The Market

Canadian and US markets continued their upward ascent from the depths of the March 23, 2020 lows with all-time highs reached for the S&P500 on September 2, 2020 of 3580; a remarkable 60% gain led by the increased concentration of Big Tech stocks in market indices (FANGAM: Facebook, Amazon, Netflix, Google, Apple, and Microsoft).   Near the end of the third quarter, market participants took a well needed breather and sold their holdings in FANGAM, leading to a decline of over 10% for the S&P500 from the highs and entering correction territory in September.

Canadian markets represented by the S&P/TSX Composite continue to lag the US due to the slower recovery of the heavily weighted financial and energy sectors where the latter continues to be punished by fears of oversupply and diminished demand for global crude oil.

The table below shows the market performance as of close on September 30, 2020, in Canadian dollar terms.

Performance

In Q3 2020, the YouFirst Growth and YouFirst Conservative Growth composites increased by 5.2% and 4.6%, respectively, breaking into positive territory for 2020. 

Although the gap is closing, on a year to date basis the YouFirst Growth and YouFirst Conservative Growth composites still trail the FPX Growth benchmark by 1½ percent and the FPX Balanced benchmark by four percent.  A higher than normal cash position and lagging preferred share and convertible debenture high yield hybrid income securities performance are the main reasons for the disparity.  In time, the markets tend to revert to the mean.

Portfolio Activity

During the aforementioned market pullback in September, we increased our equity holdings for clients underweight equity by purchasing Manulife (Mawer) Global Equity Pool  (MMF4606 / MMF4027).  For clients who have expressed interest in ESG (environmental, social and governance) investing with a focus on socially responsible investments, we continue to increase our holdings of Mackenzie Global Environmental Equity Fund (MFC5786).  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.

In support of ESG / Impact Investing,  we introduced Algonquin Power and Utilities Corp. (AQN) to our portfolios.  Algonquin Power owns regulated and non-regulated assets across 13 U.S. states and Ontario in three business lines: generation, transmission, and distribution.  In total, the company owns 53 wind, solar, hydro and thermal facilities with 93% of the portfolio under long-term contracts across diverse regulatory jurisdictions.  Of the total 3,137 MW of generation capacity, 1,427 MW is renewable which works out to 45% of the generation unit in renewables.  The balance being mostly natural gas, which some consider a bridge fuel from fossil fuels to renewable energy. 

There is planned expansion of another 2,000 MW of renewable power generation capacity by 2023 which would raise the renewable portion of the generation unit to 67%.  With this renewable generation and the closing of the last coal burning plant in March 2020, management have demonstrated a commitment to sustainability and a transition to a low-carbon economy.

On the regulated utilities front, we continued to add to Fortis Inc. (FTS).  Starting with the December 2020 dividend payment, Fortis will increase its quarterly dividend by 5.8%, to $0.505 a share from $0.4775, a new annual rate of $2.02, yielding 3.8%.  We believe Fortis’ regulated utility business will provide investors with secure income as it has done for the last 47 years of consecutive dividend payouts. The wide geographic footprint of its operations also diversifies its exposure to high concentration COVID-19 regions.

We established a position in Brookfield Asset Management (BAM.A) common shares as a proxy for clients to get exposure to private equity investing.  BAM is a leading global asset manager focused on high quality real assets, including property, renewable power, and infrastructure.  Brookfield’s share price declined over 48% from peak-to-trough during the COVID-19-induced panic in the markets in March 2020.  Since then, the share price has slightly recovered but has yet to reach pre-COVID-19 highs.  We believe we have found an attractive entry point to a high quality company with several positive growth levers once the COVID-19 risks subside.

We divested our holdings of SNC Lavalin Group Inc. (SNC) and Vermillion Energy Inc. (VET), both companies being a disappointment.    In addition, we trimmed Visa Inc. (VISA) shares as the increase in share price has caused our position to become overweight.

Outlook

Market returns only paint a small picture of the economic fallout due to the COVID-19 pandemic.  Investors should realize that the stock market rarely represents the state of the economy which, at present-time, is even more dislocated and bifurcated than ever.  The services industry, which has been hit disproportionally hard, has yet to recover to pre-pandemic levels and has contributed the most to Canada’s 10% plus unemployment rate¹; the highest level since the Great Depression.  In addition, some industries such as airlines, resorts, and entertainment may take years to recover to their prior levels and many restaurants and other small businesses may never reopen. 

In contrast, the pandemic has resulted in structural changes to the way we live and work: automation and video/telecommunication has led to the ability to work from home for many professionals and white-collar workers.  These employees are more likely to have kept their jobs and experienced home and/or stock market price appreciation.

Generally, these changes have resulted in skyrocketing technology company stock prices.  It’s worth noting that businesses that are doing well are currently overrepresented in the stock market compared to businesses that are struggling or not publicly traded: think of your favourite restaurants, coffee shops, hair and nail salons, and other businesses that require you to be there in person.

The stock market is generally forward-looking and works by taking forecasted cash flows of businesses that are publicly traded, and discounting them back to today to calculate a company’s intrinsic value.  If we anticipate that sales tomorrow will be better than today, the stock market tends to go up.  Of course, there are many other things going on that affect the prices of securities in the market, but in general, this is how the market as a weighing machine determines security prices. 

We may never see the pre-pandemic low levels of unemployment again, but we believe that people, as creatures of comfort and habit, will be back to shopping at malls, dining out at restaurants, and travelling on airplanes once a vaccine has been tested and adopted. 

The short term, however, will likely present a bumpy road ahead for investors with US elections coming in November as well as a second wave of COVID-19 as we enter the cooler months.

Our approach moving forward will be a prudent and patient approach, waiting to deploy our higher-than-normal cash holdings in selective securities that we believe will weather the storm while providing a reliable dividend or coupon payment rather than a passive investment strategy of “buying the market”.

Announcement

We are pleased to announce that Simon Chun is now registered with the Ontario Securities Commission (OSC) as an Associate Portfolio Manager.

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