Note: The following strategies guide our advice to clients and are reflected in the fund allocations for the Founders Fund.
We recommend that your equity weighting be near your long-term target. In the Founders Fund, our stock weighting is slightly below 60%, which is its target. We feel valuations are reasonable in sectors that haven’t fully participated in the rally but are wary of the speculation that appears rampant in industries such as cannabis, cryptocurrencies and technology.
Our outlook for bonds is subdued as yields are unattractive. We recommend a below-average position in the asset class, with cash as an alternative. In the Founders Fund, 17% of the portfolio is currently held in cash.
We don’t think it’s the time to stick your neck out. Rather, manage the inflation and recovery uncertainty by being diversified, keep debt levels contained, and if you need money for an upcoming project or trip, set it aside now.
The risk versus return trade-off for bonds remains unattractive. Real yields on government bonds (the yield after accounting for inflation) remain negative.
Over the next five years, we expect bonds to return between 1-3% per year, which translates to a 5-15% cumulative return. These returns are likely to come with higher volatility than investors have been accustomed to.
Despite our modest return outlook, bonds remain an important tool for most clients. They provide safety when stocks are volatile (as they have been recently), 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 (24% of total assets). Instead, we’re holding cash (17%) which provides some defence when interest rates are rising and gives the fund liquidity.
Our best estimate for 5-year stock market returns, which is 4-6% per year or 20-35% cumulative, reflects the significant rally over the last year.
Founders has been fully invested in stocks (60-66% of total fund) over the last 18 months, although the weighting has gradually been brought down to its long-term target of 60%. Despite limited opportunities in fixed income, we are proceeding more cautiously due to full valuations on most stocks and a stubbornly high degree of bullishness and speculation (note: investor sentiment is a contrarian indicator of future returns).
If you would like an assessment of your portfolio or a second opinion, give us a call (1-888-888-3147). We provide advice and can help better align your investments to your personal situation.
Founders Fund Asset Mix: November 3, 2021