Looking forward to 2021, the year of economic recovery
At the start of the new year, there is an almost irresistible urge to make predictions. Everybody wants to know what will happen next. The demand for good fortune tellers, however, has always exceeded the supply, and for a simple reason. Nobody knows what will happen next. There is no better example than the year that just ended.
Last year, when looking ahead to 2020, nobody predicted the global pandemic that is now killing almost 4,000 Americans per day, a death toll that exceeds, every 24 hours, the total number murdered in the 9/11 terrorist attacks, and which over a two week span will end more American lives than the total number of U.S. soldiers lost in the Vietnam War over a period of 12 years. Even if somebody had predicted the pandemic and its horrific toll, would that person have predicted that tens of millions would refuse to take even the most basic steps to protect themselves and their families by wearing face masks and avoiding gatherings? And if our prescient seer had foreseen both of these highly unlikely events, would that person have predicted that the major U.S. stock markets would react by rising 16% in 2020?
As we enter 2021 we see some obvious positive signs for capital markets:
- Interest rates remain at historic lows, with the 10-year U.S. treasury bill at about 1% and many interest rates around the world still in negative territory. Cheap money makes it easy for companies to expand, and makes investing in shares more attractive than buying bonds or holding cash. Most central banks have pledged to keep rates low at least for 2021;
- The COVID-19 vaccine is rolling out in North America and Europe, albeit more slowly than hoped. By the end of the 1st quarter most of the most vulnerable will be immunized; by the end of the 2nd quarter most everyone over 65 will have had their jab. Ending the pandemic is key to getting the consumer economy back to the pre-2020 normal. We feel confident that this will happen by the end of 2021;
- The incoming Biden administration is, in our opinion, a huge plus for both the US and the world economies. More money will be put in the hands of the poor and the working poor, where it will be consumed rather than saved. Immigration will start up, leading to more households, more demand for hard goods, and a small but much-needed reduction in the average age of the population. The destructive trade war with China will be scaled down and tariff barriers between Canada and the US in materials such as steel, aluminum and lumber will likely be eased or abandoned.
At the same time, we also see some warning signs and at least one flashing red light:
- Much of the good news noted above may already be priced into the market. We have seen the share prices of some companies, that are still in obvious distress due to the pandemic, rise based on expected rapid improvement. It may be that this will be a classic example of “buy on rumour, sell on news”, in which the anticipation will be better than the realization. We will be keeping a close eye on company earnings as the year progresses;
- Growth stocks have had an incredible two-year run, no more so than in the technology sector. Stock prices are high and rising and must, at some point, reach a peak. Even a great company stops being a great stock to own if the price gets high enough. We are comfortable with our portfolio which is composed entirely of high quality, profitable companies, but we do worry about the contagion effects if lower quality names take a big dip;
- The speculative part of the market is in extreme bubble territory. New entrants carry values that cannot be justified by normal financial analysis. We expect a blow-off event in which the prices for some of these assets could fall by amounts similar to what happened in the dot.com crash of 1999-2000;
- Finally, we have some concerns about the value of the Canadian dollar. Currently trading at around USD 0.795, the loonie is up around 8% year over year, and commentators believe it could rise to the USD 0.82 range. This currency risk affects the return on our US stocks and is something that we are watching carefully.
Investing is always a balancing act. We all want to get good returns, but nobody wants the risk of a significant loss. Since we cannot know what is going to come next, the best we can do is weigh the factors we can identify and recognize that we will inevitably have to deal with things that are simply not on the radar at the moment. As the year unfolds, and as in all years, paying attention to the markets, to the economy and to the world around us, will allow us to make the adjustments and portfolio changes needed to keep the risks and rewards in balance.
David Baskin, President
The Baskin Fixed Income Pool
As you are aware, in January 2020 we launched the Baskin Fixed Income Pool (” Pool”). The Pool became the primary vehicle that we use for the fixed income allocations in client accounts. All the bonds, preferred shares, and similar instruments which we purchase and manage are now held in this Pool and our client’s own units of the Pool instead of individual fixed income securities.
After a smooth transition of client assets into the Pool and a most interesting year in the markets, the Pool has grown to over $250 million in size as at year end. We are pleased to report to you that the Pool has had a strong start with a year-to-date rate of return of 5.3% from its launch on January 21st to December 31, 2020. For clients who own units of the Pool in non-registered accounts, you can expect to receive T3 slips from the custodian, NBIN, showing related income from your investment.
At this time, we believe it is worthwhile to revisit the reason for introducing the Pool. We will also revisit its Investment Objectives and Strategy as well as the benefits to our clients.
For most of our clients, having a portion of their portfolio allocated to fixed income is prudent. It is important that we continually look for opportunities to make the most of that fixed income allocation and we see significant benefits to investing through the Pool as opposed to holding individual securities.
The Baskin Fixed Income Pool aims to provide investors with a moderate degree of income with reasonable safety of capital. Our objective for the Pool is to achieve a higher potential total return than available in money market instruments or short-term bonds.
In pursuing its investment objective, the Pool invests in high quality, primarily liquid investment grade fixed income securities (bonds and preferred shares) issued in Canada, and some U.S., by governments and corporations. Investments across different industries and sectors provide diversification. To achieve downside protection, investments will tend to be shorter maturities to reduce interest rate risk.
Benefits to Our Clients
There are three areas in which investing through the Pool benefits our clients – Pricing, Diversification, and Investment Opportunities. Together, these can lead to higher returns and lower volatility.
- Pricing: As with any other commodity, prices are usually better for larger orders. The Pool has the buying power to make large orders, and this gives us the ability to approach additional dealers allowing us the opportunity to negotiate even better pricing. These pricing benefits are shared by all investors in the Pool.
- Diversification: There is a significant benefit to maintaining a diversified portfolio as this reduces risk. Investing through the Pool allows all our clients to have a broad exposure to the market, increasing the number of fixed income securities in which they hold a stake.
- Investment Opportunities: The size of the Pool gives us access to new bond issues and the ability to make larger scale purchases of bonds that are scarce or trade rarely. More opportunities for all our clients enhances the performance of our fixed income allocation.
If you have any concerns or questions about the Baskin Fixed Income Pool, please contact your Portfolio Manager.
The Baskin Growth Equity Pool
We are very excited about the upcoming launch of the Baskin Growth Equity Pool (“Pool”). The Pool will allow us to achieve a greater level of diversification for our clients’ smaller accounts by investing in a group of high-quality North American equities. The Pool is particularly targeted for RESP’s and TFSA’s, and other smaller portfolios. In order to demonstrate our confidence in this initiative, each of the owners of Baskin Wealth Management will be investors in the Pool.
When we manage equity portfolios, we endeavour to achieve investment diversification in at least three ways:
- Different industries and sectors
- Different countries (generally Canada and the US)
- Securities with varying yield, growth, and taxation characteristics
For this reason, we ideally have approximately 30 equity positions within a portfolio. However, quite often this is not possible for smaller portfolios, and it leads to several challenges:
- Too few positions may result in larger swings in performance due to the overly large influence of one or two securities that are doing particularly well or poorly.
- Inability to buy certain high-priced securities. For example, Amazon currently trades at over $4,000 CDN per share. Clearly this puts it out of reach for a new TFSA or RESP, even if we think it would be a suitable holding. The same problem arises with several our best investment ideas, such as Google, Constellation Software and Netflix, which all cost over $600 CDN per share.
- The smaller number of securities makes it hard to put new money into an account or take money out without causing significant changes in sector and security weightings.
The Pool will own the same 30 or so names that make up the core holdings of our separately managed portfolios. When changes are made in those core holdings, we will make the same changes in the holdings of the Pool.
The investment objective of the Baskin Growth Equity Pool is to provide our clients with long-term capital appreciation. Using fundamental analysis and independent judgement, the strategy for the Pool will be to identify companies which are protected from competitors by deep moats, have strong growth potential and have experienced management. We will seek to obtain shares of these companies at a fair price and hold them for the long-term.
This Pool is suitable for our clients that have a medium to long time horizon and for those who are willing to accept the higher level of volatility associated with a growth-oriented portfolio. The fees to operate the fund will not exceed 0.20% of the value of the fund.
If you have any concerns or questions regarding the Baskin Growth Equity Pool, please contact your Portfolio Manager.
Constellation Software Spin-off of Topicus.com – December 16, 2020
What is next for Constellation Software? – December 16, 2020
David Baskin on BNN – December 11, 2020
Barry Schwartz on BNN – December 31, 2020