Year End Reports

Enclosed in this YouFirst quarterly Portfolio Review package are your:

• Portfolio Evaluation Report
• Annual Performance Report(s)
• Annual Investment Management Fee Report
• For non-registered account holders. The following items should be given to your income tax preparer for inclusion on your 2021 income tax return:
  • Annual Investment Management Fee Report
  • Summary of any capital gains or losses incurred during the year.

Important Reminders

• The start of the new year is a great time to top up your Tax-Free Savings Account (TFSA). The annual contribution limit for TFSAs is $6,000 for 2022.
• The RRSP contribution deadline for the 2021 tax year is March 1st, 2022. To ensure arrival in RRSP accounts before the deadline, please ensure that online bill payments are made on or before February 25, 2022.
• For other tax slips, please see the attached document from Fidelity Clearing Canada for the 2021 tax reporting timelines.

Client Focused Reforms

As of December 2021 many client-friendly OSC regulatory reforms have been introduced.  The key items are:

• Portfolio Managers (PMs) are obligated to disclose all conflicts of interest.
• PMs must select suitable securities for portfolios that are consistent with risk profiles identified in client Investment Policy Statements.
• Clients will be offered the ability to assign a “Trusted Contact Person” who could be contacted if the PM suspects abuse or fraud in a client account.

The Market

Markets ended trading in 2021 on a volatile note, with moderate sell-offs near the end of the year spurred on by the emergence of the Omicron COVID-19 variant that was first reported on November 24 in South Africa.  In spite of this, North American stock markets had another record year.  In Canada, the S&P/TSX 60 ended the year 28% higher due to strong performance from energy, financial, and other pro-cyclical stocks that benefit from a pickup in economic growth.  South of the border, the S&P500 closed almost 29% higher led by another outstanding year from the technology sector.

The table below shows the market performance as of market close on December 31, 2021, in Canadian dollar terms:

Performance

The table below compares the YouFirst portfolio composites with their respective FPX Benchmarks:

The outperformance of the YouFirst Growth and Conservative Growth benchmarks were primarily due to an underweight holding of fixed income securities in the portfolios and an overweight of hybrid securities such as convertible debentures and preferred shares.  In the future, we believe that the expectation of rising interest rates will continue to drive outperformance in the minimum rate reset preferred shares that we hold, as the dividend payment on these securities are reset on the Bank of Canada 5-year government bond rate.

Portfolio Activity

Where required, we rebalanced portfolios to bring them in line with our client’s willingness and ability to take risk based on the Investment Policy Statement document.

With continued pressure on bonds due to the expectation of rising interest rates, we have maintained our underweight position in bonds while being overweight equities and cash. 

To increase our fixed income weights, for accredited clients, we purchased additional units of the Next Edge Private Debt Fund (NEC452).  The fund provides reasonable liquidity and an attractive risk/return profile targeting an 8% net annual return.  Furthermore, as discussed in the next section, with our expectation for rising yields in the near-term, the fund provides a relatively lower interest rate sensitivity than traditional credit. 

We increased positions in select hybrid debt securities by purchasing additional shares of minimum rate-reset preferred shares: Brookfield Office 5.1% (BPO.PR.E), Brookfield Renewable 5.0% (BEP.PR.M), and Firm Capital Mortgage Investment Corporation 5.0% convertible debentures (FC.DB.K).

Outlook

Since the start of the COVID-19 global pandemic in Q1 2020, the stock market has increased for two consecutive years and has recently closed the year near record highs making it difficult to think that 2022 will be any different.  These are some themes that we believe may create some headwinds for markets in 2022:

• Interest rate hikes. In early November, it was predicted that the Fed would raise rates starting in Q2 2022, however after the January 2022 FOMC meeting, expectations have drastically shifted to rates rising as early as March 2022 with three rate hikes planned for the year, starting with winding down its bond-buying stimulus program at twice the rate originally expected.  Rising interest rates are generally seen as a negative for growth-oriented stocks.
• Inflation.  As a result of supply chain disruptions, consumer prices jumped the most in 39 years in November 2021, making basic necessities like food and clothing more expensive while wage gains have not been sufficient enough to offset inflation.  The erosion of purchasing power has been felt most by those on a fixed income.  The latest US inflation number was 6.8%, compared to 1.4% in 2020 and policy makers are no longer using the word “transitory” to describe inflation.  Research has suggested that almost every stock market suffered its worst real returns (returns minus inflation) during high inflationary periods.
• Overvaluation. Asset bubbles appeared in housing, luxury goods, and used cars as the COVID-19 lockdowns created a wealth of extra savings for those who were fortunate to keep their jobs.  Further, the market has continued to reach higher highs with growth stocks in technology and “work-from-home” names booming to record levels, while value stocks: financials, energy, and materials lagged.  Irrespective of an observed rotation from growth into value, overall markets are overvalued with the Shiller P/E for the S&P500 sitting at 38 at the end of 2021 versus the historical average of 17.  Earnings would have to continue to be extraordinary to keep prices this far above the historical average.
• Earnings.  With the above said, Corporate North America generally reported better-than-expected earnings in 2021, providing fuel for rising stock prices. But that was from a low base in 2020, when the world economy was locked down for a period of time.  It will be much harder to replicate that performance in 2022.
• Geopolitical Turmoil. Sometimes the market needs an excuse to sell-off.  War and geopolitical turmoil could be that very reason.  With Russian forces building up on the eastern border of Ukraine, and China threatening Taiwan, a conflict of one or more of the world’s superpowers would send stocks tumbling.

Although the above doesn’t sound too rosy, we think that the following could provide some tailwinds to drive markets higher:

• The Fed signals that inflation is contained.  We believe that when supply chains resume their normal course of operation and consumer spending reverts back to experiences (i.e. travel) versus material goods, inflation numbers will decline. Central banks target between 2-3% as the normal annual inflation rate.
• Some medical experts believe that Omicron could be the final wave of COVID. If this ends up being the case, the stock market could rally in celebration.  Supply chains would ease, offices would reopen and the hospitality industry could finally recover back to pre-pandemic levels.
• Companies with strong ESG ratings, particular green energy and utilities with a focus on clean water and energy will prosper in 2022. Although these stocks did very well in 2020 leading up to the election of the Biden administration, many of the stocks got ahead of themselves and pulled back in 2021.  We expect many of them to recover.

Our client portfolios are well positioned coming into the new year to weather the storm – with a mix of growth stocks trading at a reasonable price, and defensive names in utility, financial and telecom sectors to protect capital and generate reasonable income should high rates of change in inflation continue to persist.  The only question that remains for our “crystal ball” is whether the winds of change will push the markets back in the favour of the investor for another strong year ahead.

We wish everyone a healthy and prosperous 2022.

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

Jane Garner, BA, EPC
VP Operations and Client Experience

Simon Chun, P.Eng., CFA
Director, Associate Portfolio Manager