The Market

Global stock markets continued a strong upward climb in the first quarter of 2021 with Canadian markets, finally leading the way.  The TSX gained 9% during the quarter as a result of strength in the financial and energy sectors.  Financials have now recovered beyond the pre-COVID-19 highs as bank earnings top analyst forecasts on lowered loan loss provisions.

The S&P500 ended the quarter up almost 5%.  However, midway through the quarter, investor focus shifted away from the technology sector towards stocks that are poised to benefit the most from the reopening thesis – banks, travel/leisure, industrials, and energy.  The unexpected sector rotation from high flying FANGMAN (Facebook, Amazon, Netflix, Google, Microsoft, Apple, Nvidia) stocks resulted in the Nasdaq entering correction territory, falling over 10% from mid-February to mid-March and eventually recovering with an incremental gain of 2.8% at quarter end.

The table below shows the market performance in Canadian dollars as of close on March 31, 2021, in Canadian dollar terms.

Performance

For Q1 2021, the YouFirst Growth and YouFirst Conservative Growth composites increased by 4.4% and 3.9%, respectively, both outpacing the FPX Growth benchmark at 3.7% and the FPX Balanced benchmark at 1.2%. The outperformance was mainly due to a recovery in non-tech REIT, utility, financial, consumer staple and energy stocks and hybrid income securities.

Portfolio Activity

During Q1 2021, we purchased First Capital Realty REIT (FCR.UN) to begin positioning portfolios for a post-COVID-19 recovery scenario.  First Capital is a leading owner, operator, and developer of mixed-use real estate located in Canada’s most densely populated cities with over $10B in total assets.  First Capital has not fully recovered to pre-COVID-19 price levels implying a fair relative valuation compared to the overall Canadian REIT universe from a P/AFFO and P/NAV basis. Furthermore, First Capital has a strong identified development pipeline which if realized, will represent an attractive growth opportunity for long-term investors.  The stock currently yields 2.5% which provides a margin of safety from having its distribution cut in the event that its cash flow is impaired due to further pandemic-related risk. The 2021 expected AFFO payout is 42%.  In addition, First Capital scores well on an ESG basis relative to its peers.

While REITs tend to sell off during periods of sharply rising bond yields, we expect any such material downward pressure could present attractive opportunities to add to additional REITs, particularly for investors with an income orientation and a longer-term focus.

In our Q4 2020 Portfolio Review, we discussed the market’s exuberance towards specific Environmental, Social, and Governance (ESG) focused investments.  This optimism continued into early 2021 and eventually boiled over in February resulting in some names giving back the majority of the 2020 double-digit gains.  Fortunately prior to this pullback, where the position had become overweight, we scaled back some holdings of the Mackenzie Global Environmental Equity Fund (MFC5786), locking in gains.

We bolstered our holdings of Algonquin Power and Utilities Corp. (AQN) and Fortis Inc. (FTS) as two regulated utilities with strong ESG ratings, as well as introduced a new position in Northland Power Inc. (NPI) as a pure play renewable energy utility.  Northland Power is an independent power producer which generates about 2,700 MW of renewable-derived power in Asia, Europe, Latin America, and North America.  Currently there is an additional 130 MW of generating capacity under construction with an expected 2,674 MW of capacity in development.  Northland has a history of delivering consistent returns and stable dividends to its shareholders with a track record of growing its cash flows.  The stock currently yields about 2.6%.

For growth focused ESG investors, we established a position in American depository receipts of Novo Nordisk (NVO:US); a Danish pharmaceutical company which is a major producer of insulin and diabetes care products, as well as treatments for coagulation disorders, and hormone replacement therapy products.  Novo Nordisk controls over 46% of the world’s market share of insulin providing a strong moat in a highly controlled industry. Novo Nordisk is also ranked as one of the best ESG scoring companies in the US stock market that doesn’t fall into a “greenwashing” trap.

We added to our holdings of Alimentation Couche-Tard (ATD.B) when its stock price temporarily pulled back during its failed attempt to acquire French based, Carrefour.

We also discussed in our Q4 2020 Portfolio review the potential for outperformance in small cap stocks which historically tend to do well during the upwards swing in the business cycle.  For clients underweight small cap, we topped up with the Mawer Global Small Cap Series Fund (MAW150).  As the volatility for small caps in general is high, we capped our allocation at 10% of portfolios for growth focused investors.

Finally, we liquidated our entire position of the Series H issue of BTB REIT convertible debentures (BTB.DB.H) at a healthy profit, as the growth in the underlying REIT price had increased the value of the debenture beyond its breakeven “in the money” conversion price.  We will swap for the series G debenture when there is a pull back in price.

Outlook

If 2020 could be described in one, overused word, “unprecedented” comes to mind.  During the span of the last year, we saw an unprecedented global pandemic and medical crisis, an unprecedented stock market collapse which recovered almost immediately on the tailwinds of unprecedented global monetary and fiscal stimulus.

As we entered the new year, investors continued to look forward with optimism in a global economic recovery due to the continued roll-out of COVID-19 vaccines as well as near-zero policy interest rates.  US Federal Reserve Chair Jerome Powell was quoted on 60 Minutes aired April 11, 2021 saying that the US economy is at an “inflection point”, meaning that if the US is able to defeat the virus in the coming months, we could see big job gains and [economic] growth ahead.

The 10-year US government bond is widely considered a safe haven asset for investors and the bond market (usually) acts in an opposing force to equity markets.  On the cusp of this forthcoming economic recovery we are now faced with an important paradox for equity investors brought on by the recent gain in the US 10-year treasury yield.  Investors have begun to move funds away from bonds into the stock market thus driving the yields up and bond prices down.  This should indeed be taken as a positive sign for an improving economy, however rising bond yields could be an omen for rising policy rates in the medium-term should inflation signs begin to emerge.  The current buoyant markets are supported in part by low interest rates and any whisper of inflation worries may be enough to deflate the currently distended equity markets back to the mean trend.

It is important to remind our clients that the markets as represented by the indices that we discuss do not provide the whole picture and it is worth viewing the markets on a sector-by-sector basis to determine where valuations have been stretched and where there is risk-adjusted opportunity.  From this lens, we have actively underweighted our exposures to companies and industries with frothy valuations and have tilted our exposure to well-managed companies trading at a reasonable price that have a strong economic moat and predictable cash flows.

Now, more than ever, we remain steadfast in following a disciplined, active approach to investing.

Notice from the Ontario Securities Commission

The Canadian Securities Administration (CSA), along with IIROC and MFDA have established new disclosures regarding the ”Client Focused Reforms” (CFRs) initiative under National Instrument 31-103 with respect to enhanced disclosures of Conflicts of Interest.

As per guidance from the CSA, our custodian, Fidelity Clearing Canada (FCC) will be delivering the attached notice in your March 31, 2020 quarter-end statement package.  We have also included it here for your convenience.  The new enhanced disclosures will be posted on FCC’s website on or prior to June 30^th, 2021.

https://www.clearing.fidelity.ca/fcc/en/home

In addition, YouFirst Financial has adopted and abides by the Code of Ethics and Standards of Professional Conduct (the Codes and Standards) of the CFA Institute; an abridged version is attached here. Section VI of the Codes and Standards outlines the minimum guidelines for addressing Conflicts of Interest in our business including appropriate disclosures, priority of transactions, and referral arrangements.

For more information or questions regarding the Enhanced Conflict of Interest Disclosure please contact us at simon@youfirstfinancial.com

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
Associate Portfolio Manager