by Scott Ronalds
Markets have been jumpy this month and you may be getting nervous. A little counsel and context can come in helpful at times like this.
You probably already know the gist of our message — stay the course, don’t panic, and tune out the noise. Markets never move in a straight line and the current choppiness is par for the course. Nonetheless, I thought it would be useful to give an update on our positioning and thinking.
We’ve been positioned cautiously for quite some time. Our equity fund managers have been concerned about the high valuations that stocks are trading at, and have been focusing on industry-leading businesses that have strong pricing power and little (or no) debt. Generally speaking, they’ve been avoiding the high-growth companies that have been garnering much of the media’s attention, including technology and cannabis stocks. Stocks in these sectors have seen the greatest price swings lately, although the uptick in volatility has spread to most corners of the market.
In our Founders Fund, we’re holding less stocks than normal (54%, versus a long-term target of 60%), less bonds (29% vs. a target of 35%), and significantly more cash (17% vs. a target of 5%). Our defensive stance has held back the fund’s return in recent quarters, but it’s this kind of choppy market that we’ve been positioning the fund for. Its current structure should help mitigate any declines and allow us to act quickly on opportunities.
To provide some context, stock markets in Canada and the U.S. have fallen roughly 10% from their summer highs (before today’s rebound in the U.S.). The Canadian bond market is down about 2%. These moves are meaningful, but not significant enough to get us thinking offense yet.
That said, our managers have been more active than normal. In the Equity Fund, we’ve purchased a new business and sold two others. Our Global Fund has bought three new stocks, and in the Small-Cap Fund we’ve added to a handful of existing holdings. As for the Founders Fund, we’ve been doing some buying of stocks (through adding to the underlying equity funds), but the goal of the purchases has been to maintain our equity exposure at the above-mentioned level rather than add to it.
If markets continue to fall, we’ll be opportunistic in the Founders Fund and will look to add to stocks more aggressively. We’re in no hurry, though, to unwind our cash reserve. We’ve had nine years of good markets and we’re prepared for more of a grinding environment.
We're not a bank.
Which means we don't have to communicate like one (phew!). Sign up for our blog to get the straight goods on investing.