Before we begin, we would like to extend our sincere wishes for a happy new year to you and your family. We would also like to thank to you for your continued trust in us and for the opportunity to assist you in working toward your financial goals. Should you have any questions about your investments or the market outlook for the coming year, please remember that we are just a phone call or e-mail away. 

The last 10 years saw unprecedented change in the wealth management industry. Investors and advisors had to quickly adapt to new products, more regulation, and improved technology. We wish to highlight four major themes in our industry that will contrast this decade with the last one. 

1. Returns will likely be lower, but still positive 

In 2010, Canadian and U.S. stock markets were just starting to rebound from the lows of the financial crisis. Today, these markets are at records highs and most market observers predict that returns for the next decade will not be as strong. Blackrock, one of the world’s largest assets managers, projects a return of 4% for a balanced portfolio in the 2020s, compared to 7% for the 2010s.   

This news should not come as a major surprise. Let’s look at the price/earnings (P/E) ratio, which is the most common metric for valuating stocks and markets. A P/E of 10 means the stock price is trading at 10 times the company’s annual earnings per share. The 25-year P/E average for the S&P 500 is about 16x earnings. In January 2010, the S&P 500 traded at 14x earnings and at the bottom of the financial crisis it traded at 9x. 

Today, it is currently trading at around 18x earnings.   

The chart below tracks the relationship between P/E ratios and historical 5-year rates of return. Simply put, the higher the valuation, the lower the projected 5 or even 10-year return. At current valuations,  history suggests a 5-year annualized return of 5.3% for the S&P 500. 

2. Investors will pay lower fees for their investments 

A positive theme for the next decade is that investors will pay less fees than ever before. 

The Management Expense Ratio (MER) is the total amount of fees investors pay to the fund manager (RBC, CI, BMO, Fidelity, etc.) and to the advisor. When I started working at Smof Investment in 2009, the MER for a growth-oriented portfolio was approximately 2.5% or more. With a 2.5% MER, a mutual fund whose basket of stocks returns 9% for the year results in an after-fee return of 6.5% to the investor. 

Thankfully, due to increased regulation and fiercer competition, fees have come down substantially. Today, MERs are commonly between 1.2% to 2.2% or 0.9% to 1.9% for higher net worth investors. Using the same example as above, a mutual fund whose basket of stocks returns 9% now results in a return of between 7% and 8% to the investor.  

3. A multi-factor strategy will be incorporated to portfolio construction

Today, most industries offer more diverse and customized product options than ever before. The investment industry is no different.  

An investment trend that has already started – but will likely grow in popularity in the next few years – is the multi-factor portfolio. In addition to well–known factors such market cap, value or dividend, there are now investment funds with volatility, quality and momentum factors built in.   

These additional factors will increase customization and risk-management in a portfolio and facilitate an advisor’s ability to tie investments to market cycles. 

For even further diversification and customization, portfolios will also be built with a mix of passive and active mandates. Passive investments aim to mimic the holdings and returns of a certain index (like the TSX or S&P 500) and are known for their low fees. Active funds are the mutual funds we are most familiar with. These are run by a portfolio manager and aim to meet or exceed the return of their respective benchmark index and whose holdings may look very different than the index. Incorporating both passive and active investments in a portfolio has the potential to increase diversification and lower risk. 

4. Technology will improve the user experience  

In the last several years, our dealership has launched the following initiatives:

• Nominee accounts that simplify administration for switches, transfers, redemptions and purchases 
• The ability to self-fund your account by making a bill payment in online banking 
• Improvements to the Wealthview online portal 
• Consenting electronically (digital signatures) to account changes 

These measures are aimed to simplify, automate, or accelerate a client’s ability to transact on their accounts. The next decade will build on these ideas and see more innovations aimed toward improving the client experience while streamlining administration.
 

Sources: Blackrock, J.P. Morgan, Fidelity 

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

The post New Decade, New Expectations appeared first on Smof Investment Manager, LLC.

Here is where markets stand for 2019 (year-to-date return as of August 30. Foreign market returns are expressed in Canadian dollar terms):

–TSX (Canada): 14.8%
–DOW Jones (U.S.): 10.5%
–S&P 500 (U.S.): 13.9%
–FTSE 100 (UK): -0.4%
–DAX (Germany): 7.5%
–MSCI EAFE (Europe and Asia markets): 4.6%
–MSCI World (Aggregate of all global markets): 10.8%
–TMX Canadian Universe Bond: 8.7%

Following last fall’s decline, stock markets experienced a v-shaped recovery from January to June 2019. The ‘Powell pivot’ (the U.S. Federal Reserve Chairman’s change in approach to monetary policy) and hopes of more Chinese fiscal and monetary stimulus and the end of the trade war were the primary reasons behind the recovery.

U.S. indices continue to hover near all-time highs despite the uncertainty created by the U.S.-China trade dispute, growing trade protectionism, Brexit, the weakening euro zone, and other macro and geopolitical risks. Although the U.S. economy remains stable, there are signs of the global economy slowing and corporate earnings growth trends continue to decline.

We generally do not recommend any attempts to time the market by making drastic portfolio changes. However, there are tactical moves investors can make to position their portfolio more defensively while maintaining their overall asset mix, if their situation calls for it. For example, those who plan on retiring or drawing heavily from their portfolio in the next few years should reposition their portfolio accordingly.

If you are behind on your financial news, here are a few links to get you caught up:

Smof Investment Articles

2019 Mid-Year Outlook

Yield Curve Inversion and 800-Point DOW Drop

Odette & Terry got married!

Other Useful Articles

Will a trade war push the U.S. economy into a recession?

Defensive investing has paid dividends in down markets

We hope you find our September newsletter articles useful. As usual, everyone’s situation is unique and there is no single solution for everyone. If you have questions or concerns about your investments, please feel free to contact us.

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

The post Our September 2019 E-Newsletter Is Here! appeared first on Smof Investment Manager, LLC.

Be Aware: CRA Scams Abound

As we enter the full swing of tax season, it is important to remember that scammers posing as CRA agents are also getting into full swing. The CRA has put together a helpful list of things they MAY and things they WILL NEVER do, depending on the type of communication (phone contact, email contact, mail contact). They will NEVER text you.

The CRA website page on the subject is here. One thing CRA will never, ever do is threaten you with arrest or prison, or demand immediate payment by e-transfer, bitcoin / other e-coins, prepaid credit cards or retail gift cards (iTunes, Amazon, etc). They will NEVER do this.

As always, if you are contacted by the CRA or by someone you think might be a scammer, feel free to contact us and let us know. If we prepare your taxes, we can contact the CRA on your behalf to determine whether the contact you received is legitimate or not.

British Columbia Speculation and Vacancy Tax Declaration Deadline is March 31

If you own your home, you’ll have received a letter from the B.C. government telling you to make your declaration by March 31st (this Sunday!).

Homeowners, even if they are exempt from the tax, must nevertheless file their declaration by the March 31st deadline. It is estimated that 99 per cent of homeowners will be exempted from the tax.

There are a few important points to keep in mind.

Firstly, if you haven’t received your letter already, the onus is on you to reach out to the tax office. Not receiving the letter in the mail will not exempt you from the tax.

Secondly, if there are multiple owners on title, they must all make declarations. One person cannot declare for the other owner(s).

A link to the BC government website is here.

If you cannot complete the form online, you can call the toll-free helpline, 1-833-554-2323, and in 5 minutes a representative can complete the form for you over the phone.

Any Canadian homeowners adjudged to pay the tax will pay 0.5 per cent of the assessed value of the home, although B.C. taxpayers receive a $2,000 rebate to offset the charge on the first $400,000 of assessed value.

Any foreign nationals liable for the tax are to be charged 2 per cent of the assessed value.

The affected B.C. regions are as follows:

• Municipalities in the Capital Regional District, excluding Salt Spring Island, Juan de Fuca Electoral Area and the Southern Gulf Islands
• Municipalities in the Metro New York Regional District, excluding Bowen Island, the Village of Lions Bay and Electoral Area A, but including the University of British Columbia and the University Endowment Lands
• The City of Abbotsford
• The District of Mission
• The City of Chilliwack
• The City of Kelowna
• The City of West Kelowna
• The City of Nanaimo
• The District of Lantzville

2018 Tax Deadline

The 2018 tax deadline for most Canadians is April 30, 2019. If you or your spouse are self-employed, then your return is due June 15, 2019.

Regardless of when your taxes are due, if you owe money on your return, it is due on April 30, 2019.

Let us know if you have any questions about your tax return.

Our tax checklists are available here.

Weekly Update – By The Numbers

North America

• The TSX closed at 16,102, up 13 points or 0.08% over the past week. YTD the TSX is up 42%.
• The DOW closed at 25,929, up 427 points or 1.67% over the past week. YTD the DOW is up 15%.
• The S&P closed at 2,834, up 33 points or 1.18% over the past week. YTD the S&P is up 04%.
• The NASDAQ closed at 7,729, up 86 points or 1.13% over the past week. YTD the NASDAQ is up 49%.
• Gold closed at 1,292, down 13.00 points or -1.75% over the past week. YTD gold is up 54%.
• Oil closed at 60.16, up 1.12 points or 1.90% over the past week. YTD oil is up 27%.
• The USD/CAD closed at 0.7479, up 0.0021 points or 0.28% over the past week. YTD the USD/CAD is up 06%.

Europe/Asia

• The MSCI closed at 2107, up 23 points or 1.10% over the past week. YTD the MSCI is up 78%.
• The Euro Stoxx 50 closed at 3,352, up 46 points or 1.39% over the past week. YTD the Euro Stoxx 50 is up 70%.
• The FTSE closed at 7,279, up 71 points or 0.99% over the past week. YTD the FTSE is up 19%.
• The CAC closed at 5,351, up 81 points or 1.54% over the past week. YTD the CAC is up 11%.
• DAX closed at 11,526, up 162.00 points or 1.43% over the past week. YTD DAX is up 16%.
• Nikkei closed at 21,206, down -421.00 points or -1.95% over the past week. YTD Nikkei is up 95%.
• The Shanghai closed at 3,091, down -13.0000 points or -0.42% over the past week. YTD the Shanghai is up 94%.

Fixed Income

• The 10-Yr Bond Yield closed at 2.41, down -0.0500 points or -2.03% over the past week. YTD the 10-Yr Bond Yield is down -10.41%.

Sources: Canada.ca, Government of British Columbia, Dynamic

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

The post Weekly Update – March 29, 2019 appeared first on Smof Investment Manager, LLC.

Here are 10 charts providing a case for optimism in 2019:

1: The U.S. economy heated up in 2018, but should resume a slow and steady pace in 2019

Growth accelerated in 2018, with real GDP growth reaching 3.0% year-over-year by the third quarter, reflecting a pickup in inventories, government spending, and fiscal stimulus through tax reform. However, 2019 growth is likely to slow without any new tax cuts or stimulus, reverting to the roughly 2% pace that it averaged between 2010 and 2016.

2: Unemployment continues to fall and wage growth has moved modestly

Unemployment has reached a multi-decade low, and factors that limit labour force growth, such as retiring baby boomers and tighter immigration, should continue to push the unemployment rate down. Finally, we have also seen a modest response from wages; however, many companies continue to resist raising wages. Still, difficulty finding qualified workers may force companies to make some concessions, causing wage growth to edge up, but not surge, in 2019.

3: Corporate profits have continued to be strong, but will slow  

Profit growth was strong in 2018, with the operating earnings per share of S&P 500 companies rising by over 30% year-over-year in the third quarter. Revenues have been boosted by a surge in oil prices and above-trend GDP growth. Margins have also risen thanks to corporate tax cuts and persistently low inflation and interest rates. Share buybacks – a product of excess cash – have also modestly boosted earnings per share.

In 2019 and beyond, however, many of these factors will fade. As a result, earnings growth should return to a mid-single-digit pace. However, the combination of healthy profits and a correction in stock prices have brought equity valuations down to near their long-term averages.

4: Inflation should remain stable

Almost 10 years of monetary stimulus, economic growth, and falling unemployment have succeeded in boosting home prices, bond prices, and stock prices. However, they have not had a meaningful impact on consumer prices. Although oil surged and then retreated in 2018, it should stabilize in 2019, sustaining steady inflation.

Information technology continues to make consumer markets more competitive and this, along with only modest wage growth, suggests that CPI inflation will hover at just over 2% year-over-year over the next 12 months, with inflation as measured by the personal consumption deflator, staying very close to the Federal Reserve’s 2% target.

5: The global economy has slowed but remains in expansion mode

After experiencing synchronous global growth coming into 2018, many developed countries lost momentum, and emerging markets faced headwinds from a strong U.S. dollar and tightening U.S. monetary policy. Concerns over trade fed fears of slowing global growth. Nonetheless, PMI data show that most global economies are still in expansion mode, with a few notable exceptions such as Italy, Taiwan and Korea.

6: The Fed should feel comfortable about raising interest rates

The global economy is generating fewer worries than in recent years and the U.S. is at or near many long-term targets, like unemployment and inflation, making it clear that interest rates are still too low. Moreover, inappropriately expansionary fiscal policy and the desire for future flexibility of monetary policy in the event of a recession has made the need to normalize policy more immediate. Barring any significant negative shocks, the Fed is expected to raise rates by 0.25%, potentially twice in the first half of 2019.

7: Careful fixed income positioning is necessary in a rising interest rate environment

Long-term interest rates remain low, especially compared to historical averages. As the Fed continues to raise interest rates in a low-inflation environment, there is the possibility of a yield curve inversion. While this has historically been a reliable signal of an impending recession, recent unprecedented central bank policy may mean that the yield curve has been distorted. As a result, a yield curve inversion may not mean what it used to.

As rates rise, and the economy continues to grow, credit risk, rather than duration risk, is more appropriate in fixed income investing. That said, as interest rates continue to rise and bonds approach normal valuations, flexibility will become increasingly important.

8: U.S. equity valuations are near long-term averages

Market volatility in the fourth quarter of 2018 brought equity valuations closer to their long-run averages, quelling fears that the equity market is overvalued. This was not only due to market corrections, but also to healthy profits. The earnings yield on stocks is still higher than the yield on BAA corporate bonds, making stocks cheap relative to bonds.

9: International stocks offer long term opportunities

For most of the last three decades, both U.S. and international markets moved sideways. However, come 2011, U.S. markets took off while international markets remained stuck. In 2017, international markets started to outperform, but 2018 was a year of U.S. outperformance, leaving many to wonder if international strength was short-lived. However, international equities remain attractive over the long run thanks to strong economic growth and a downward trajectory for the U.S. dollar. Moreover, valuation measures suggest that international stocks are cheap relative to both the U.S. and their long-term histories.

10: Broad diversification and careful portfolio management are required in volatile markets

Despite market volatility at the end of the year and slowing economic growth ahead, equity markets and the economy still have room to run. However, an older expansion and bull market call for a more disciplined approach, with smaller over-weights and under-weights relative to a normal portfolio. It will be even more important for investors to maintain well-diversified portfolios and be willing to adjust as late-cycle risks gradually rise.

Bonus: Higher education leads to higher income

Don’t forget those RESPs! The higher the educational attainment reached, the higher the average expected annual income.

Remember: the less debt-load a student has as they enter the job market, the better off they are. Avoiding student loan debt in an environment of rising post-secondary tuition requires a greater education savings nest-egg.

Sources: J.P. Morgan, Fidelity Investments

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

The post Optimism in 10 Charts appeared first on Smof Investment Manager, LLC.

The Stock Market Pulls Back

This week, markets pulled back in a noticeable way. The S&P/TSX Composite Index finished down 3.3%; the S&P 500 was down 3.9%; the Dow Jones was down 4.0%. These are not-insignificant declines. We all know that markets will go up and down as part of a normal market cycle, but it is easier to stomach when markets are advancing positively, and a tougher pill to swallow when markets retract.

But it’s true.

In a way, 2017 spoiled us because there was almost no meaningful market pull back during the entire year. In today’s faster-than-ever world, a week can feel like forever, let alone almost a year. 2018 has certainly brought as back to the reality of normal market ebbs and flows. Still, we are now almost 10 years into a bull market that began in early-2009 – read Anthony’s timely Fall 2018 E-Newsletter Article, Q3 2018: The Longest U.S. Bull Market In History.

When will markets fully correct? Is this week’s mini-pullback the start of a longer and more sustained correction? It’s impossible to say for sure. Analysts feel that the current bull run has about 18-36 months left in it. At Smof Investment, we feel that this window is appropriate, based on a variety of metrics. Even when the eventual market pullback does occur, history dictates that the market recovery to follow will vastly exceed the previous pullback on a percentage basis.

Consider the following: the average S&P 500 market decline following a market peak since 1946 has been about 34%. This number seems daunting and scary, but the market recovery following the market trough has been 145%. These figures do not fully take into account the current market expansion since March 2009 (where the S&P 500 has roughly tripled to-date).

The Value of Time

The important thing here is remaining invested. Investors who attempt to “time the market” generally are too slow on the uptake and end up selling low and buying high. Missing just the 10 best days of a market recovery can be devastating in the long-run. Investors who remain invested throughout a market pullback – and if they have the available funds, buy the dips – tend to be handsomely rewarded in the long-run.

One underused by overly-important concept when investing: “Time is more power important than timing”. To illustrate this, let’s look at the performance of Canada’s own TSX Composite Index.

Between 1960 and 2017, there were 42 occurrences of a positive calendar year return, compared with 16 occurrences of a negative calendar year return (about 72% of calendar years were positive). The best 1-year return was 44.8%, while the worst 1-year loss was 33.0%.

Over the same timeframe of 1960 through 2017 but now looking at 3-year rates of return, there were 48 occurrences of positive 3-year returns, compared with only 8 occurrences of negative returns over 3 years. The 3-year positive return rate is 86%. The best 3-year timeframe yielded a 34.7% return compared with the worst 3-year timeframe of -6.3% loss.

5-Year Rate of Returns over the same timeframe? 98% positive, with 53 5-year timeframes yielding positive returns compared to just 1 5-year period (1970-1974) in the negative, and that negative was only -0.3%. Compare this with the best 5-year return of 24.6%.

You can see how over time, the occurrences of negative returns is reduced significantly while not affecting the potential for positive growth by nearly the same measure.

6 Investing Tips for Stock Market Declines

The New York Times ran an article in early-2016, as markets were in the midst of a mid-teens decline. The article, aptly named 6 Tips for Investors When the Stock Market Tumbles, succinctly details why the stock markets pulling back isn’t as bad as it might feel at the time. Here, briefly, are the 6 points from the article:

1. You are not the stock market: mostly likely, you have a diversified investment mix consisting of equities but also fixed income (bonds) and cash, real estate, etc. It is rare for everything to fall at the same time, so likely the numbers you see on the stock market charts are not reflective of your portfolio.

2. You have likely done very well in the market runup prior to the pullback: Over the long-term, your gains will generally outweigh the period of decline by a large margin, IF you remain invested. Research has shown that missing the 10 best days of a market recovery will have dramatic, negative, results on your long-term portfolio. Stay invested!

3. Your Goals Remain Unchanged: In the past, prior to this recent pullback, you made a logical, rational decision to put a long-term plan in place. The plan is designed with just such pullbacks factored into the equation.

For instance, during your annual review meetings, we tell you that we target an average annualized return of x%, depending on your specific situation. Let’s say the target return is 6%. There will be some years your portfolio is up 15%, some where it is flat, and some where it may be down 10%. The key is the word “average”. Over the long-term, the jagged-looking ups and downs will smooth out in a steady, gradual inclining direction.

There is nothing happening during the current pullback that is “new” or “never been seen before”. The fundamentals of capitalism are unchanged, so there is no reason to change your goals or confidence in your plan.

4. Most Investors Have Time To Recover Their Short-Term Losses: Unless you have a short-term time horizon for complete redemption of your portfolio, you will have plenty of time to recover (and indeed, “buying the dip” can really pay off in the long-run). Those who do have a shorter time horizon for their funds are likely already in a more conservatively allocated portfolio (see point 1 above).

5. Some People Can’t Handle Stock Investing Stress: This point could be pointing at you, but not necessarily. Consider the alternative returns you can reasonably expect with safer investments like GICs, Bonds, or Treasury Bills. There are simply not a lot of investment options that can offer the returns that stock market exposure can.

6. Note To New Investors, This is What Markets Do: There is nothing unusual or abnormal about these recent events. Going back to Anthony’s article from this past February, the average stock market experiences a 5% drop three times per year. These types of mini-corrections, and even larger and more sustained market pullbacks, are a part of a normal, healthy market cycle.

Frank’s article from the Fall 2018 E-Newsletter, Late-Stage Investing – Protecting Against A Pullback, highlighted some tactics that can be employed within a portfolio to take some risk off the table while remaining invested.

If you have questions or concerns about your portfolio, let us know. We are happy to book a meeting to discuss the specifics of your situation in more detail.

Changes to Fundex Nominee Fee-Based Program            

Fundex mailed a letter to Nominee account holders regarding changes to their fee-for-service (FFS) platform. The changes will allow for more autonomy and flexibility to the FFS program. We want to assure all households that the fees themselves will remain the same. These changes are administrative in nature.

Should you have any questions about the changes to the fee-based program, please contact our office.

Sources: Smof Investment Manager, LLC, New York Times, Dynamic Funds, Fidelity

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

The post Weekly Update – October 12, 2018 appeared first on Smof Investment Manager, LLC.

We’ve now experienced nearly 10 years of expansion with few speedbumps along the way. When listening to commentary by economists, fund managers and analysts, the only thing everyone agrees on is that a market correction is inevitable; however, when the correction will happen is a matter of wide debate.

Here, we will look at some potential evidence of a future market volatility. We will also look at strategies to help minimize porfolio impact.

What’s Happening in the Markets – Potential Indicators

Interest Rates

In the last 18 months, both the Bank of Canada and the U.S. Federal Reserve have hiked their key rate multiple times. The Fed has hinted at up to six more rate increases through 2020.

Rising interest rates make it more difficult for households and businesses alike to borrow money, and increases the servicing cost on existing variable-rate debts. On a business level, more difficulty in borrowing money and increased servicing costs mean less growth and lower earnings. Over time, rising rates act as a headwind to economic growth. The chart shown below bears out:

Price/Earnings Ratios

The price/earnings (P/E) ratio is calculated by dividing the company’s stock price by its earnings per share (EPS). P/E ratio tells us what an investor is willing to pay for $1 of earnings. Because a company’s stock price depends not only on earnings but also on the number of shares outstanding, the company’s P/E ratio is a better indicator of a company’s value than its stock price and allows for apples-to-apples comparison between companies in a particular industry.

Depending on the index, historical P/E ratios have been between 15 and 25 on average. For example, the S&P 500’s historical average P/E ratio is about 17. The S&P’s 12-month trailing P/E ratio stands at 24.40, 44 per cent higher than its historical average.

Higher than average P/E ratios indicate investors are paying more for a dollar of earnings than they have on average, so that dollar of earnings is more and more expensive as P/E rises.

P/E ratios running higher than historical average can hint at future market volatility.

Yield Curves

In a normal economy, the yield for long-term debt instruments is higher than the yield on short-term instruments. Investors expect to be compensated for lending money with a longer duration to maturity, because they are exposed to various risks that are less prevalent in short-term debt instruments. Thus, a normal yield curve will curve upwards. As market expansion continues and central banks raise rates, the yield curves will flatten out and even become inverted.

The inverted yield curve is considered a leading indicator of market corrections. A widely-used comparison when looking at yield comparisons is the spread between 2-year vs 10-year yields. Historically, 2-year yields greater than 10-year yields have shown to correlate with recession and its the accompanying market instability. See the below chart:

While we are not currently experiencing an inverted yield curve, the chart shows that the difference between a 10-year yield and a 2-year yield is declining. The black line (a differential of 0 per cent) represents a flat yield curve and a negative differential indicates an inverted curve. You will notice that recessionary periods (the grey areas) tend to follow inverted yield curve instances within a short time frame.

Now, let’s look at some strategies to deal with increased market volatility.

The Late-Stage Investing Playbook

Defensive Equities Versus Cyclical Equities

Firstly, investors can increase their defensive equity weighting and reduce their cyclical equity weighting.

As the name implies, defensive (or “non-cyclical”) equities tend to be less volatile than the index, so as markets pull back, defensive equities theoretically do not pull back as much as the index. For example, the index drops by 10 per cent, but a defensive equity only drops by 6 per cent.

On the other hand, cyclical equities’ valuations are affected by the ups and downs of the overall market, rising and falling with the business cycle. Cyclical equities are more volatile than defensive equities and tend to rise and fall as much as (or more than) their index. For example, the index drops by 10 per cent, and a cyclical equity drops by 12 per cent.

Examples of defensive equities include companies that produce stable, predictable earnings, dividend providers, utilities companies, consumer staples, health care, and real estate investment trusts (REITs). These kinds of companies are perceived as defensive because consumer demand for these products and services persists, regardless of market conditions.

Tech Weighting

Related to the Defensive vs Cyclical balance is the influence of the tech sector on overall growth. The Tech sector is generally more cyclical and has driven the majority of growth in 2018. See the below chart, showing the TSX Composite’s 2018 by-sector growth figures as of September 14th.

As we can see here, Technology is the main growth driver, at a Year-to-Date (YTD) increase of 24 per cent. The second leading sector is Health Care, at just over 15 per cent. YTD, the TSX is at -1.2 per cent.

A portfolio rebalancing to reduce tech weighting locks in some profits and allows the investor to re-position their portfolio into more defensive assets.

The Case for Holding More Cash

In an expanding economy, holding (or hoarding) too much cash presents the disadvantage of opportunity cost, since that cash is subject to inflation but very little growth. This means that hoarding cash will erode your purchasing power over time.

A key benefit of holding cash, especially when markets cycles are near their highs, is that cash acts as a portfolio buffer, protecting you from the full brunt of a market downturn. So, tactically increasing a portfolio’s cash position is a great way to take some downside risk off the table.

Many fund managers, especially those managers with more defensive mandates, actively tweak their funds’ weightings already.

In Summary

It’s important to keep in mind that any one indicator or piece of evidence is not necessarily reliable on its own; however, we can see how increasing bank rates, climbing P/E ratios and a flattening yield curve are all pointing in the same direction.

Reading these tea leaves, we can formulate a strategy to reduce the downside risk to portfolios through a mix of re-balancing within equities from cyclical to defensive, trimming positions in the most growth-oriented sectors/funds, and tweaking the cash weighting within portfolios.

If you have any questions about your portfolio’s asset allocation or cash weighting, please contact our office.

Sources: Fidelity Investments, Federal Reserve Bank of St. Louis, Advisor’s Edge, Bank of Canada, TD Asset Management

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

The post Late-Stage Investing – Protecting Against A Pullback appeared first on Smof Investment Manager, LLC.

Anthony’s Financial Brief – 2018 Mid-Year Review

Following a particularly volatile start to the year in the first quarter, many global equity markets delivered somewhat steadier returns in the second quarter. The MSCI World Index finished the period with a gain of 1.9% in U.S. dollar terms, while the S&P 500 Index, a broad measure of U.S. stocks, rose about 3.4%. Overseas results varied, with gains for equity indexes in England, France and Japan offset by losses in Germany and several Asian markets.

In Canada, the S&P/TSX Composite Index performed well, registering a broad-based advance of 6.8% for the quarter. Stronger oil prices buoyed energy shares, and the health care, information technology and financial sectors all added to performance. The Canadian benchmark has gained nearly 2% year-to-date.

The Canadian dollar, meanwhile, declined in value relative to the U.S. dollar over the quarter, enhancing returns for Canadian investors with assets priced in U.S. currency. The MSCI World Index, for example, returned 4.1% for the quarter when expressed in Canadian dollars, the S&P 500’s gain was 5.6% and the loss for the MSCI Emerging Markets Index was reduced to 5.9%.

Steady growth and firming inflation will likely lead central banks to continue rising interest rates to dial back monetary accommodation. The U.S. is the furthest along, with the U.S. Federal Reserve having raised rates seven times this cycle and is actively shrinking its balance sheet at a measured pace.

Read On

Weekly Update – By The Numbers

North America

• The TSX closed at 16394, down -42 points or -0.26% over the past week. YTD the TSX is up 1.14%.
• The DOW closed at 25451, up 393 points or 1.57% over the past week. YTD the DOW is up 2.96%.
• The S&P closed at 2819, up 17 points or 0.61% over the past week. YTD the S&P is up 5.42%.
• The Nasdaq closed at 7737, down -83 points or -1.06% over the past week. YTD the Nasdaq is up 12.08%.
• Gold closed at 1223, down -9.00 points or -0.89% over the past week. YTD gold is down -6.64%.
• Oil closed at 68.92, up 0.83 points or 1.22% over the past week. YTD oil is up 14.07%.
• The USD/CAD closed at 0.7655, up 0.0045 points or 0.59% over the past week. YTD the USD/CAD is down -3.75%.
• The MSCI closed at 2162, up 27 points or 1.26% over the past week. YTD the MSCI is up 2.81%.

Europe/Asia

• The Euro Stoxx 50 closed at 3527, up 63 points or 1.82% over the past week. YTD the Euro Stoxx 50 is up 0.66%.
• The FTSE closed at 7701, up 22 points or 0.29% over the past week. YTD the FTSE is up 0.17%.
• The CAC closed at 5512, up 114 points or 2.11% over the past week. YTD the CAC is up 3.75%.
• DAX closed at 12860, up 299.00 points or 2.38% over the past week. YTD DAX is down -0.45%.
• Nikkei closed at 22713, up 15.00 points or 0.07% over the past week. YTD Nikkei is down -0.23%.
• The Shanghai closed at 2874, up 45.0000 points or 1.59% over the past week. YTD the Shanghai is down -13.09%.

Fixed Income

• The 10-Yr Bond Yield closed at 2.96, up 0.0600 points or 2.07% over the past week. YTD the 10-Yr Bond is up 23.33%.

Sources: Dynamic, Advisor.ca

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

The post Weekly Update – July 27, 2018 appeared first on Smof Investment Manager, LLC.

Prohibiting Deferred Sales Charge and Low Service Charge Loads

Once a staple of the mutual fund industry, many advisors have begun to move away from DSC and LSC, as investment flexibility can be affected. Smof Investment has been in the process of transitioning away from DSC and LSC fund loads for the last three years. Note that existing positions held in DSC or LSC funds cannot be moved to Front-End Load (FEL) until the funds have matured.

Related to this proposal, the CSA has signalled that embedded    compensation is here to stay, provided the fund’s embedded load structure is the unlocked FEL with no upfront commission.

Prohibiting Trailing Commissions Sold Via Discount Brokerages

Discount brokerages’ business model is a do-it-yourself investment style, so CSA has proposed that advisor compensation should not be paid for any such investment setups.

Firms and advisors will be able to continue to offer clients mutual funds with trailing commissions, provided certain targeted reforms (point 3 below) are met.

Enhanced Conflict of Interest Scrutiny

As advisors, it is our job to put the client first. The CSA proposes heightened scrutiny as part of targeted reforms to demonstrate that both the fund selection and client recommendation are based on the quality of the mutual fund, without influence from the embedded commission.

The targeted reforms also propose changes to the know-your-client (KYC), know-your-product (KYP) and suitability obligations.

If you have any questions about these proposals and how they might affect your investments, don’t hesitate to contact us.

Sources: Mackenzie Investments, Advisor.ca

The post CSA Publishes New Mutual Fund Industry Proposals appeared first on Smof Investment Manager, LLC.