The health and safety of our clients is paramount so we have decided to electronically deliver your quarterly report and statement packages. 

Furthermore, if you or anyone in your family has lost income because of COVID-19, the Canada Emergency Response Benefit (CERB) will provide you with temporary income support of up to $500 per week for up to 16 weeks.  More information can be found on the Government of Canada’s website (www.canada.ca) or by emailing us at simon@youfirstfinancial.com to determine if you qualify for these benefits.

The Market

From the all-time highs reached by global markets on February 19, 2020, we have seen the S&P500 index recede by 23.7%, erasing about two years of gains in less than a month to close off the quarter.  Within the same period, markets whipsawed with high intraday volatility, some days swinging over 5% between session highs and lows as investors digested the rapidly evolving news regarding the effects of the coronavirus pandemic.

At home, the S&P TSX Composite index fared no better with losses amplified by the falling price of crude oil.  West Texas Intermediate, a commonly used benchmark for North American crude oil, dropped from $60 plus USD at the end of 2019 to less than $20 USD per barrel; the first time the benchmark hit that price since 2002 on the confluence of a supply-side shock due to the ongoing price war between Saudi Arabia and Russia, and a demand-side shock due to the “corona crisis” which has essentially brought travel and global supply chains to a standstill.

As typical during equity market turmoil, capital market participants fled at an alarming rate to safe-haven assets such as bonds backed by the US Treasury and Bank of Canada, driving the yields of these bonds to new lows.  Factoring inflation, nominal yields have now turned negative, with the US and Canada 5-year bond yields trading at 0.6679% and 0.5610%, respectively.  High quality, non-government fixed income investments such as corporate bonds were punished indiscriminately as investors, worrying about a credit calamity, sold their positions and moved towards US treasuries.

The table below shows the market performance as of close on March 31^st, 2020, in Canadian dollar terms.

Performance

For Q1 2020, the YouFirst Growth and YouFirst Conservative Growth composites declined by 12.6% and 10.9%, respectively.  These composites lagged behind the FPX Growth benchmark at -10% and the FPX Balanced benchmark at -5.6%.

The underperformance of the YouFirst composites can largely be attributed to the market sell-off of our holdings in high yield hybrid income securities such as preferred shares and convertible debentures.  As discussed in the previous section, investors have fled to the security of safe haven treasuries and government-backed bonds in an overall risk-off sentiment.  When the market and negative behavioural sentiment stabilizes, we fully expect that the prices of these securities will recover. Until then, investors are currently compensated for their patience by the attractive yields which should help cushion the short term price depreciation from a total return perspective.  Another significant influence on portfolios during the quarter was the 9% gain of the US dollar relative to the Canadian dollar, benefitting securities denominated in US dollars.

Portfolio Activity

During the quarter, we bolstered our holdings of Brookfield Property Partners LP (BPY.UN – TSX) which is a diversified global real estate company that owns, operates and develops one of the largest portfolios of office, retail, multifamily, industrial, hospitality, self-storage, student housing and manufactured housing assets.  We believe the recent pullback in price is short term as the entire REIT complex is being sold off due to market herd behaviour and general credit worries.

On February 6, 2020, Innergex and Hydro-Quebec announced a strategic alliance, to “leverage the combined expertise of both companies in renewable energy and build on their strengths to accelerate their development in North America, Latin America, and Europe.”  As a result of the news, Innergex common shares (INE – TSX) increased 10%, putting the convertible debenture INE.DB.B – TSX in-the-money for conversion.  We elected to sell the debenture prior to conversion for all accounts holding the issue at $115. Since then we have repurchased both INE.DB.B and INE.DB.C at distressed prices ranging from $90 to $95.  The C-series debenture INE.DB.C yields 4.65%.

In addition to Innergex, we have been selectively purchasing convertible debentures at distressed prices with issuers that have relatively strong creditworthiness and a healthy balance sheet.  The following debentures were purchased: BTB REIT 6% (BTB.DB.G – TSX), Morguard NA Residential REIT 4.5% (MRG.DB.A – TSX), Algoma Central 5.25% (ALC.DB.A – TSX), and Firm Capital 5.3% (FC.DB.H – TSX).

Outlook

We believe that the global economy is headed for, if not already in a recession due to the immediate and significant decrease in business and consumer activity from social distancing and lockdown measures that governments have enacted to help “flatten the curve” of infection.  Policymakers and central banks have acted by throwing everything but the kitchen sink at the economy in an effort to prevent a global meltdown and resulting depression from occurring.  Bank of Canada Governor Stephen Poloz said it best, “a firefighter has never been criticized for using too much water.”  The next several months will be absolutely critical to determine the recovery pattern for the economy based on the success of social distancing measures and whether we see a “v-shaped” recovery, or a much longer, more drawn out recovery.  Our old high school teachers would probably scold us for using Twitter as a bibliographical source, but @yourMTLbroker has summarized two potential recovery cases nicely:

The bull (good) case:  Everything opens in 6 weeks.  The unemployed can go back to old jobs or as true Americans [and Canadians], bootstrap.  Economy back to normal within 6 months.  2T$ in PE [private equity] dry powder, low gas prices and 0% interest rates pour fuel into the economy.  The roaring 20’s mean the 2020’s now.

The bear (not so good) case: Unemployment goes to 20%+.  Everything does NOT go back to normal before at least a year or two, and in the meantime, there is a huge demand shock.  The effects of the lockdown on businesses as well as the oil shock create depression-like conditions.

Author and former Wall Street trader Nassim Nicholas Taleb describes a “black swan” as an event, positive or negative, that is deemed improbable yet causes massive consequences.  The central tenet of Taleb’s book is to not attempt to predict what these black swan events are, but to build robustness into the system to minimize the impact when the inevitable black swan occurs. 

We may have sounded like a broken record over the past several quarterly reviews, however we believe that our defensiveness in keeping cash on hand will be rewarded as we begin deploying assets into the markets opportunistically. 

No one can consistently time the market, and we certainly don’t claim to do the same.  Historically, the overall direction of the capital markets is positive in the long run and we don’t expect this time to be any different.  Investor patience and resilience will pay off as we expect continued volatility and aggressive market swings to persist in the near-term.  Now is a good time to revisit your long-term goals and remind yourself why you decided to begin the investing journey

Be kind to each other and stay safe.

Doug Garner, P.Eng., CFA
President, Portfolio Manager

Jane Garner, BA, EPC
VP Operations and Client Experience

Simon Chun, P.Eng., Passed CFA Level III
Investment Analyst