Leadership Transition at YouFirst Financial

We are pleased to announce a leadership transition at YouFirst Financial, underscoring our commitment to delivering exceptional client service and effective succession planning within our firm.

Doug Garner will assume the role of Chairman of the Board of Directors and Senior Portfolio Manager.  Doug’s leadership has played a pivotal role in shaping YouFirst Financial’s achievements. In his new position as Chairman, Doug will dedicate his efforts to nurturing client relationships, overseeing corporate governance, and ensuring a smooth transition in leadership.

After nearly three decades of dedicated service as co-founder and Vice President, Jane Garner has decided to retire from the day-to-day operations but will remain a cherished and friendly presence within our firm and among our clients.

Simon Chun has assumed the role of President and Portfolio Manager of YouFirst Financial. Simon’s successful track record at YouFirst Financial, progressing from Investment Analyst to Director and Portfolio Manager, coupled with his technical expertise, and commitment to client service, positions him ideally to lead the company forward.

What’s New?

• IMPORTANT REMINDER: YouFirst Financial will never send unsolicited emails requesting personal information or digital signatures unless we communicate with you. Additionally, in all our communications, we will address you by your name to ensure a personalized and trustworthy interaction.
• 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 has increased to $7,000 for 2024.
• The RRSP contribution deadline for the 2023 tax year is February 29, 2024. To ensure arrival in RRSP accounts before the deadline, please ensure that online bill payments are made no later than February 23, 2023.
• The First Time Home Savings Account (FHSA) is now available to our clients. The FHSA is a registered plan that combines the best features of the TFSA and RRSP in helping Canadians save for their first home purchase.  We discussed some of the details of the FHSA in our Q3 2023 newsletter
• Please see the attached document from Fidelity Clearing Canada for the 2023 tax reporting timelines for various slips

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 2023 income tax return (if applicable):
  • Annual Investment Management Fee Report
  • Capital gains/losses incurred during the year

The Market

Capital markets in 2023 embarked on a turbulent journey, characterized by a rollercoaster of events as traders navigated the delicate balance between the looming threat of high interest rates and the yet-to-fully-materialize spectre of a global recession.

Following a sharp sell-off in September, US equity markets experienced a notable rebound during the final quarter of the year. This resurgence was fueled by the collective optimism that the era of rising policy interest rates has ended and the hope that rate cuts could be on the horizon in 2024. Consequently, the S&P500 index concluded the year with an impressive 22% gain, inching close to an all-time high.

On the domestic front, Canadian stocks, particularly those in debt-heavy sectors such as materials, energy, telecoms, and financials, felt the impact of escalating interest rates. In 2023, these firms faced significant pressure as rising yields failed to adequately compensate investors for the heightened risk, resulting in increased dividend yields and diminished stock prices. As a result, the TSX ended the year with a more modest gain of 12%.

Internationally, stocks showcased commendable performance, with the MSCI EAFE index recording a 14% increase in 2023. Similar optimism prevailed as investors anticipated a potential shift towards a more accommodative monetary policy among international policymakers in 2024.

In a surprising turn, bonds delivered their best performance in several years. Fixed income investors redirected cash from savings and GICs into bonds, aiming to lock in yields in anticipation of a potential loosening of monetary policy in 2024.

The table below shows the market performance as of December 31, 2023, in Canadian dollar terms:

Performance

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

During this quarter and throughout the year, the YouFirst Growth and YouFirst Conservative Growth composites trailed their benchmarks. This can be attributed to the appreciation of the Canadian dollar and a higher money-market allocation relative to fixed income in YouFirst portfolios compared to the benchmark portfolios.

The appreciation of the Canadian dollar had a negative impact on the return of global equities and other foreign assets during the quarter. Meanwhile, as the likelihood of interest rate hikes diminished, bond performance experienced a swift turnaround, leading to increased returns for the FPX Balanced and Growth benchmark. These benchmarks, consisting of 40% and 20% allocation to bonds, respectively, benefited from the shift in bond performance.  Conversely, YouFirst fixed income holdings, specifically minimum rate reset preferred shares and convertible debentures have fared poorly due to retail investor sentiment driving down price returns on these securities.  A corollary is that many of these holdings now have dividend yields up to 11%, which adequately compensate investors while waiting for rationality to return to these securities.

Portfolio Activity

For conservative growth clients who are currently underweight in fixed income, we purchased units of BMO Aggregate Bond Index ETF (ZAG:TSX).  The aim is to tactically increase exposure to bonds, considering the likelihood that we may be approaching peak policy interest rates, thereby securing a favorable yield.  ZAG is invested in a diverse range of debt securities with an average term of 10 years and an approximate yield to maturity of 4%. It encompasses a broad spectrum of the Canadian investment-grade fixed income market, including Federal, Provincial, and Corporate bonds.

For clients who are underweight in global equity and possess a higher risk tolerance, we have increased positions in Manulife (Mawer) Global Equity Class (MMF4606) or Manulife (Mawer) Global Equity Private Pool (MMF4027). While overall market volatility is expected to persist due to the fragility resulting from the hawkish central bank policies of 2022 and 2023, coupled with ongoing geopolitical headwinds, there is evidence of improved relative strength and confidence. Central banks have paused rate increases and are transitioning to a more dovish tone, contributing to this positive shift despite the prevailing challenges.

Outlook

The ongoing debate on a hard versus soft landing for the global economy remains unsettled. While the official start date of any recession may only be determined retrospectively, we believe the combination of high rates and stringent bank lending standards signals a potential recipe for recession as they have done historically with the only saving grace being robust job growth in the US.

We maintain a positive stance on equities, driven by the resilience of consumers and sustained corporate earnings support.  The recent market pullback and potential conclusion of the global rate-hiking cycle further reinforce our positive outlook for equities, however, we acknowledge recessionary pressures still prevail and geopolitical turmoil from 2023 will likely spill over into 2024 causing further volatility in this asset class.

After a decade of low interest rates, bonds are finally beginning to offer an attractive risk-adjusted return, combining a steady income stream from coupons with potential capital growth as deeply discounted bonds move toward their par value at maturity.  We have a two-pronged preference towards bonds in our portfolios: investment grade bonds versus high-yield, and short to medium term bonds over long term.

In the current landscape, a blend of government and investment-grade corporate bonds is yielding close to 5%, making bonds a valuable addition to a well-rounded portfolio alongside equities. Bonds historically provide benefits such as lower volatility, predictable returns, and the security of a maturity value.

While we perceive less value in high-yield debt due to underpriced recession risks, our portfolios do include some high-yield convertible debentures, offering investors coupons upwards of 6% while patiently awaiting maturity.

We are closely monitoring the interest rate environment and remain prepared to shift our strategy should inflation continue to be more persistent than expected and yields materially begin rising again.

As always, we focus our attention on high-quality businesses with robust balance sheets, sustainable dividends, and less sensitivity to economic cycles. We anticipate economic headwinds to dissipate sometime in 2024, positioning portfolios that have retained their value to seize opportunities when a stronger economic growth pace reemerges.

We wish you all a joyful and prosperous New Year ahead!

Yours Sincerely,

Simon Chun, P.Eng., CFA
President, Portfolio Manager

Doug Garner, P.Eng., CFA
Chairman, Senior Portfolio Manager

Jane Garner, BA, EPC
Client Experience

¹ BENCHMARK DISCLOSURE

Monitoring your portfolio’s performance by comparing it to a relevant benchmark is essential. A benchmark is an independent standard for evaluating performance, often represented by indices like the S&P/TSX for Canadian stocks, DEX Universe for Canadian bonds, or S&P 500 for U.S. stocks. To ensure meaningful comparisons, the benchmark should closely reflect the asset classes and allocation in your portfolio since most investors don’t have 100% of their portfolio in bonds or stocks alone.

Given that most investors have diversified portfolios, a percentage return alone doesn’t indicate true value. Comparing your portfolio against a passive benchmark provides a clearer picture of its performance. For example, if the benchmark returned 7% and your portfolio 8%, your portfolio performed well.

At YouFirst Financial, we use the Financial Post Index Benchmarks publicized by the Croft Group, specifically the FPX Balanced and FPX Growth. These benchmarks reflect commonly accepted asset mixes: 10% cash, 40% fixed income, and 50% equity for balanced investors, and 10% cash, 20% fixed income, and 70% equity for growth investors. They are rebalanced at least annually and exclude management fees and other charges.  Both benchmarks are presented in Canadian Dollars and on a total return basis.

For more information about comparing your portfolio’s return to a benchmark, please contact us.