As you have likely seen in the financial news, the equity markets experienced a sharp pullback starting in late September. The largest market in the world, the US stock market, dropped by almost 10% from its recent peak on September 20th to its recent low on October 29th. Market corrections have historically been a blip and recoveries have always eventually occurred. In the current case, markets are already showing signs of a recovery, with the US market up over 6.5% from its recent low as shown in the table below.
Recent Returns in the Markets
|Market Index||Asset Class||Returns|
|Sep 20 to Oct 29||Oct 29 to Nov 7|
|FTSE TMX Canada Universe Bond Index (C$)1||Canadian Bonds||+0.15%||-0.64%|
|FTSE World Broad Investment Grade (US$)2||World Bonds||-1.24%||-0.13%|
|S&P/TSX Capped Composite Index (C$)3||Canadian Stocks||-8.91%||+4.46%|
|S&P 500 Index (US$)1||US Stocks||-9.76%||+6.57%|
|MSCI World Index (US$)4||World Stocks||-9.84%||+5.54%|
Sources: 1. Blackrock, 2. FTSE Yieldbook, 3. TMX, 4. MSCI
Nobody likes to see drops of the magnitude we saw after September 20th, but this type of market environment is the reason Alitis started our business and our funds. Markets rise and fall and the volatility of the markets brings risk, but our mission is to manage volatility and deliver solid, longer-term returns while providing a more stable ride in achieving them. These types of conditions, and the slower-moving ones we have seen over the last few years, allow Alitis to fulfill this mandate. As well, it also showcases why the enhanced diversification of the Alitis approach benefits you.
The most obvious observation from the table above is that bonds did quite well during this downturn. World bonds actually made money in Canadian dollar terms as that index is quoted in US dollars and the Canadian dollar dropped during the downturn. From an investment perspective, we have underweighted bonds for some time simply because they have not offered much upside return. However, they almost always have a place in a portfolio as they will usually make a little money when stock markets experience the jitters. And this is exactly what happened here; they did their job perfectly and acted as a counterbalance to stocks.
That is not to say that bonds are your only option for diversification! At Alitis, we use many other asset classes and strategies to provide further diversification and to provide greater growth potential. Below is the approximate asset allocation of all the Alitis Investments, which illustrates the much broader diversification that we use when managing your investments:
Approximate Asset Allocation of the Alitis Investments
|Fund||Cash||Bonds||Mortgages||Stocks||Real Estate||Other Alternatives|
|Alitis Strategic Income Pool||5%||46%||19%||4%||2%||24%|
|Alitis Income & Growth Pool||1%||25%||15%||31%||18%||10%|
|Alitis Growth Pool||0%||0%||7%||49%||37%||7%|
|Alitis Mortgage Plus Fund||0%||0%||86%||0%||0%||14%|
|Alitis Private REIT||11%||0%||0%||0%||89%||0%|
|Alitis Private Real Estate LP||1%||0%||0%||0%||99%||0%|
Allocation information as of October 26, 2018
What the table shows is that stock and bond markets had essentially no impact on the Alitis Mortgage Plus Fund, the Alitis Private REIT, and the Alitis Private Real Estate LP as their investments were primarily exposed to other markets and types of investments. As for our three diversified investments, Alitis Strategic Income Pool, Alitis Income & Growth Pool, and Alitis Growth Pool, stocks and bonds make up less than half the assets. As such, the ups and downs of these markets will likely have less than half the impact on each of these investments, which is about what was experienced.
We have underweighted stocks and bonds in the Alitis Investments for quite a few years now as it was our view that these asset classes were overvalued. However, overvaluation can continue for quite a long time so not investing in an asset class can also lead to problems. This is why we usually under-weight asset classes rather than eliminating them entirely. In the case of bonds, the market peaked a few years ago and this asset class has generated no return for over two years. Our decision to underweight bonds and increase exposure to mortgages and other alternatives has been well-rewarded. On the other hand, stocks continued to rise over the last few years so our move to real estate and other alternatives, while still very profitable, has not been as well-rewarded.
So what does all this mean for you and your investment portfolio? Well, a few things come to mind:
- Being broadly diversified across traditional asset classes (stocks & bonds) and alternative asset classes (mortgages, real estate, others) provides you with a portfolio which performs more consistently across a broader range of market and economic conditions.
- Alitis’ underweighting to the stock markets means that your portfolio will not be impacted as much by what goes on in the that market.
- When any asset class drops in value, it becomes more attractive, not less so, and that should get you excited for the possibility of capitalizing on those events.
There has been a drop in the stock market and a bit of a bounce-back, but these market corrections are considered short-term fluctuations that in the long run, help your portfolio. It is often said that the markets are governed by two emotions – greed and fear. People tend to get greedy after markets have risen because they see everyone else making money and people tend to get fearful after losses that look like they will never end. The profitable thing to do is the opposite – be fearful when markets keep rising and money looks easy to make, and be greedy when markets drop and other investors are in despair. And as always, DIVERSIFY! This is what Alitis does and why we continue to anticipate making solid returns with less risk.