The markets experienced a wild ride in 2020 – a swift 35% drawdown in the equity markets from early February to the middle of March followed by a stunning recovery which grew stronger through year-end driven by investor optimism towards the widespread rollout of the COVID-19 vaccine, certainty around the US election, low interest rates and the outlook for increased fiscal stimulus. Absent trillions of dollars of stimulus and central bank intervention, equity markets would have likely fallen further.
Headlines suggest that returns were abundant last year – this would be misleading. Volatility certainly increased but not all issuers, asset classes, and investment strategies participated equally as the market melted up. As a result, there are many expensive investments as well as those representing attractive value. Generally speaking, investments that benefitted from heavy retail participation (work from home technology, tech giants, green energy, electric vehicles and battery, Bitcoin, cannabis, and de-SPACs) and central bank buying (bonds, namely investment-grade corporate issuers and ETFs) are fully priced whereas other sectors and asset classes, dominated by more informed buyers, were slower to recover and present attractive opportunities. Active and open global capital markets have resulted in an ample supply of attractive opportunities to garner returns through arbitrage – examples would be convertible bonds, mergers and acquisitions, and SPAC IPOs. At Anchor Pacific, we have been active participants in these markets and will continue to allocate client capital to these strategies for their collective combined attributes of diversification, yield, downside protection, and upside optionality.
To those of you who have followed us, nothing has changed in our way of thinking – we stand by what we’ve previously written as our beliefs are substantially rooted in first principles thinking, evidence-based foundational pillars for investment and risk management, and an adaptive and disciplined process. While it may sound like a broken record, risk management will always matter and with market volatility expected to remain high, it is undeniably the most important consideration in creating a proper foundation for wealth management and goal realization.
The single biggest question for investors in 2021 and beyond will be how one successfully navigates all of these different land mines in order to make an acceptable long-term rate of return with bonds and low risk assets expected to return less than1% and equities priced to perfection.
The answer in our opinion remains a multi-asset or “Endowment Approach” that forms the backbone of our Outsourced Chief Investment Office (OCIO) platform. The private wealth advisory business in Canada must adopt the OCIO model – while there is talk of it, many in the marketplace are using the term incorrectly and irresponsibly. Any firm which manufactures investment products cannot be a true OCIO because of the inherent conflict of interest resulting from the lack of a fiduciary relationship between the firm and its client. In other words, a true OCIO must practice fully open architecture with respect to the investments utilized within client investment portfolios.
The path to realizing one’s financial goals rests on the realization of predictable and reliable returns – failing to properly structure one’s investment program to minimize large drawdowns which are the biggest detractor to compounding wealth is likely to have serious consequences.
Jon Hirtle, the Outsourced Chief Investment Office model’s earliest pioneer said recently in an interview:
“Actually, a high reliable return is much better than a somewhat higher but unreliable return. Serious investing is about consistency. Of course, a higher return is better and if only we could invest in retrospect we could simply pick which asset performed best last year and capture high returns with absolute certainty but we can’t. Serious investors position their portfolios to succeed in a highly uncertain future. Each year, one of the worthy assets included in an investment program will perform best and one worst by random. Predicting which asset will do best each year has proven impossible and certainly lead to mission failure – promises unfulfilled. The endowment model improves consistency and gets clients where they need to go – it’s the magic of skillful diversification; not just owning a bunch of things, but a carefully assembled collection of investments (chosen from the broadest opportunity set) to generate complementary cash flows that rise and fall at different points in the economic cycle. They offset each other’s volatility, tighten the distribution around an expected return, and increase the certainty of success.”
Back to present circumstances, many investors have no idea if they are on track to meet their goals. A good outcome in 2020 may or may not have been the result of a good process, in which case luck may have been the greater influence. Irrespective of the market’s rapid turnaround in the height of a global pandemic, most public and private equity markets remain very expensive, as investors continue to indiscriminately chase return and income with little to no regard for risk. We on the other hand continue to operate cautiously and adjust capital allocation in order to capture the best risk/reward offerings across globally unconstrained opportunity sets.
Keys to investor success in 2021 and beyond will be as follows:
Disciplined, scalable and repeatable investment process and structure
Full alignment of interest between client and advisor
Unconstrained investment opportunity sets
Maintain ample liquidity for emergency cash needs and future attractive market opportunities
Minimize behavioural mistakes
Optimize after-tax returns through pre-planning structures, choice of instrument, and investment placement
Harvest return through unique and differentiated strategies that combine non-correlation (or equity market non-dependency), cash flows that are secure and able to compound, embedded upside optionality and downside protection through either hedging or structure
Position for mean reversion for equity markets with respect to geography, sector cyclicality, and other style factors
Emerging Markets, International and Canada vs the United States
Cyclical versus Technology sectors
Value versus Growth
Inflationary vs deflationary assets
Outsourced Chief Investment Office platforms are equipped to build investment programs that deliver durable returns and reduce risk – traits needed to buffer investors more than ever in the reality of today’s highly uncertain times. Anchor Pacific remains unwavering in its commitment to the OCIO model.
We would like to thank you for your continued support and trust that you have placed upon us in being guardians and stewards of your capital. With challenges come growth and new opportunities and we are excited for the year ahead.
October 1, 2020 to December 31, 2020
North American Equity Markets
Canada: TSX composite +8.92%, TSX 60 +7.76%, TSX Small Cap +23.92%
US: Total Market +14.75%, S&P 500 +12.12%, S&P 500 (C$) +7.08%, Russell 2000 +31.30%, Dow Industrials +10.70%, NASDAQ 100 +13.13%
International Equity Markets
EAFE Developed: FTSE EAFE +16.45%, FTSE Europe +16.34%, FTSE Asia Pacific +18.28%
Emerging: FTSE +16.59%
Canada: Total Market +0.81%, IG Credit +1.69%
US: Total Market +0.73%, Short Govt +0.02%, Medium Govt -1.28%, Long Govt -2.98%, IG Credit +3.40%, High Yield +6.24%
USD Index -4.38%, CAD +4.56%, Yen +2.05%, Euro +3.96%
Broad Index +14.70%, Gold +0.70%
Global Equity Market Valuations – Valuations and Total Risk Returns:
(Source – iShares US, Blackrock, Research Affiliates, Portfolio Visualizer, etfdb.com, Yahoo Finance, Anchor Pacific)
Global Equity Market Valuations – Price Earnings Ratios:
(Source – iShares US, Blackrock, Research Affiliates)
Download the complete Fourth Quarter Market Commentary & Performance:
Anchor Pacific Investment Management Corp. (“Anchor Pacific”) is a Vancouver, BC-based portfolio management firm, which leverages process, technology, and infrastructure to democratize the process of managing endowment and pension style investment portfolios to deliver innovative, high-touch, and transparent investment programs across the full spectrum of asset owners and investment consumers.