Current Outlook

Updated May 12, 2022

Print

The following strategies guide our advice to clients and are reflected in the positioning of the Founders Fund.

Global supply chains were already tight last year, but a combination of Russia’s invasion of Ukraine and COVID lockdowns in China’s largest cities have acted as a vice grip. This situation is converging with North American businesses trying to hire in a strained labour market where skilled workers are in high demand. The outcome? Some of the highest inflation we’ve seen in years. And markets hate unexpected inflation.

The result is that both bonds and stocks are experiencing bouts of elevated volatility. While there are no clear answers to the global challenges driving stocks lower, the breadth of price declines has brought opportunities.

Our equity managers have been buying new companies and topping up existing holdings. We’ve taken our cue from them with respect to the positioning of the Founders Fund. The cash allocation has fallen from 14% at the end of 2021 to 8% today. We’ve added to both stocks (63%) and bonds (29%), but in recent weeks we’ve been adding more to stocks. In the Builders Fund, we’ve made sure the fund is close to fully invested in equities. We encourage you to start deploying any cash you might be sitting on and ensure your mix of stocks and bonds is on target.

Bonds

The risk versus return trade-off for bonds has improved but remains unattractive overall. Over the next five years, we expect bonds to return between 2-3% per year, which translates to a 10-15% cumulative return. These returns are likely to come with higher volatility than investors have been accustomed to as yields react to changes in inflation and central bank activity.

Despite our modest return outlook, bonds remain an important tool for most clients. They can provide safety when stocks are volatile, and as such, are a diversifier for a balanced portfolio.

Our Income Fund is positioned defensively. It also owns real return bonds to protect against rising inflation. In the Founders Fund, we’ve maintained our below-target weight in bonds (29%) but have increased the allocation with the rise in yields. We continue to hold an above-target weighting in cash (8%), which provides some defence when interest rates are rising and gives the fund liquidity.

Stocks

Our outlook for 5-year stock market returns has increased to 5-7% per year (or 25-40% cumulative), from 4-6%. Our fund managers see more attractive opportunities than they did just a few months ago. Specifically, our global-oriented managers have found an increasing number of investment ideas recently.

The Founders Fund has increased its stock allocation to 63%. We ended 2021 close to the fund’s long-term target (60%) but increased our weighting as the market declined.

Specific Advice

If you would like an assessment of your portfolio or help with developing an investment strategy, give us a call (1-888-888-3147). We provide clear-cut advice and can help better align your investments to your personal situation.

Founders Fund Asset Mix: May 12, 2022