by Tom Bradley
I love my noise canceling headphones. The sound is great and they’re useful when I want to listen to music while my wife is doing something else. They’ve come in handy for work too, particularly in recent months. There’s more noise around the markets than usual.
We’re being barraged by talk about inflation, recession, the U.S. Federal Reserve’s next move, banks, AI, the war, China relations, and of course, the perpetual U.S. election buzz. These things are all serious business, but the speculation about what is going to happen, and the inevitable (bold) predictions, do nothing to enhance an effective investment process. Making investment decisions based on unknowable outcomes is folly.
I will try to put the noise in perspective in an upcoming National Post column, but in the meantime, I want to review how we deal with all these uncertainties.
In a word, we diversify. We make sure your portfolios have exposure to a broad array of asset types, economies, currencies, and industries. In other words, at least a part of your portfolio will benefit from whatever the outcomes are. Being disciplined about this has meant clients in the Founders Fund have achieved strong results since its inception.
At Steadyhand, diversification doesn’t mean we own everything. We hold more of some things and less, or none, of others based on two factors: our fund managers’ investment philosophy, and their short to medium-term strategies.
For instance, we have a long-standing bias towards corporate bonds, which at times make up more than half of the Income Fund. We tend to hold a lot of stocks in companies that are categorized as industrial or consumer products. The unifying theme in these highly diverse sectors is consistent profitability and the opportunities to benefit from rapid advancements in technology.
Conversely, Steadyhand portfolios tend to have modest holdings in oil & gas, banks, and real estate. There are many good companies in these sectors, but either slow growth, erratic profitability, excessive debt, or uncontrollable risk prevent us from going all in. And our fund managers traditionally have little or no exposure to unprofitable companies, many of which operate in the technology, resources, crypto and cannabis sectors. The companies don’t have the profitability they’re looking for, which means we miss some hot stocks in good markets but also avoid some equally powerful meltdowns.
Specific to right now, our search for attractively valued companies has our funds tilted away from the U.S. market. We still own plenty of American companies (29% of the Builders Fund) but are finding better opportunities in Europe and Asia.
Our long-term preferences and near-term tactics aren’t intended to capture every ounce of an upturn, or completely avoid a downturn, but rather to give your portfolio the best combination of return potential and risk over the long term.
If the level of noise has your head spinning, we understand. For us, however, the increased volume doesn’t change our approach. We observe the current landscape and make sure we understand it. We have views on how things will play out but don’t base our strategies on them. Rather, we prepare to take advantage of whatever comes our way by focusing on the businesses we own, or want to own.
I encourage you to read the rest of our Q1 Report, where we provide more details on our specific strategies and what we've been doing in each of our funds.
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