by Salman Ahmed
In March, I wrote that we were experiencing the most dramatic fall in stock prices in many years. This was swiftly followed by one of the fastest rebounds on record. Our managers have responded by adjusting their portfolios and we’ve done the same in the Founders Fund.
In the Founders Fund, we’ve rebalanced our weight in stocks to get closer to our long-term target – 60%. Our stock weighting drifted up to 67% as a result of purchases made during the market tumult and the subsequent recovery. Since mid-March, we’ve experienced the fastest market rebound in the last 50 years.
But that bounce back has been uneven. Technology, pharmaceuticals, and precious metals companies have left economically sensitive industries in the dust. For context, the U.S. market is now back in the black (in Canadian dollar terms) for 2020 as technology accounts for more than a quarter of the S&P 500 Index.
It won’t be a surprise to long-standing clients that the underappreciated areas have accounted for most of the recent additions in our funds. The Steadyhand Equity Fund purchased heavy equipment supplier Toromont and convenience store owner Couche-Tard. The Global Equity Fund bought aerospace equipment manufacturers Safran and Howmet. The Small-Cap Equity Fund repurchased engineering firm SNC-Lavalin and hydrovac firm Badger Daylighting, while the Global Small-Cap Equity Fund added to staffing agency en-Japan.
Our Income Fund has also made changes. Despite equity markets rising, safety is as expensive as it has ever been. For example, 10-year Government of Canada (GOC) bonds yield just 0.5%. The manager, Connor, Clark & Lunn, has shifted its GOC holdings to provincial and corporate bonds. Though they provide less protection if the stock market goes through another bout of turbulence, they are expected to do better as yields rise from these historic lows.
In the Founders Fund, we’re currently holding 25% in bonds – which is 10% less than our target. Instead of a full bond weighting, we’re holding 12% cash to balance out the economically-sensitive nature of our bonds and stocks. Cash also provides ballast if market volatility returns.
It’s impossible to know if the market rebound will continue or if stocks are poised for another dip. Rather than spend time on the unpredictable, we recommend investors rebalance to their target mix of stocks and bonds. If you own the Founders Fund or the Builders Fund, we’re already doing this for you. We also suggest our retired clients use the recent market lift as an opportunity to top up their cash reserves if they use one. If you’re not sure what a reserve is, book an appointment with one of our specialists to discuss if it makes sense for you.
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