It has been over 20 years since the launch of YouFirst Financial. We would like to extend our sincere thanks to our clients for your loyalty throughout the years, especially during the challenging times of the 2000 Tech Bubble, 2008 Great Recession and present 2020 COVID-19 pandemic.

It has been a pleasure to welcome Simon to the firm, with his analytical expertise, business experience and millennial perspective. We are excited to continue expanding our client base and greatly appreciate your ongoing support and the referrals you have provided over the years.

We look forward to communicating with you soon to update Know Your Client information and we wish everyone a safe, healthy and enjoyable summer.

The Market

From an unprecedented global-scale lockdown to contain the spread of the novel coronavirus, to countries and economies beginning to show signs of life again after the government induced coma, we have observed the following noteworthy points:

• On February 19, 2020, the US and Canadian stock markets reached all-time highs of 3,386 and 17,970 for the S&P500 and S&P/TSX Composite, respectively.
• As investors began pricing in the unknown effects of the novel coronavirus disease, markets dropped at the fastest rate in history into bear market territory, closing at 2,237 and 11,229 for the S&P500 and S&P/TSX Composite, a fall of 34% and 38% from their respective highs since March 23, 2020.
• Amidst heightened volatility and large intraday swings, the S&P500 had the best second quarter in over 20 years at 3,100; just 4.8% shy of the start of the year
• The Canadian markets, while making an impressive recovery from the March 23^rd lows to 15,515, lagged the US due to the slower recovery of the heavily weighted financial and energy sectors
• Both countries’ recovery was fueled largely on the backbone of a never-been-seen-before amount of monetary and fiscal policy stimulus by the US Fed and Canadian Central Bank

Performance

For Q2 2020, the YouFirst Growth and YouFirst Conservative Growth composites increased by 9.3% and 8.9%, respectively.  Mainly due to the underperformance of our holdings in high yield hybrid income securities, such as preferred shares and convertible debentures, the YouFirst composites are still down about four percent on a year-to-date basis.  In the meantime, until these hybrid income securities recover, they provide a current yield ranging from 4.5% to 10%.

Portfolio Activity

For clients underweight equity, we took advantage of the low price environment in the markets by increasing our holdings of Manulife (Mawer) Global Equity Pool  (MMF4606 / MMF4027) as a way to provide a diversified entry into the market.  For clients who have expressed interest in ESG (environmental, social and governance) investing with a focus on socially responsible investments, we added Mackenzie Global Environmental Equity Fund (MFC5786) and iShares Global Green Bond ETF (BGRN – NYSE).

The Mackenzie fund is managed by Greenchip Financial who has been dedicated solely to environmental themed investing since 2007.  The fund focuses on investing in more sustainable business models in companies and industries where a systemic shift from fossil-based energy to decentralized, renewable power is creating new investment opportunities.

The iShares ETF holds investment grade bonds directly related to climate or other environmental sustainability.

We divested our holdings of Northview Apartment REIT (NVU.UN) at the end of April as the REIT is being acquired by private equity investors Starlight and KingSett Capital.  Given the COVID pandemic’s impact on renters’ ability to pay their monthly rent and the reduced probability that the acquisition will be completed, we sold.  Since then, the price of NVU.UN has declined.

In the fixed income space, we continued to add convertible debentures at distressed prices with issuers that have relatively strong creditworthiness and a healthy balance sheet.  The following debentures were purchased: 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 are often asked what our outlook is for the foreseeable future for the capital markets at the best of times.  Our typical response, much to the investor’s chagrin, is never black and white.  While no one can predict the future, the need to emphasize this sentiment cannot be understated especially as the COVID-19 pandemic continues to unfold.  We believe that we aren’t out of the woods just yet…

We can think of the positioning of an investor’s portfolio along a continuum between offensiveness and defensiveness.  The role of a Portfolio Manager is to take several inputs such as micro and macroeconomic developments, and current asset prices relative to forward-looking corporate earnings, and determine the likelihood of future positive returns for the investor.

In March and April, with depressed asset prices, the “fear gauge” in the economy and stock market was high and optimism was nowhere to be found (try finding a positive headline anywhere at that time) and risk premiums were generous.  We made the decision to bolster our equity holdings for clients who were underweight stocks, becoming less defensive.  This proved to be a fruitful decision in the following months.

However, we wonder if there is a justification for the stock market’s 45% gains from the low, seen at the interim high on June 8, 2020.  By almost all accords, market participants had completely forgotten about value and were purchasing securities for whatever price they could get; a clear indication that FOMO (“the fear of missing out”) was taking place and optimism was once again taking precedence over risk aversion. An important reminder is the adage: The price is what you pay, and the value is what you get. 

As of this writing, both forward justified price-to-earnings ratios of 21.4 and the cyclically adjusted Shiller price-to-earnings ratio of 30 are well above the historical averages and normal levels.  In other words, the market has completely disregarded all the uncertainties that COVID-19 has created with regards to the economy: GDP contraction, record unemployment, and structural changes that may see some industries and companies disappear forever.

As markets continue to increase out of proportion to the economic reality, the expected returns decrease and the odds fall out of favour once again for the investor.  We believe that the time to switch back from offensiveness to a more defensive posture is warranted.

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