Important Reminders

• The new year is a great time to top up your Tax-Free Savings Account (TFSA). The annual contribution limit for TFSAs is $6000 for 2021.
• The RRSP contribution deadline for the 2020 tax year is March 1st, 2021. To ensure arrival in RRSP accounts before the deadline, please ensure that online bill payments are made on or before February 25, 2021.

The Market

North American stock markets ended the year on a positive note in the shadows cast by the on-going COVID-19 global pandemic.  Stocks in the S&P500 rose about 16% to close 2020 at a record high for the index, led by the tech-heavy Nasdaq which gained a remarkable 44%.  Canadian markets represented by the S&P/TSX 60 gained a modest 6%, with a late-year rally driven by beaten down financial and energy stocks.

International equities and emerging markets also performed admirably in the last quarter of 2020, gaining almost 11% and 12%, respectively, despite the continued geopolitical turmoil caused by rising COVID-19 cases in UK/Europe and Asia as well as Brexit (as of January 1, 2021 the UK officially “Brexited” the EU).

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

Performance

For 2020, the YouFirst Growth and YouFirst Conservative Growth composites increased by 6.4% and 4.3%, respectively.

The YouFirst Growth and YouFirst Conservative Growth composites trailed the FPX Growth benchmark at 8.7% and the FPX Balanced benchmark at 9.3%.  A conservative, higher than normal money market position, negligible fixed income holdings and an unwillingness to chase overvalued, high-octane, growth stocks are the main reasons for the disparity.  In time, the frothy equity market trends will revert to the mean and the gain from fixed income securities experienced earlier in the year will unwind.

Portfolio Activity

The tailwinds of the US presidential election results as well as retail investor interest in Environmental, Social, and Governance focused investing (ESG) has continued to drive the price of renewable/clean energy stocks to high valuations (the Biden administration has promised to create a more sustainable future with a more aggressive climate change policy, relative to his predecessor). 

To continue finding opportunities for our clients with an ESG focus in mind, we are taking a targeted, non-exclusionary approach with our responsible investing philosophy by focusing on companies that are ESG leaders in their respective industries.  By directing capital to companies that are flagships in their industry, we believe that we can enact more meaningful change than a simple negative screen or exclusion.

We divested our holdings of Suncor Energy Inc. (SU:TSX) and purchased additional shares of Tourmaline Oil Corp. (TOU:TSX) to maintain our sector weighting in Energy.  Tourmaline has clear disclosure of their GHG (green house gas) emission reduction targets and deadlines and has a number of initiatives in place to meet these objectives.  For example, Tourmaline plans to reduce emissions intensity corporate-wide by 25% by 2027 and has had a declining carbon emissions footprint over the last three years.  Further, the company does not operate in the Canadian oil sands as most of their production is natural gas and natural gas liquids focused, considered a bridge fuel from fossil fuels to renewable, in the Alberta Deep Basin, Montney and Peace River formations in Northern Alberta and BC.

In further support of ESG investing we also established a position in Telus Corporation (T:TSX).  Telus is the biggest telecom company in Western Canada and the third largest in Canada (behind the oligopoly of Rogers and Bell).  Telus yields a healthy 4.7% dividend.  Over the past few years, Telus has been investing heavily in upgrading its wireless networks across Canada to 5G technology which has helped attract new customers.  Telus is also Canada’s biggest healthcare IT provider through Telus Health, which due to the COVID-19 pandemic has now signed on over 26,000 physicians using video conferencing to connect with patients.  From an ESG perspective, Telus has launched a $100 million sustainability fund to help support enterprises with socially responsible products and services.  For example, one of the fund’s initial investments include  $1.5 million to US start-up Tidal Vision, which aims to transform crustacean shells into a biodegradable biopolymer (plastic) material for industrial applications.  We believe Telus has many positive growth levers ahead relative to its peers in a regulated industry.

In order to capitalize on the momentum generated by ESG investing without exposing our clients to excess market-level risk and volatility, we entered a position into a long/short liquid alternative investment with Waratah Capital Advisors in their Waratah Alternative ESG Fund strategy.  Waratah manages over $2 billion in assets from high-net-worth individuals, family offices, foundations, Canadian bank platforms, and pension funds and are based in Toronto, ON.  The fund invests in global equity securities while maximizing a net ESG score using an objective scoring framework that evaluates companies on 30 variables across Environmental, Social, and Governance pillars.  The fund will buy companies that score high on the framework and short (sell) companies that are ESG laggards.  The fund targets a long-term annualized return of 7-9%, net of fees.

Salesforce.com Inc. (CRM:US) is a leading provider of on-demand customer relationship management (CRM) services. It is a cloud-based software company that offers services to manage and share information regarding sales, customer service and support, marketing operations, and data analytics.  Salesforce has enjoyed strong revenue and profit growth year-over-year and its stock price has moved higher accordingly.  On December 1, 2020, Salesforce announced a U$27.7 billion acquisition of Slack Technologies Inc. (WORK:US), which is a software-as-a-service (SaaS) company focused on developing tools and applications for better connectivity and productivity.  Salesforce’s stock price fell over 17% on the news due to the high price paid for Slack.  We believe CRM’s price after the correction offered an attractive entry point for Salesforce so we established a position in higher growth portfolios.  We believe that the trends moving towards increased remote work and education accelerated by COVID-19 will require more efficient collaboration platforms and the synergies between the two companies will play out for investors in the long run.

With the challenges faced by COVID-19 on office and retail properties, we sold all holdings of Brookfield Property Partners (BPY-UN:TSX).  Since then, it’s parent company Brookfield Asset Management has announced its plans to acquire 100% of all outstanding shares of BPY-UN taking the limited partnership private.  Shares of BPY-UN fell over 50% in March 2020 due to COVID-19 and have yet to fully recover.

Outlook

The 2020 gains in the US stock market can be mostly attributed to unprecedented levels of fiscal and monetary stimulus from policy makers in the US government.  However, despite the optimism on Wall Street, “Main Street” is still in a public health and economic crisis with over 400,000 dead in the US due to COVID-19 and case counts still increasing at a rapid rate globally.

 The US Federal Reserve changed their target for the key interest rate to a range of 0% to 0.25% (essentially the “risk-free rate”) to counter the economic devastation.  At one time, a high quality investment grade bond would yield 5%.  Now, that same bond may yield 2% or less.  In order for investors to get their required return in the capital markets to fund their future obligations, they have moved up the risk curve; from bonds to high-quality stocks which has driven the price of quality stocks to record valuations.

In the immediate term, it appears that the stock markets are pricing in more stimulus from a Democrat-majority Congress, which could mean short to intermediate term outperformance of cyclical/value stocks that would benefit the most from another round of fiscal stimulus (Goldman Sachs expects another stimulus package around $600 billion).  However, a Democrat-controlled Congress could lead to higher corporate taxes and tougher regulations on companies, specifically tech-focused companies who had the largest runup in 2020.  This could result in potential underperformance of the FANGMAN (Facebook, Apple, Nvidia, Google, Microsoft, Amazon and Netflix) technology names. 

So where do we see opportunity for our clients? As previously mentioned, cyclical/value stocks could see another resurgence. Further, small cap stocks historically tend to outperform their large and mega cap peers during an economic recovery.  This is intuitive as small caps also tend to get hit the hardest in a recession (the COVID-19 pandemic was no exception; think small businesses and more economic cycle-sensitive companies).  Due to the price contraction seen in small caps, valuations are also more attractive at this point for companies with good fundamentals.  The table below drives this point home comparing price to earnings and price to book ratios from a relative valuation standpoint:

We would not be surprised if the market experiences a pullback in 2021 after the stellar gains experienced in 2020, however we see no reason at this point for reducing equity positions to cash as low interest rates will have a deleterious effect on real returns (returns after inflation).  We will continue to be defensive while selectively buying when the market presents an opportunity to do so.

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