COVID-19 Economic Response Plan – Tax Changes

Last week, the Government of Canada announced Canada’s COVID-19 Economic Response Plan, designed to support individuals and businesses. The plan offers benefits for a wide variety of people and situations. Below is a summary of the benefits we are feel are most likely to impact our clients.

2020 Income Tax Changes – Extra time to file and pay income taxes

The government is providing more time for individuals to file their personal income tax returns. The revised filing deadline is now June 1, 2020 which gives Canadians an extra month to file. For self-employed individuals, the filing deadline remains June 15, 2020. The deadline for paying taxes owed has been extended even further. Typically, balances owing are due on the filing deadline (April 30, 2020) but the government has extended the payment deadline to August 31, 2020. In order to keep money in the pockets of Canadians during a time of uncertainty, no interest or penalties will be charged on amounts that became payable between March 18, 2020 and August 31, 2020. Taxpayers who are required to make quarterly installments are also being offered relief. Installments that are generally due in March and June can now be deferred until August 31, 2020 without accumulating interest or penalties. Canadians eligible for GST credits or the Canada Child Benefit are being encouraged by the government to NOT delay filing their returns so that the 2020-2021 benefits can be calculated and updated for the July 2020 payment. In order to reduce contact and encourage social distancing, the CRA is temporarily recognizing electronic signatures for T183 forms. Taxpayers are required to sign T183 forms in order to authorize accountants and other tax preparers to file their tax returns.

Alitis Advice

If you are expecting a tax refund or other benefits, we recommend you file by April 30, especially if you can file your own returns at home and avoid an in-person interaction with your tax preparer. If you are expecting to pay a tax bill there is no harm in delaying your 2019 income tax filing and payment.

2020 Withdrawals from Registered Retirement Income Funds – 25% reduction available

To give seniors the flexibility to keep more of their assets invested, the government has reduced the required minimum withdrawal from RRIF accounts by 25% for 2020. This will allow seniors to reduce portfolio withdrawals through a negative market, hopefully allowing their portfolios to recover more quickly from the decline we’ve seen over the last few weeks.

Alitis Advice

If your current RRIF payments aren’t needed to cover your living expenses, then reducing or delaying the withdrawal should be considered to avoid liquidating assets at lower valuations. We believe that this reduction will also apply to Locked-in Income funds (LIF) accounts but are currently waiting on further confirmation. Please contact Alitis to discuss the best strategy for your situation to determine if reducing or pausing your payments is the best way to take advantage of this benefit.

We are available

If you have any questions regarding the above government initiatives or want to discuss how they may affect your personal situation, our Wealth Management Team continues to be available to our clients. We can be reached by email or by phoning 250-287-4933 or 1-800-667-2554.

Alitis CEO Message – Market Assessment COVID-19

Three months after I started my career in the investment industry (July 1987) I received an early introduction to RISK, the largest single day decline in global stock marketsBlack Monday, October 19,1987.

For your interest here are the top three single day declines in history:

Largest daily percentage losses1:

Rank Date % Decline
1   Black Monday 1987-10-19 −20.47%
2   1929 Bubble 1929-10-28 −12.34%
3   COVID-19 2020-03-16 −11.98%

 

What I learned from 1987, and subsequent series of Bear markets, is:

  1. More money is made, and more money is lost in times like these.
  2. How we were prepared beforehand and how we behave during these severe market declines has a huge impact on the long-term performance of our clients’ portfolios.

I’ll first put things into perspective with some supporting comments and historical observations.

This Market Event Will Pass

It is a perfectly normal event to see business cycles go up and down over time. We have all known this 11-year cycle would end, we just didn’t know when or what would trigger it. Now that we know, so it’s time to shift to how we can benefit from the panic in the markets. We believe that the complete disruption of the global supply chain and the severe declines in business volumes will cause a global recession. Most financial assets (especially stocks) will be re-priced to more realistic levels.

The one upside of panic selling we are currently seeing in markets is that when stocks become over sold it is common to experience quick rebounds from market bottoms. Investors who continue to hold and have cash to add to their portfolios often find their portfolios better off in the long run. For those of you who worked with our team through the 2008/2009 Subprime Mortgage Crisis you may remember our approach. We made some minor shifts to the most deeply discounted stock market sectors and benefitted from buying through the bottom of that market crisis.

An investment expression, variously attributed to J.P. Morgan and other legendary investors, states:

“In bear markets, stocks are returned to their rightful owners.” In other words, those who buy stocks from others who are selling due to panic tend to end up as the wealthiest in the end.

Your Financial and Retirement Plans Remain Solid

Alitis financial planning projections model very conservative long-term investment returns. We remain confident that we can achieve the long-term Target Returns for each of our highly diversified pools. So far, the risk protections we put in place on the pools have met our expectations for this scale of market decline. This short-term market turbulence is unlikely to impact your long-term retirement income projections. However, if you are concerned please reach out to your adviser and they will be happy to illustrate the minimal impact of this event on your planning.

Alitis was prepared!

The whole reason we created Alitis was to build more diversified portfolios that were not as reliant on, or exposed to, stock markets. To be clear, we love stocks, we (and our clients) just don’t like the severe volatility that is associated with publicly traded equities, so we choose to hold lower allocations to stocks than many other investors. Instead, we have designed portfolios with a diversified mix of income and growth-oriented investments that can deliver reliable returns regardless of what public stock markets are doing – these are called uncorrelated investments. Our private real estate, mortgages, asset-backed loan funds and institutional bond strategies have all provided protection over these last few weeks.

In addition to structural diversification our investment committee has been building meaningful amounts of cash inside the pools. We were both taking profits on highly valued stocks and adding extra protection as we could see this business cycle coming to a peak. That cash not only minimizes losses but also helps speed recovery as we take advantage of buying opportunities.

What Should You Do Now?

First, stay calm. The entire Alitis team is actively monitoring your investments. If the news and the market fluctuations get the better of your emotions give us a call. Try focusing on something else, this is a great time to concentrate on family and health.

Second, prepare to invest your cash. Nobody can pick the absolute bottom of a market, so we are advising clients who have cash on hand to discuss options with their adviser. One strategy is to systematically invest cash over the coming weeks.

Third, consider reducing or postponing withdrawals from your portfolio. If you don’t need the funds for regular spending leave it in your portfolio. Your portfolio will recover much faster if you can minimize or avoid withdrawals at the bottom of the market.

In a month or two we believe that Canada’s and the world’s approach to COVID-19 will see a flattening and gradual decline of the infection rates and like all crises THIS TOO WILL PASS.

We are here to help

You can contact us through normal channels. Our regular phone lines are open and the Alitis Wealth Management Team is actively connecting with clients via phone, email and video conference. We are business as usual except for face to face meetings.

 

Sincerely,

Cecil Baldry-White, CEO

 

March 20, 2020

 

  1. https://en.wikipedia.org/wiki/List_of_largest_daily_changes_in_the_S%26P_500_Index

Alitis Suspends In-Person Meetings – Coronavirus

March 13, 2020

 

To our valued clients,

It is with an abundance of care for our clients, staff and community that we wish to advise you on how Alitis will operate for the next few weeks to do our part in limiting the spread of the COVID-19 virus.

Alitis has a Business Continuity Plan for such emergencies and effective today, Friday March 13, 2020, the company has invoked its operating procedures. We do not expect any significant disruption to the business, but there will be some changes to how Alitis will operate for the next while:

  • Our offices in Campbell River and Victoria will be closed to clients to protect our staff and clients from the virus and reduce its possible transmission within the community.
  • The majority of Alitis staff are equipped to work from home and have been instructed to do so. Essential members of the Client Service and Administration teams will continue to work in the Alitis offices to ensure that critical processing is kept up to date. No staff member will be required or permitted to enter the office if he or she experiences any flu-like symptoms.
  • Our Portfolio Managers and Wealth Service Coordinators will continue to host meetings by phone or video call. If you have a meeting scheduled for March or April, a member of our team will contact you to arrange a phone or video call meeting. For those who prefer an in-person meeting, we will schedule your meeting for a future date.
  • The company has also redirected its phone lines to ensure that your calls continue to be answered. Please continue to contact Alitis as you normally would.
  • As for the Alitis Pools, our Investment Committee will operate as normal. As you may know from previous communications, the Investment Committee has been pro-active and hands-on throughout the market cycle; and continues to operate with diligence, vigilance and care in navigating market turbulence.

We want to take this opportunity to reiterate our commitment to service. Alitis established procedures for operating remotely long ago. These have been tested on multiple occasions as part of on-going business operations. Alitis service providers, such as the custodians, transfer agents and those related to processing have provided us with status updates and communication instructions for continued operations after invoking Business Continuity Plans similar to Alitis’.

If you have any other questions or concerns, please contact your Alitis adviser by email or the office at 250-287-4933. Thank you for your understanding during these challenging times, and we look forward to getting back to normal operations as soon as it is safe to do so.

Sincerely,

The Alitis Team

Alitis Market Update – Recent Activity March 10th, 2020

Kevin Kirkwood, CFA

President & Chief Investment Officer

March 10, 2020

 

As you are probably aware, there has been a great deal of activity in the markets due to the COVID-19 Coronavirus and, more recently, the shocking drop in the price of oil. Monday saw a nasty drop in the world’s stock markets, so we wanted to provide you with another update.

COVID-19 Coronavirus

The COVID-19 Coronavirus continues to create headlines as it spreads across the globe. Yesterday, Italy has effectively locked down the entire country to stop the transmission of the virus, and rightfully so as the number of cases is skyrocketing:

Italy – Active Cases – March 9, 2020

https://www.worldometers.info/coronavirus/country/italy/

Perhaps even more concerning is that closer to home, the number of deaths in Washington state now stands at 22 and BC just had its first death related to the virus. Thankfully, BC’s Provincial Health Officer, Dr. Bonnie Henry, is extremely qualified to deal with the issue as she worked on the front line in Toronto during the SARS crisis, helped eradicate polio in Pakistan, fought Ebola in Uganda, and worked to control the H1N1 influenza outbreak in 2009. https://www2.gov.bc.ca/gov/content/health/about-bc-s-health-care-system/office-of-the-provincial-health-officer/biographies More COVID-19 cases will be found in BC, but it is unlikely that the province will be caught off-guard as other regions of the world have been.

Not all the news is bad, however. Countries that were in the news previously have started to get the spread under control. South Korea, for example, still has an increasing number of active cases, but the rate of growth is slowing which would indicate that they are getting the outbreak under control.

South Korea – Active Cases – March 9, 2020

https://www.worldometers.info/coronavirus/country/south-korea/

China, where the virus began, is even farther along in controlling its spread. More people have been recovering from COVID-19 than have been getting it, resulting in 2/3 reduction in active cases from the peak in mid-February.

China – Active Cases – March 9, 2020

https://www.worldometers.info/coronavirus/country/china/

COVID-19’s progression in both China and South Korea shows that the virus can be controlled and then reduced. This is a good sign for what can be accomplished elsewhere, as long as there is the will to do what is necessary. Vigilance is the key.

Oil

Besides fear, one thing that the COVID-19 virus has done is reduce the demand for oil.  People are clearly traveling less as the virus story continues to develop. Then adding to that, this last weekend, Saudi Arabia shocked the world by dropping the price of its oil after OPEC and Russia could not agree on production cutbacks to keep prices higher.  https://www.cnn.com/2020/03/08/investing/oil-prices-crash-opec-russia-saudi-arabia/index.html Essentially, Saudi Arabia has started a price war that has crushed the price of oil…

Brent Crude Oil Price

…and hammered the price of energy stocks in Canada and around the world…

iShares S&P/TSX Capped Energy Index ETF (XEG.TO)

Stocks & Bonds

 

The one-two punch of the coronavirus and the collapse in the price of oil led to a substantial market decline on Monday. It was an awful day!

There has been a bit of a recovery on Tuesday with some calm returning to the markets; so we believe that some reasonable assessments can be made about future investment prospects. It’s likely that the volatility in the stock markets will continue for some time as the full impact of COVID-19 and oil prices filters through the economies of the world. New information will be scrutinized and acted upon very quickly – both positively and negatively. The one certainty is that the world is not going to end, and opportunities will arise. The time to get out of stocks has already passed and Alitis reduced its exposure some time ago. Presently, the Alitis Growth Pool is only about 50% allocated to stocks with the remainder in real estate and cash.  When opportunities do arise, Alitis will increase the exposure to stocks.

On the other hand, bonds have continued to do very well. Fear drives investors to safety, and bonds are viewed as a safer place to be. This demand for bonds has boosted their prices and dropped their yields, resulting in stunning changes in the US government bond market.

US 10 Year Treasury Yield

From February 20th to March 9th, the yield on 10 year US government bonds dropped from 1.5% to a low of about 0.42% — a truly unprecedented drop. A similar decline has happened in Canada, and all this has helped drive bonds to excellent gains:

iShares Core Canadian Universe Bond Index ETF (XBB.TO)

Alitis Pools

As mentioned previously, Alitis has been very underweight in stocks for quite some time now as it has been our view that better returns for the same level of risk (or less) could be achieved elsewhere. As such, we have been overweight in fixed income, mortgages, real estate, and cash. The result of our reduced stock exposure meant that the Alitis Income & Growth Pool, which holds a diversified portfolio of investments across the full range of asset classes that Alitis uses, returned 0.3% to March 6th. The Alitis Strategic Income Pool, which is invested in fixed income products, has done very well year to date with a gain of 2.4% while the Alitis Growth Pool, which has the highest allocation in stocks, dropped only 4.7% since the beginning of the year.

Returns for the Alitis Pools in 2020

January February February 28th to March 6th
Alitis Strategic Income – Class E 1.16% 0.46% 0.76%
Alitis Income & Growth – Class E 0.86% -0.76% 0.21%
Alitis Growth – Class E -0.13% -3.95% -0.68%
Alitis Mortgage Plus – Class E 0.34% -0.08% n/a
Alitis Private REIT – Class E -0.49% 0.36% n/a
Alitis Private Real Estate LP – Class E 0.84% 0.42% n/a

 

Overall, the Alitis funds have performed as we expected in these adverse conditions and are well-positioned to take advantage of opportunities moving forward.  Stocks are still rather volatile, so we do not plan to deploy the excess cash at this time, but as markets calm down there will be opportunities to profit. As famed investor John Templeton once said, “To buy when others are despondently selling and to sell when others are avidly buying requires the greatest of fortitude and pays the greatest ultimate rewards.” We endeavour to keep these words in mind when managing your money.

Kevin Kirkwood, CFA

President & Chief Investment Officer

Recent Returns in Markets – 2020

The year 2020 has begun in dramatic fashion, with many newsworthy stories arising locally and internationally. There is no way to predict the events that occur or their outcome, and we humbly recognize this. We at Alitis strongly believe in our ability to protect and grow your investments over a longer time horizon. This includes times where markets are extremely volatile and that is exactly where we see ourselves today.

Last week Kevin Kirkwood, our President & Chief Investment Officer, wrote an update on the Coronavirus and its expected impacts on the Pools. This week, we would like to highlight how the Alitis Pools have performed during this recent period to show the benefits of investing across both traditional and alternative asset classes.

Here is a look at how the traditional stock and bond markets have fared over the week, the month of February 2020, as well as how they have performed over a trailing 1-year period:

Investment Returns Category 1 Week 1 Month 1 Year
Vanguard Total Bond Market Index US Bonds +1.12% +1.67% +12.05%
iShares Core Canadian Universe Bond Index Canadian Bonds -0.15% +0.53% +8.78%
iShares S&P/TSX 60 Index Canadian Stocks -8.16% -5.41% +4.94%
SPDR S&P 500 ETF US Stocks -11.16% -7.92% +7.65%
Vanguard FTSE Emerging Market Index Emerging Markets Stocks -6.25% -3.55% +0.61%
Vanguard FTSE Pacific Index Asian Stocks -6.83% -7.42% -3.14%
Vanguard FTSE Europe Index European Stocks -9.96% -7.96% +0.48%

In looking across these traditional investments, the top performers were fixed income investments, with BND and XBB both positive over the month of February. Fixed income investments often play the role as a diversifier and safety net from stocks, and the month of February shows quite clearly why they deserve a place in a portfolio. Bonds have also benefited from the continued downward pressure on interest rates, which could carry through to the end of the year.

In addition to bonds, Alitis uses non-traditional or alternative asset classes to further diversify and protect client’s wealth. Our allocations to private real estate, private mortgage and private debt help insulate our portfolio from market shocks that occur.

The US stock market had been driving higher through 2019 and because of that we have been cautious on US equity valuations for several months now. In our models, we continue to see better value in equity markets outside the US than we see inside the US.

Now let’s look at how the Alitis Pools have performed, and keep in mind that we allocate across both traditional and alternative investments:

Alitis Pool Returns 1 week 1 month 1 year
Alitis Strategic Income Pool -0.06% +0.46% +6.05%
Alitis Income & Growth Pool -1.43% -0.76% +7.56%
Alitis Growth Pool -4.20% -3.95% +2.56%
Alitis Mortgage Plus Fund -0.08% +6.96%
Alitis Private REIT +0.36% +8.18%
Alitis Private Real Estate LP +0.42% +7.72%

As you might expect, our fixed income and alternative investments performed well over the last week, month and since 2019. The Alitis Strategic Income Pool lead the way, increasing 0.46% for the month but the real estate (REIT and RELP) and mortgage pools were not far behind.

Alitis’ Income and Growth pool was down only 0.76% over the week compared to its benchmark1 which was down 4.49% over the same period. This highlights the diversification and downside protection that we build into our balanced pool.

As mentioned above and in the prior publication, we reduced the equity exposure in Alitis’ Growth Pool in late January. We worried that the equity markets didn’t fully appreciate the risks and uncertainty of the Coronavirus. This cautious stance and our legacy private real estate holdings helped the Growth Pool and over the week as it declined 4.20% vs its benchmark2 which declined 9.49%.

Only two months in, 2020 is proving to be an exciting year for financial markets and is showing no signs of stopping. It is still too early to see the full economic impact of the Coronavirus and how quickly a recovery will occur. Beyond this, there is a US election occurring in the Fall which could prove to be as polarizing as the 2016 election.

We continue to monitor these events as they develop and keep an eye out for other issues that may impact your portfolios. As Kevin mentioned in his update last week, it is a hallmark of Alitis to be prepared for potential risks. The Alitis process for managing your investments has been operating for over 10 years now and is built off our team’s experience dating back decades.

If you have any concerns, please contact your adviser and we will work with you to address them.

Sincerely,

Alitis Team

 

References
  1. Benchmark may change over time. Benchmark is currently: 30.00% FTSE TMX Bond Universe, 30.00% MSCI World Index (C$), 15.00% TSX Capped Real Estate, 5.00% Dow Jones Real Estate (C$), 20.00 FTSE TMX All Corporate Bond
  2. Benchmark may change over time. Benchmark is currently: 100% MSCI World Index ($C)

Update – Coronavirus and the Alitis Pools

Kevin Kirkwood, CFA
President & Chief Investment Officer
February 25, 2020

Today’s Markets

Alitis’ Investment Committee has been watching the evolving Coronavirus story and working to ensure that the Alitis Pools are positioned to ride out this volatility while still being able to participate in the inevitable upside which generally follows these declines.

Various stock markets were down yesterday, and this will always get media attention but what did not get headlines was that bonds did relatively well. Below are how some major investments fared yesterday:

Returns for Monday, February 24, 2020 (C$)

Investment Symbol Category Gain/Loss
Vanguard Total Bond Market Index BND US Bonds 0.73%
iShares Core Canadian Universe Bond Index XBB Canadian Bonds 0.24%
iShares S&P/TSX 60 Index XIU Canadian Stocks -2.31%
SPDR S&P 500 ETF SPY US Stocks -2.92%
Vanguard FTSE Emerging Market Index VWO Emerging Markets Stocks -3.12%
Vanguard FTSE Pacific Index VPL Asian Stocks -3.40%
Vanguard FTSE Europe Index VGK European Stocks -3.91%

Our Conservative Allocation to Stocks

The Alitis Growth Pool is the most exposed to the effects of the coronavirus on equity markets as it contains the greatest percentage of stocks. However, this exposure is only about 50% of the Pool’s assets as we had already positioned the Pool conservatively in anticipation of the market challenges that we see now. Because of our defensive stance, the declines in equity markets may cause the Growth pool to decline about half as much as the markets. Presently, the Alitis Growth Pool has the following asset class exposures:

Alitis Growth Pool – Asset Allocation

Asset Class Current Allocation
Cash 30.3%
Stocks 48.4%
Real Estate 21.3%

Our View on the Coronavirus

The only other Alitis Pool that has an allocation to stocks is the Alitis Income & Growth Pool. This Pool’s stock allocation is less than 15%, while its allocation to fixed income is almost 42%. Again, we believe that this conservative positioning will help to mitigate any negative performance caused by further declines in stock markets.

The world has experienced many viruses over the years – some worse than the current coronavirus and some better. Our view on the coronavirus is that it is certainly a situation that needs to be considered, but in a realistic and rational manner that looks at the facts, while understanding the emotion which often drives hasty, ill-planned decisions.

The Spread of the Coronavirus

It appears that the Chinese have started to get their outbreak under control, but two events in the last few days have changed the story quite dramatically. First, Italy has had a significant outbreak near Milan. Having an outbreak in Europe, especially near a major economic centre like Milan, makes the spread of the virus throughout Europe quite likely. This event is what has caused the major stock market declines yesterday.

The other major news – and the one that has local implications – is the outbreak in Iran. According to the health authorities in Iran, there are only 64 cases in the country with the first one being diagnosed on February 19th:

Coronavirus in Iran4

Date Cases
(new)
Cases
(cumulative)
Deaths
(new)
Deaths
(cumulative)
19 Feb 2020 2 2 2 2
20 Feb 2020 3 5 0 2
21 Feb 2020 13 18 2 4
22 Feb 2020 10 28 2 6
23 Feb 2020 14 43 2 8
24 Feb 2020 21 64 4 12

However, on February 20th BC’s provincial health officer announced that a woman who returned from Iran to Greater Vancouver on February 14th – a full five days prior to any official cases being reported in in that country – had tested positive for the virus. It would appear that Iran simply had no idea about the spread of the virus or did not have the capacity to detect or deal with it properly. That failure has had direct implications in BC and around the world. What may turn out to be a major source of the virus went undetected for quite some time and may allow it to spread to other countries and, most importantly, very close to where we live.

The takeaway from last two events is that it is unlikely that the spread of the virus can be stopped. The measures undertaken by governments around the world has slowed the spread – which is good – but the virus is most likely coming our way.

Death Rates

While Alitis is an investment firm and the impact on investments is important to us, it is the effects on people that truly matter. Obviously, the loss of life is the most worrisome aspect of the coronavirus. But so far, the statistics5 indicate that overall mortality rate is 2.8% for men and 1.7% for women. However, as noted previously, it is almost certain that the actual number of cases of coronavirus is much higher which will reduce these rates. As well, the vast majority of reported cases are presently in China which certainly has different demographics and health care standards than Canada. For example, 47.6% of Chinese men smoke versus 17.7% of Canadian men1. Given that coronavirus’ greatest impact is on the lungs, smoking is likely a major determinant of the outcome. Age is also a consideration as this virus, like most others, impacts the elderly and health compromised more than any other group. Children, on the other hand, do not appear to be as susceptible to the virus2.

To put all this in perspective, the regular seasonal flu also kills many people. The US Centers for Disease Control and Prevention (“CDC”)3 measures the number of cases and deaths each year, with the most recent years summarized below:

Flu Statistics for the United States

Season Cases Medical Visits Hospitalizations Deaths
2015-2016 23,504,319 10,642,006 276,198 22,705
2016-2017 29,220,523 13,633,446 496,912 38,230
2017-2018 44,802,629 20,731,323 808,129 61,099
2018-2019 35,520,883 16,520,350 490,561 34,157
2019-2020 (est)

29,000,000 – 41,000,000

13,000,000 – 19,000,000

280,000 – 500,000

16,000 – 41,000

Quarantines, Disruptions and the Markets

As you can see, a lot of people die in the US every year from the flu and it appears that 2017-2018 was a particularly bad year. It is likely that due to proximity alone, Canada experienced similar results.

The biggest impact is coming from the measures taken to contain the virus. As we have all seen in news reports, the Chinese government has been very aggressive in working to contain the virus and slow its spread through quarantines and travel restrictions. Italy has also imposed restrictions on many of its citizens this last weekend. These measures will likely help slow the spread of the virus, but there is always a cost.

At the local level, people simply change their habits to protect themselves from the unknown. Fear drives people to stop going out and spending money as they usually would. In the Vancouver area, there is plenty of anecdotal evidence that spending in restaurants and malls that cater to Asian communities has declined significantly over the last few weeks. That is not good for the economy. On a grander scale, any quarantines and travel restrictions would seriously impact business’ ability to operate and to ship goods. This is already happening, with the most famous example being Apple which has stated that sales in China will definitely be down this quarter and that there may be a shortage of iPhones since these products are assembled in China.

Impact on the Markets

Obviously, the short-term impact on the stock markets has not been good. There was a short-lived drop in late January when the virus first popped up on the radar, but it would appear that this current drop may have more staying power. That being said, we do not expect the impact of the coronavirus to be a long-term problem. As mentioned earlier there have been many viruses which have caused problems, but they have always resolved themselves. Based on this history, the coronavirus situation should be no different. There will be some short-term pain with stocks, but we have a ready supply of cash to invest when times look the bleakest as that is when the best opportunities usually arise. On the other hand, fixed income has done well recently but that could change when money starts flowing back into the stock markets.

Longer term changes are far more interesting. Two major manufacturing trends over the last 40 years have been: (1) just-in-time manufacturing, and (2) outsourcing production to cheaper locations overseas – particularly to China. The coronavirus has exposed the risk in these two strategies. Having only a limited supply of parts on hand because new ones can be ordered just-in-time does not leave a lot of room for error if new supplies are not forthcoming. As well, a lot of manufacturing has been moved to China as a way of reducing costs on products. Generally, this has been great for consumers, but it has also increased the risk that something could go wrong with supply chains. It is very likely that a lot of firms will be reassessing their manufacturing processes and supply chains to try and mitigate the problems that are presently being experienced. Longer-term outlooks for certain markets will likely change.

Alitis is Preparing

Although it is highly unlikely that we will need to enact this, Alitis is also preparing for how the firm would continue to operate should the virus arrive in BC and people change their behaviour or, more critically, health officials impose quarantines. Alitis has become very web-based over the last few years and most staff have the ability to operate from home offices. Today, I requested that we look into enabling all staff to work from home so that Alitis could continue to function should these unlikely scenarios unfold. As well, we are re-assessing the business continuity plans for our major service providers to ensure that they will be able to continue operating. Again, it is doubtful we will need to go to these measures, but as prudent managers of your investments and associated risks, we prefer to be prepared for all known potential risks – this is our hallmark.


I hope this communication provides some realistic and rational information about the coronavirus and its implications on your investments, society, markets, and Alitis itself. We are on top of the situation, we have your interests in mind, and we are prepared to continue Alitis operations should the situation in BC deteriorate. If you have any concerns, please contact your adviser and we will work to help you address them.

Sincerely,

Kevin Kirkwood, CFA
President and Chief Investment Officer

 

References
  1. http://worldpopulationreview.com/countries/smoking-rates-by-country/
  2. https://kidshealth.org/en/parents/coronavirus.html
  3. https://www.cdc.gov/
  4. https://en.wikipedia.org/wiki/2020_coronavirus_outbreak_in_Iran
  5. https://www.worldometers.info/coronavirus/coronavirus-age-sex-demographics/

Diversification Works When Done Correctly

At Alitis, we spend a lot of time reading and learning about the financial markets. We stay up-to-date on current events, we constantly monitor our positions, and we are always keeping an eye out for new investments that could improve our portfolios and their diversification.

That being said, we do understand that the financial marketplace can be a complex and confusing place, and there are some common pitfalls that we need to be mindful of. One of those pitfalls is called naive diversification.

Naive Diversification

Naive diversification occurs when someone has bought many different investments that they incorrectly believe to have the benefits of having either a low or negative correlation. They hope that they are protected from having large losses across their portfolio at the same time, but unfortunately, they are not.

An example would be someone that has “diversified” their portfolio by buying all the bank stocks in Canada. This is better than putting all of one’s money into only one bank stock, but there are plenty of factors that would affect all Canadian bank stocks at the same time. The same could be true of a portfolio containing all stocks in the world, as stock markets globally have similar exposures and are highly connected.

Imagine having a closet full of different shoes, but they are all high heels. You have hundreds of pairs of high heels, full of colourful designs, patterns and fabrics, but only high heels. If we asked you, “Do you have many pairs of shoes?” your reply would be, “Of course! I have hundreds of pairs!”

We would think that you must be well-prepared for all occasions with so many shoes. However, the next time you go to buy groceries after it snows, or you go to mow the lawn, or you go on vacation to Europe and have to walk down a cobblestone street, you may be surprisingly ill-equipped.

Our Approach to Diversification

At Alitis, we take a great deal of time and effort to ensure that your portfolios are both well-dressed and well-suited for a variety of market conditions. We select investments with purpose and keep in mind how new investments will complement the rest of the portfolio. After all, how your entire portfolio performs is more important to us than any single investment.

We look to create meaningful diversification across many asset classes and markets with the goal of providing a stronger risk-adjusted return than our benchmarks. And we are proud of that.