By David Baskin January 22, 2016
Some years, it is hard for investors to make money. As it turns out, 2015 was one of those years. Investors have a large and increasing menu of asset class choices. Take a look at the total returns (including dividends or interest) for some possible investment choices for last year:
|· Canada S&P/TSX||-10.8%|
|· U.S. S&P 500||+1.7%|
|· U.S. Dow Jones Industrials||+0.2%|
|· Emerging Markets||-15.5%|
|· Developed Markets (non U.S)||-5.3%|
|· Oil in US$||-30.1%|
|· Gold in US$||-11.9%|
|· U.S. High Yield Bonds||-4.6%|
|· Canadian Bond Index||+3.5%|
|· Canadian 90 Day Treasuries||+0.2%|
As can be seen, there was some safety, if not great returns, to be had in bonds and in the giant U.S. stocks that dominate the S&P 500 (particularly Facebook, Amazon, Netflix and Google, known collectively as FANG). These stocks together accounted for all of the gains in the S&P 500. About 80% of the stocks in the S&P 500, or 400 out of 500, fell during the year, as did the majority of the stocks in the Dow Jones Industrial Average. Efforts to diversify into alternative assets such as commodities, foreign stock markets of either developed or emerging economies, or high yield bonds only led to deeper losses for most buyers in 2015.
At Baskin Wealth Management we made some strategic decisions going into the year. We decided to eliminate energy stocks from all of our client portfolios, and we opted to maintain a zero-weight position in gold and other precious metals. We also eliminated all holdings of base metals. More importantly, starting in 2012 we systematically increased our portfolio weighting in U.S. large cap stocks. By the end of last year we were at a record level for U.S. equities. This helped our clients in two ways: the U.S. stocks out-performed the Canadian ones on average, and the sharp drop in the Canadian dollar gave us some welcome currency gains.
A particular problem we experienced in 2015 was in the preferred share market. The record low level of interest rates in Canada put tremendous pressure on preferred shares that will re-set their dividend rates in the next few years, and also affected floating-rate preferred issues. With the 5 year Government of Canada bond closing the year at less than 0.7%, investors are concerned that the future yield on these instruments will be lower than they had originally expected. Tax-loss related selling at year-end and illiquid markets for some of these instruments exacerbated the problem.
One statistic that we measure regularly is “downside capture”. Simply, when the market declines (say 10%) how much do our clients’ portfolios decline? A downside capture ratio of 100% would mean that our clients did exactly as poorly as the market. A ratio of 200% would mean they did twice as badly as the market; and a ratio of 50% would mean that they only suffered half of the market decline. When looking at your portfolio’s return for the year, we suggest you compare its performance (which may include management fees paid) to that of the various asset classes shown above. You will likely find that your downside capture was considerably less than 100% for the year. If you enjoyed a positive return, your downside capture was less than zero.
We tell our clients, at the start of our relationship, that our emphasis on protection of capital means that they may lag behind the markets in terrific years, but that in poor years, they should enjoy better than market returns. We are gratified that this is exactly what happened in the difficult conditions of 2015, depending in each individual case on the timing of your initial investment with us, and the make-up of your portfolio.
Those who saw, read or viewed our Outlook 2016 presentation should not be surprised that the world is in a low-growth period. We outlined the reasons why we think the major world economies will grow slowly for the next few years, why commodity prices will be slow to recover and why corporate profits will also show sluggish progress. In other words, the things that seem to have alarmed investors in the last few weeks should not have been news to our clients. We don’t know what will happen to markets in 2016, and neither does anyone else. Our job, as managers, is to protect our clients’ capital by taking a long term view based on fundamental value. We are gratified that this worked in a difficult year for 2015. In spite of a shaky start to 2016, we hope that our clients will enjoy a profitable and happy New Year.