The second quarter of 2022 has followed first as being extremely challenging for the markets, with both the broad equity and fixed income markets experiencing further negative returns, and most balanced portfolios now down 14-16% on a year-to-date basis. Over this time, we have protected capital on behalf of our clients whose investment portfolio have decline within a range of 5 - 8%.
There have been many forces at play – COVID and the devastating war in Ukraine continue to have major effects on the supply chain and commodities, especially energy and wheat. The compounding result of all of this and more is inflation.
Canada’s most recent inflation report showed a 7.7% year-over-year increase, which is highest it’s been since January 1983. Many other countries are grappling with these same issues and central banks have begun to withdraw the unprecedented liquidity that was provided to the markets for most of the past decade and accelerated during COVID. The Bank of Canada has increased the overnight rate from 0.25% to 2.50% and is indicating more on the horizon until inflation is firmly stamped out.
The resetting of interest rates to more normalized level is resulting in what we view as a very healthy correction in the pricing of risk assets which had gotten to different levels of extreme as low interest rates have encouraged excessive and in our opinion irresponsible risk taking amongst many actors.
We have never subscribed to this behaviour and our clients have been rewarded. The single biggest risk to not achieving one’s long-term financial goals is large and protected drawdowns defined as the decrease in one’s investment portfolio from its peak value. While drawdowns are unavoidable, our goal is to minimize client drawdown risk subject to your unique preferences, tolerances and capacity to absorb risk (that’s why we use psychometric risk scoring).
We continue to stand on our highly disciplined investment process which is rooted in a purposeful and adaptive multi-year risk framework for asset selection and portfolio construction. Allocations to our Stable Portfolio yet again have provided us meaningful diversification and risk mitigation during this unprecedented volatility.
Risks in the market remain elevated and there are compelling arguments for a recession driven by demand destruction and/or stagflation – our portfolios are prepared for either of these extremes as well as whatever may fall in between. We remain of the view that forward-looking returns will be lower and more volatile and that they key to delivering positive outcomes comes from owning “fortress” portfolios.
I encourage everyone to revisit our relatively new website and the part where we detail our culture, investment philosophy and process.
We would like to thank you for your continued support and trust that you have placed upon as being stewards and fiduciaries of your capital.