The second quarter saw risk assets experience a phenomenal turnaround from their March lows fueled by central bank stimulus, expectations for a V-shaped recovery as economies reopened from COVID-19 lockdown, and a thirst for all things technology.
Retail investors came back into the market following the central banks rapidly expanding balance sheets with the greed factor yet again overtaking the fear factor.
In spite of the market’s strong comeback, unfortunately, all is not well – the reopening has led to large spikes in new COVID-19 cases, unemployment remains structurally high, and the U.S. faces a looming election that could result in the rollback of substantial market-friendly legislation enacted under the present Executive Order. Markets appear to be priced for perfection and as our views from last quarter remain largely unchanged, our commentary may appear similar.
Although it might seem the case, all investment portfolios are not built the same and a market such as the one we are presently encountering is certain to expose weaknesses and structural flaws which will likely prove costly if not properly addressed.
At Anchor Pacific, we have been cautious on equity markets, both public and private, which, in our opinion, has been overvalued for some time. We have observed investors indiscriminately chasing return and income with little to no regard for risk. Lastly, we have observed what we would characterize as “a false comfort from diversification”, meaning that portfolios, while touted as diversified, really weren’t, especially under the severe market stress we experienced.
We continue to operate cautiously believing risk is being mispriced in most asset classes and are picking our spots accordingly. We presently like actively managed maturity and event-defined strategies with tight risk control as well as certain areas of the structured capital markets where liquidity related price dislocation occurred and have subsequently lagged during the market recovery. We have significant experience with these sectors and are presently preparing to position client portfolios opportunistically.
The paradigm shift we referred to last quarter where risk management matters once again remains firmly in place – market volatility will remain elevated, now and not later is the time to take a hard look at asset allocations, measure true liquidity within portfolios and critically assess existing private strategies such as real estate, private equity and private lending. Our adaptive multi-asset portfolios are designed to provide durable returns and reduce risk. These traits will buffer investors and are needed more than ever in today’s new economic reality.
This is not our first financial crisis nor will it be our last – both Steve and Jon have in excess of 25 years of protecting and preserving capital through multiple periods of financial stress. Disciplined risk management (framework, structure and process) and intelligent diversification (via portfolio construction) will continue to remain one’s best edge. Capable and competent leadership combined with a high level of technical expertise are of critical importance in successfully reaching the other side.
Strong rebounds in credit and equity sectors, as well as with gold which was up 13% for the quarter and 17% year-to-date (YTD). Interest rates stabilized and returns from long duration flattened out during the quarter, resulting in much of the attribution of bond market returns coming from tighter credit spreads. The perceived discount of most global equity markets relative to their historical Cyclically Adjusted Price Earnings Ratios (CAPE) disappeared given the rally. Most markets are now historically expensive based on an “E” in earnings which may not be realistic (too high) given the economy’s anticipated trajectory.
North American Equity Markets
Canada: TSX composite +17.40%, TSX 60 +15.09%, TSX Small Cap +37.77%
US: Total Market +21.97%, S&P 500 +20.17%, S&P 500 (C$) +16.33%, Russell 2000 +25.50%
International Equity Markets
EAFE Developed: FTSE EAFE +16.94%, FTSE Europe +17.08%, FTSE Asia Pacific +15.80%
Emerging: FTSE +18.56%
Canada: Total Market +7.54%, IG Credit +11.00%
US: Total Market +3.08%, Short Govt +0.21%, Medium Govt +0.64%, Long Govt -0.22%, IG Credit +9.72%, High Yield +8.39%
USD Index -1.90%, CAD +3.57%, Yen -0.54%, Euro +1.62%
Broad Index +11.50%, Gold +13.05%
Global Equity Market Valuations – Valuations and Total Risk Returns:
(Source – iShares US, Blackrock, Research Affiliates, Portfolio Visualizer)
Global Equity Market Valuations – Price Earnings Ratios:
(Source – iShares US, Blackrock, Research Affiliates)
Download the complete Second Quarter 2020 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.