by Tom Bradley
It’s been a volatile start to the year. The list of issues on investors’ minds is long, topped by inflation, rising interest rates, COVID, supply chain problems, and of course, Vladimir Putin’s invasion of Ukraine and the resulting exodus of western businesses from Russia.
Both stocks and bonds have had a rough quarter. U.S. and global markets are in correction territory (down 10%), with the technology sector down closer to 20%. The Canadian market has fared better due to its heavier weighting in resource stocks (the price of oil, industrial metals, and agricultural commodities have soared), but many domestic stocks are down sharply as well. Shopify, for example, has lost two-thirds of its value in just four months (we do not own the stock). Emerging markets have also suffered significant losses, led by Russia. We do not own any stocks in the country (see our recent post on the topic here).
Bonds, which are typically a safe haven when stocks are falling, have not held up their end of the deal. The Canadian bond market is down around 6%, as yields have risen on the back of an uptick in inflation (when yields rise, bond prices fall). Our Founders Fund is down 5.6% in 2022 (as of March 16). Our Canadian investments have helped buoy its performance, and our large cash weighting (10% of the fund) has also helped. While negative returns are always off-putting, the fund has held up well all things considered. Our Builders Fund is down 7.4% this year.
Our advice to clients hasn’t changed: stick to the plan. In any market pullback, the worst course of action is to panic and make sweeping changes to your portfolio. A well-diversified portfolio will recover over time. The world is a scary place right now, but there are always things to worry about. Stocks have endured many geopolitical conflicts and recessions. The current issues are real and distressing, but we have no reason to believe individuals and businesses won’t pull through again.
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As has been the case throughout our 15-year history, we’ve been a net buyer of stocks during the recent weakness. Most of our purchases have been in shares of existing holdings that our managers know well and are still keen on. The companies are typically best-in-class businesses that are highly profitable, well financed, and whose fundamentals and longer-term growth prospects haven’t changed. Examples include:
Toromont (heavy equipment dealer)
- Thomson Reuters (information services)
- Brookfield Renewable Partners (renewable power)
- S&P Global (financial information and analytics)
- Magna International (global auto parts manufacturer)
- Rentokil (pest control services)
- Sony (consumer electronics, movies, music, and games)
- Adobe (software developer)
- Kion Group (manufacturer of forklifts, warehouse equipment and automation technology)
- Amplifon (global leader in hearing aids)
- Sleep Country Canada (mattress and sleep products retailer)
- Northland Power (renewable energy)
We’ve also purchased a handful of new businesses, including Zoetis (world’s largest producer of medicine and vaccinations for pets and livestock), CNH Industrial (manufacturer of agricultural machinery and construction equipment), FMC (maker of insecticides, herbicides, and crop protection products), Grafton Group (home and garden retailer in the U.K.), Dolby Laboratories (leader in audio technologies for movies, TV, music, and gaming), and Hudbay Minerals (copper and zinc mining).
To fund these transactions, we trimmed some of our stronger-performing investments. These have primarily been in the resource/commodity sector, including Nutrien (fertilizers), MEG Energy (oil producer), Franco-Nevada (gold), and Ag Growth International (grain handling and storage). Our managers have also moved on from a few stocks where the outlook has weakened or the valuation is no longer compelling. These include Koninklijke Philips, Orpea, and Dassault Systèmes.
In the Founders Fund, we’ve been active in adding to the underlying equity funds. Despite the market weakness, the fund’s stock weighting has increased 2-3% to 62%, which is slightly above the long-term target (60%). If the market weakness persists, we will likely get more aggressive in adding to stocks. We still have a healthy cash position in the fund that allows us to act on such opportunities.
We’ve also used the weakness in the bond market to add to the Income Fund holding (although Founders remains under committed to bonds). Fixed income securities are more attractive with higher interest rates.
Our Q1 Report will be coming out in a few weeks and will provide further colour on the transactions we’ve made this quarter and the positioning of our funds. If you have any questions about your portfolio in the meantime, I encourage you to book a call or video chat with one of our Investor Specialists (just click the ‘Book now’ button), or you can reach us at 1-888-888-3147. I assure you, we don’t go into hiding when our clients need us the most.
[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.]