By Tom Bradley
We’ve been going through a period of increased volatility as we head into the New Year. Many commentators have pointed to the probability of the U.S. Federal Reserve increasing the key lending rate as the cause, but it’s never that simple. There are lots of things Mr. Market can choose to worry about.
But one thing is certain: no one knows where the markets are going from here. It wouldn’t surprise us if there’s a real shakeout, or a significant rally. Either is possible. As investors, we have to keep our eye on the prize. We know that if we’re going to produce good long-term returns, we need to make decisions based on long-term value. So here are our two rules: first, if short-term news and price movements change long-term valuations, we’ll react. And second, if the noise is just that, noise, we’ll use all our fortitude and patience to stay the course.
What this means (and as is always the case in periods like this) is that our managers are doubling back to look at the financial strength of their companies and compare stock prices to their long-term valuation ranges. Generally, we will be more active because market gyrations create opportunities to make changes. For instance, some stocks hold up well (i.e. don’t go down much) and become expensive relative to the rest of the market, and others get hit hard and warrant additional purchases.
Or, the managers’ assessments may result in a stock being sold when it’s down because of deteriorating fundamentals. This is not a happy circumstance, but is a necessary part of portfolio management. Sometimes we need to take our lumps and move on (last week we took a little lump in the Equity Fund, selling out a small position in Birchcliff Energy).
We’re intensely watching the year-end turbulence, but haven’t made any meaningful changes yet. As a reminder, in August our equity managers were active buyers on market weakness, as were Salman Ahmed (our portfolio manager) and I with the Founders Fund. Depending on how the market plays out this time, we may get active again.
Despite the recent declines, diversified portfolios at Steadyhand are still up for the year. For example, the Founders Fund is up 2.4% as of Dec. 15 (update: the fund gained 3.9% in 2015). While corporate bonds have been soft and Canadian stocks downright dismal, the foreign stocks, aided by our weak dollar, have provided an offset.
Currently, the Founders Fund is invested 25% in bonds (mostly provincials and corporates), 26% Canadian stocks (a mix of small, medium and large; all industries including energy) and 34% in foreign stocks (U.S., Europe and Asia). The remaining 15% of the fund is held in cash.
Specific to the market’s current hot spots, 6-7% of the Founders Fund is invested in oil and gas stocks and 3% in high yield bonds. For more detail on the funds’ industry and stock allocations, I’d refer you to our Third Quarter Report. The names and faces haven’t changed much since September 30th.
Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of return are the historical annual total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.1