • Moves to safer currencies: In times of crisis, there is generally a move to safer currencies such as the US Dollar, Japanese Yen, and Swiss Franc.  On the day of the invasion, these safer currencies performed the best.  Interestingly, the Australian and Canadian dollars have held up well too; distance from the war and quantity of natural resources are probably factors in this performance.  Obviously, the European currencies have done relatively poorly.

Change in Currency Values Relative to US Dollar

(Source: Pacific Exchange Rate Service, fx.sauder.ubc.ca)

  • Moves to safer assets: Not all investments have the same risks, so there has been a shift from risky assets to safer ones.  Bonds have generally done well as investors flock to snap them up. This is readily apparent in the yield on 10-year US Government Treasury Bonds where the yield dropped from about 1.98% just before the invasion to about 1.75% presently. As yields drop, prices go up.  Stocks have generally dropped although some markets have done okay; others, principally in Europe, have done poorly.

US 10-Year Treasury Bond Yield Dropped

(Source: Yahoo Finance, finance.yahoo.com, symbol = ^TNX)

  • Moves to safer locations: Obviously, being close to the Ukraine at this time is not good, so investments closest to the fighting will have the biggest risk and the biggest losses as money moves to locations farther away.

From an investment/economic perspective, the big unknown is the impact that all the sanctions that have been announced will have on investments.  Given that Russia is a large exporter of oil, natural gas, wheat, and other commodities, it is almost certain that there will be ripple effect felt around the world.  Canada is also a large exporter of these same commodities, so we will likely be somewhat shielded. On the other hand, countries that need to import these items will be much more exposed to negative effects.  Obviously, Europe is the most affected as it is the closest to Russia and has the most economic ties to it.

Impact on the Alitis Pools

Alitis’ diversified approach to investing tends to work well in these situations.  During the last major event – the initial Covid drop in 2020 – there were some declines in some investments but overall, the drawdown was limited.  This limited decline was mostly due to the diversification we employed because of the asset classes we used.  The following sections provide an overview of the expected impact on the major asset classes we use in constructing portfolios:

Real Estate

With respect to real estate, we expect events in the Ukraine to have little or no impact.  The vast majority of real estate exposure is in private deals that have no direct connection to the Ukraine or public markets.  At present, the only publicly-traded real estate holding is Dream Impact Trust (MPCT.UN) which represented the following exposures at the end of February:

  Dream Impact Trust Exposure in Alitis Pools
Alitis Private REIT 0.59%
Alitis Private Real Estate LP 0.27%
Alitis Income & Growth Pool 3.59%
Alitis Strategic Income Pool 1.44%
Alitis Growth Pool 2.49%

Mortgages

Our mortgages investments are in a similar position as Alitis’ real estate holdings with most of the assets being private and in Canada.  Current events are expected to have little or no impact on these investments.  There is some exposure to US private mortgages but, as with Canada, events are not expected have any material impact.  Some publicly-traded mortgage investments are held, but their reaction has been mixed since the invasion – one up, one down, and one about the same.  It would appear that the publicly-traded mortgage investments are generally indifferent to the situation and they still generate a nice yield.

Publicly-Traded Mortgage Investments, Returns and Yield (as of March 4, 2022)

  Return Since February 23rd Return Year-to-Date Yield
MCAN (MKP) +4.09% +12.19% 7.5%
Atrium (AI) -0.28% +0.50% 6.3%
Timbercreek (TF) -1.96% -1.04% 7.2%

(Source: Yahoo Finance, finance.yahoo.com)

Fixed Income

Fixed income has had a tough time over the last year as inflation has increased and interest rates have risen.  However in times of stress, fixed income is generally a safe haven and does well, and that is the case with events over the last week. As mentioned above, yields on US 10-Year Treasuries have dropped which has caused most bond prices to increase.  This is the reason why we like to have traditional fixed income investments in portfolios – when adverse events happen, bonds do well and provide protection for your portfolio.  If the situation in Ukraine persists, we expect bonds to continue to provide that safe haven for your portfolio.

With respect to the private debt investments we use in the Alitis Pools, they deal principally in Canada with some exposure to the US.  As such, it is not expected that these will have any material issues due to the war in Ukraine.

Equities

Obviously, publicly-traded equities are the biggest concern, as they should be when wars happen.  Generally speaking, equities have performed as follows since the invasion started:

  • European markets have fared poorly as, obviously, they are closest to the action and will be most impacted.
  • The US, Canada, and Australia have all gone up.
  • Emerging markets away from Ukraine have been mixed but have generally done okay.

As of Friday’s close (March 4, 2022), here is how various markets around the world have performed using country-specific ETFs as a proxy:

Performance of Selected Country-Specific ETFs (in US dollars)

  Return Since February 23rd Return Year-to-Date
Canada (EWC) 3.43% 0.34%
Australia (EWA) 3.30% -0.28%
United States (SPY) 2.41% -9.02%
Brazil (EWZ) 2.36% 22.19%
Mexico (EWW) -0.37% -3.00%
Japan (EWJ) -2.03% -8.60%
Korea (EWY) -2.44% -10.00%
Hong Kong (EWH) -5.43% -4.70%
United Kingdom (EWU) -8.04% -5.37%
Sweden (EWD) -10.31% -25.81%
Germany (EWG) -13.67% -21.02%
Poland (EPOL) -15.12% -23.50%
Russia (RSX) -70.29% -78.81%

(Source: Yahoo Finance, finance.yahoo.com)

Overall, Russia has obviously fared the worst with other European countries also doing poorly. (Note: after market close on Friday, trading in RSX was halted making it is essentially worthless now) It is interesting to note that four countries – Canada, US, Australia, and Brazil – have gone up over since the war started.  Our exposure to the continental European countries (Germany, Sweden, Poland) closest to Russia was a concern given the situation, so the allocation to these countries was cut by about 50% on February 15th, with the proceeds left in cash.

As for the private equity and infrastructure investments utilized by Alitis, it is expected that the impact will be minimal as, on aggregate, most of the underlying investments are in Canada and the US.

Summary

The situation in Ukraine is horrible to watch and we truly hope that this madness ends quickly.  We don’t believe that a doomsday scenario will ever come close to unfolding but unfortunately, we are likely to hear more about these potential outcomes as sensationalized news gets views and drives ratings.  All this is a regrettable byproduct of the age in which we live.

From an investment perspective, however, the Alitis Pools are positioned to ride through the turbulence relatively well.  Alitis has always focused on risk management and the use of alternative asset classes which, in our opinion, should have better risk/return outcomes. These private asset classes have allowed us to increase the diversification options available for your portfolio and should work well even in these truly uncertain times.

Disclaimer and Disclosures – Alitis Investment Counsel Inc. (“Alitis”)

This article is provided for informational purposes only and does not constitute an offer or solicitation to buy or sell any securities discussed herein to anyone in any jurisdiction where such offer or solicitation would be prohibited.

Opinions expressed in this article should not be relied upon as investment advice. This article does not take into account the investment objectives, risk tolerance, financial situation or specific needs of any particular person. Each person’s investment objectives, risk tolerance, financial situation and specific needs should be evaluated before making any investment decision. This article may contain economic analysis and opinions, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. All opinions expressed herein constitute judgements as of the date of this article and are subject to change without notice.

Unless otherwise noted, the indicated rates of return are the historical annual compounded returns for the period indicated, including changes in security value and the reinvestment of all distributions and do not take into account income taxes payable by any securityholder that would have reduced returns. The investments are not guaranteed; their values change frequently and past performance may not be repeated.

Unless otherwise noted, risk refers to the annualized standard deviation of returns for the period indicated.

The information contained in this article has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. Alitis assumes no duty to update any information or opinion contained in this article.

© 2022 Alitis Investment Counsel Inc. All rights reserved. Unauthorized use, distribution, duplication or disclosure, in whole or in part, or in any form or manner, without the prior written permission of Alitis is prohibited by law.

Dividend Investing – Part II

This article is the second in a series highlighting Dividend Investing and its role within portfolios. The inspiration for this series is the first anniversary of the newest addition to the Alitis suite of funds: the Alitis Dividend Growth Pool. For more information or if you have follow-up questions from this article, please reach out to your Alitis adviser.

In Part I of this series, we reviewed the basics of Dividend Investing. In Part II, we look at the current market environment to provide our outlook for Dividend Investing for the years ahead.

2021 was a year full of twists and turns. Time and again, investors brushed off news that could have derailed investment markets. A contested US presidential election, an assault on the US Capitol, historically high inflation, supply chain disruptions—none of these events stopped the investment markets from achieving strong performance. Even the Delta and Omicron variants of COVID-19 failed to cast a shadow during the holiday season of 2021, and the markets closed out the year strongly.

2022 is also starting off in dramatic fashion. Russia’s invasion of Ukraine, central bank plans for raising interest rates & possible quantitative tightening, and lurking fears of the Omicron variant & its impact on supply chain issues are causing the markets to be very volatile over the last few weeks. The Bank of Canada kept its policy interest rate unchanged on January 26th, 2022. Similar to their US counterparts, the Bank of Canada left no doubts that rate hikes are coming.

While many moving parts cloud the outlook for markets, some key themes are beginning to emerge. Let’s take a closer look at a few of these major issues to develop our investment thesis.

Current Macroeconomic Environment

 

Rising Interest Rates

In the image below (Figure 1), the expected federal funds rate is shown to be increasing from around 0% to close to 2% over the next two years. While those numbers may not seem like extreme changes, when applied to the billions of dollars of future earnings and the billions of dollars of debt held by companies, it can make a significant difference to earnings and valuations.

Figure 1 – Higher Rates Coming (Bloomberg)

Higher rates reduce the value of companies’ future earnings, which is an important part of discounted cash flow valuation models. This weighs especially on shares of fast-growing companies with much of their valuation reliant on profits in the years ahead.

This effect would warrant an overweight of value-oriented sectors like cyclicals, financials, and energy over expensive growth stocks like the technology sector.

Higher Inflation

Inflation numbers continue to come in red hot (Figure 2) and will continue to be a talking point for the next few years.

Figure 2 – Inflation Since the Start of the Pandemic (Bloomberg)

Sustained inflation and higher interest rates have the potential to be lethal to a standard portfolio of stocks and bonds. Inflation accelerated at the fastest pace in this last quarter of 2021 since the early 1980s. A lot is riding on the idea that the Fed really can do what it says: cool down the economy without tanking it. Inflationary fears tend to drive up the yield on 10-year bonds, which is usually detrimental to growth stocks. Another trend also emerges during inflationary times; companies can raise prices to boost profit margins.

Value-based companies are mature, long-standing companies, and they can use their earnings to improve their margins. Growth companies rely on expected earnings and lack a long-standing performance track record. An environment with higher sustained inflation would warrant a tilt towards value stocks over growth stocks.

Supply Chain Issues

Whether its semiconductor chip shortages, Russia-Ukraine tensions causing oil prices to surge to over $90 or the availability of food & other consumer staples – supply chain woes are far from over. Supply chains are still grappling with high costs of energy, packaging, and transportation, as well as shortages of workers and shipping containers. Grain prices have jumped since mid-2020 as bad weather curbed harvests, China scooped up supplies, and a fertilizer crunch added to farmers’ costs. Other key foods have also seen significant price increases in 2021 (chart below). These supply chain issues will most likely continue to impact our lives for the rest of 2022 and possibly have some prolonged effects.

From an investment standpoint, these supply chain issues do not provide a clear position opportunity, as some of the increased costs/delays are passed onto consumers while others impact companies directly. In general, these effects would be expected to create more volatility in sectors with greater reliance on international shipping, like energy, consumer goods, materials, and industrials.

Geopolitical Risk

With Russia’s invasion of Ukraine, investors should maintain a defensive bias and seek haven in quality investments. While most strategists & geopolitical experts expect the impact of a potential conflict to be brief, volatility is expected in the near term (which has been very evident in the market over the past few weeks).

Keeping these geopolitical risks in mind, sectors like energy and financials, value stocks, and commodities are positioned to benefit from robust economic growth and are relatively well insulated from the primary market risks. The quality & resilience of companies is of vital importance during such challenging times.

 

Current Stock Valuations

 

The Price You Buy At Affects Your Returns

When making investments, nobody is buying with an expectation to lose money. With any purchase, the price you pay is your current perception of fair value. It includes your expectations for any future value you will receive from your purchase.

However, the stock market does not always go up in value, even though everyone buys with an expectation of a positive return. As new information becomes available and new events unfold, our expectations change. This may move prices up or down, but rarely do they stay for long on the expected path we imagined when buying.

These expectations that we start with are a large part of the stock market’s valuation. Knowing how lofty our expectations are at a given moment is not useful for forecasting short-term returns, but it can be a useful indicator for long-term returns. In fact, there is a formula in finance for this purpose: the CAPE Ratio2 (Cyclically-Adjusted-Price-to-Earnings Ratio), also known as the Shiller P/E.

CAPE Ratio

A high CAPE ratio (the current price is relatively high compared to the amount of historical earnings) indicates the market is overvalued and future long-term returns will be poor. A low CAPE ratio indicates the market is undervalued and future long-term returns will be strong.

A further look into historical CAPE ratios is included at the bottom of this post if you really like numbers. For brevity, using this valuation tool we will consider the following ranges of CAPE ratios as follows:

  • Below 10: Very Cheap
  • Between 10-20: Moderately Cheap
  • Between 20-30: Moderately Expensive
  • Above 30: Very Expensive

To be clear, the CAPE ratio is not useful as a market timing tool. Even if valuations are near all-time highs, selling out of the stock market entirely will almost always result in a lower return in the long-term versus staying invested. This ratio is meant only as a long-term point of reference, which is useful for setting expectations for long-term investing and financial planning.

Where are CAPE Ratios Today?

CAPE ratios for the global stock market are at very high levels relative to historical periods. The yellow dots in the following chart are the highest CAPE ratios recorded for the global stock market, and they are from the tech boom in the late-1990s to 2001. The shaded range is the range of CAPE ratios experienced over the past 5 years, which are no less extreme.

In using the labels above, the global stock market is Very Expensive, and has been for some time. This could continue for another long period of time, but the odds of having very strong stock returns over the next ten years from current valuations is low.

The Global Stock Market is Multiple Markets…

Not all parts of the stock market are at such high valuations. There are many ways to divide the stock market for relative analysis.

One way is to look at Growth versus Value stocks. Using indices for the broader US market, we can see the following CAPE ratios on December 31, 2021:

  • Russell 1000 Growth Index: 4 (Very Expensive)
  • Russell 1000 Value Index: 8 (Moderately Expensive)

Another way is by region. Here are some country-specific index valuations on December 31, 2021:

  • Canada: 9 (Moderately Expensive)
  • USA: 0 (Very Expensive)
  • United Kingdom: 5 (Moderately Cheap)
  • Europe: 3 (Moderately Expensive)

And a third way is by sector. Here are some sector-specific index valuations on December 31, 2021, using companies listed in the S&P 500 Index:

  • Very Expensive Sectors:
    • Communications, Consumer Discretionary, Industrials, Technology, Real Estate
  • Moderately Expensive Sectors:
    • Consumer Staples, Energy, Health Care, Materials, Utilities
  • Moderately Cheap Sectors:
    • Financials

…But The Global Stock Market Is All Connected

We can see above that most markets we look at here are either Very Expensive or Moderately Expensive. Stocks in general have had many factors in their favour in the last few years as we noted above. However, there are pockets of the stock market that have much higher valuations than others. These would typically be areas like US Growth and specifically Technology stocks that are starting to have a variety of headwinds develop.

High-valuation areas of the stock market do not warrant selling or avoiding those areas of the market entirely. They can still out-perform or have specific opportunities that can add value to your portfolio. In our long-term positioning, we favour tilting towards value over growth and tilting away from the US stock market in favor of other global markets.

Summary

At Alitis, extreme valuations in the stock market only further bolster our enthusiasm to use alternative investments and appropriate diversification to provide our clients with solid returns on their investments.

To repeat a point made above, these valuations do not provide a market timing tool. The perfect time for you to invest in anything is more dependent on your personal planning, financial goals, risk tolerance and time horizon than it is on market levels. We believe a diversified approach to investing provides better risk-adjusted returns over the long-term, which is the most important horizon to us as long-term investors.

We hope you enjoyed reading this and will look forward to the next article in our series, where we will highlight the features and benefits of the Alitis Dividend Growth Pool. We will leave you with this thought from The Intelligent Investor: The Definitive Book on Value Investing:

“The lesson is clear: Don’t just do something, stand there. It’s time for everyone to acknowledge that the term “long-term investor” is redundant. A long-term investor is the only kind of investor there is. Someone who can’t hold on to stocks for more than a few months at a time is doomed to end up not as a victor but as a victim.”

– Benjamin Graham, Author

Sincerely,

Apurva Parashar, MBA, CAIA, CIM®
Associate Portfolio Manager
Alitis Investment Counsel Inc.

Thomas Nowak, CFA
Portfolio Manager
Alitis Investment Counsel Inc.

 

References

  1. Vishnoi, Abhishek. “Cheap Stocks to Finally Have Their Day in 2022, Investors Say.” Bloomberg, 3 Jan. 2022, www.bloomberg.com/news/articles/2022-01-03/cheap-stocks-to-finally-have-their-day-in-2022-investors-say?sref=4ZAyTULR.
  2. Mathews, Steve. “A Guide to the Fed Meeting as It Seeks to Tame Inflation.” Bloomberg, 26 Jan. 2022, www.bloomberg.com/news/articles/2022-01-26/fed-to-signal-march-interest-rate-liftoff-decision-day-guide?sref=4ZAyTULR.
  3. Durisin, Megan. “Don’t Bank on Food Getting Cheaper Quickly If Crop Prices Ease.” Bloomberg, 28 Jan. 2022, www.bloomberg.com/news/newsletters/2022-01-28/supply-chain-latest-expensive-food-even-if-crop-prices-ease?sref=4ZAyTULR.
  4. Brush, Michael. “Four Reasons Why Value Stocks Are Poised to Outperform Growth in 2022 — and 14 Stocks to Consider.” MarketWatch, 15 Jan. 2022, www.marketwatch.com/story/four-reasons-why-value-stocks-are-poised-to-outperform-growth-in-2022-and-14-stocks-to-consider-11641991663.
  5. Jackson, Anna-Louise, and John Schmidt. “2021 Stock Market Year In Review.” Forbes, 3 Jan. 2022, www.forbes.com/advisor/investing/stock-market-year-in-review-2021.
  6. Chrysoloras, Nikos. “The Stock Investor’s Playbook for the New World of Rising Interest Rates.” Bloomberg, 14 Feb. 2022, www.bloomberg.com/news/articles/2022-02-14/a-stock-investor-s-playbook-for-the-new-world-of-rising-rates?sref=4ZAyTULR.
  7. https://indices.barclays/IM/21/en/indices/static/historic-cape.app
  8. http://www.econ.yale.edu/~shiller/data.htm
  9. https://siblisresearch.com/data/growth-value-pe-cape/
  10. https://siblisresearch.com/data/cape-ratios-by-sector/
  11. https://www.brandes.com/docs/default-source/brandes-institute/2018/the-cape-ratio-and-future-returns-a-note-on-market-timing.pdf

Appendix

The CAPE Ratio is used on indexes and takes the current index price divided by the past 10 years of earnings data adjusted for inflation. For more details on the calculation, see https://www.forbes.com/advisor/investing/shiller-pe-ratio/

A high CAPE ratio (the current price is relatively high compared to the amount of historical earnings) indicates the market is overvalued and future long-term returns will be poor. A low CAPE ratio indicates the market is undervalued and future long-term returns will be strong.

Using U.S. stock price data going all the way back to 1881, it can be shown that there is a clear relationship between lower 10-year returns and higher starting CAPE ratios3. For periods with starting CAPE ratios below 10, the average 10-year subsequent annual return is 11.3%, whereas starting CAPE ratios over 30 have had an average 10-year subsequent annual return of -1.0%.

The chart with the boxes shows the range of historical outcomes graphically. The top and bottom “T” lines are the maximum and minimum return for those ranges of CAPE ratios, the top and bottom of the shaded box for each range represent the 25th and 75th percentiles, and the horizontal line in the middle of each box represents the 50th percentile (median).

Initial CAPE Ratio Percentage of time in range Subsequent 10-year annualized real returns
Average (Mean) Minimum Maximum
Less than 10 15% 11.3% 1.8% 20.0%
10 to 20 62% 6.8% -4.6% 17.6%
20 to 30 20% 4.0% -4.0% 14.2%
Greater than 30 4% -1.0% -5.9% 4.5%

With this data on hand, by this valuation tool we can label these four ranges as follows:

  • Below 10: Very Cheap
  • Between 10-20: Moderately Cheap
  • Between 20-30: Moderately Expensive
  • Above 30: Very Expensive

Disclaimer and Disclosures – Alitis Investment Counsel Inc. (“Alitis”)

This article is provided for informational purposes only and does not constitute an offer or solicitation to buy or sell any securities discussed herein to anyone in any jurisdiction where such offer or solicitation would be prohibited.

Opinions expressed in this article should not be relied upon as investment advice. This article does not take into account the investment objectives, risk tolerance, financial situation or specific needs of any particular person. Each person’s investment objectives, risk tolerance, financial situation and specific needs should be evaluated before making any investment decision. This article may contain economic analysis and opinions, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. All opinions expressed herein constitute judgements as of the date of this article and are subject to change without notice.

Unless otherwise noted, the indicated rates of return are the historical annual compounded returns for the period indicated, including changes in security value and the reinvestment of all distributions and do not take into account income taxes payable by any securityholder that would have reduced returns. The investments are not guaranteed; their values change frequently and past performance may not be repeated.

Unless otherwise noted, risk refers to the annualized standard deviation of returns for the period indicated.

The information contained in this article has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. Alitis assumes no duty to update any information or opinion contained in this article.

© 2022 Alitis Investment Counsel Inc. All rights reserved. Unauthorized use, distribution, duplication or disclosure, in whole or in part, or in any form or manner, without the prior written permission of Alitis is prohibited by law.

Meet Aaron Robertson

Aaron started his career in finance and investment in 2011, but the seed was planted when his parents bought him his first stocks as a teenager.