2017 Currency War Part 1 Danny Popescu 09/08/2017 591 0 Comments Good day, As the loonie has been the world’s best-performing currency year-to-date, this has beaten up the Canadian investor diversified into international securities. Millions of Canadians are likely looking at their portfolio statements wondering why YTD figures aren’t that exciting when the S&P 500 has had strong returns. It’s worth noting that international diversification makes complete sense fundamentally and the YTD decline of approximately 1.5% on the resource-heavy TSX, speaks to this view. So if you invested only in Canada this year, you probably haven’t seen much happen and if you invested internationally, you still wouldn’t have seen much happen as the gains you might have made on your international names would have been eroded in Canadian dollar terms. Our largest portfolio program, The Willoughby Investment Pool, illustrates how even top stock picking isn’t immune to rapid currency swings. Investors in the program had a great start to the year with a 6.4% return to the end of April, but the Loonie climbed 8.49% against the USD since the beginning of May, which has taken away much of the year’s progress (see chart below showing the rapid decline in the USD). During the 4-month period (May through August) when the USD witnessed the 8.49% decline I mentioned, the portfolio’s US stock holdings saw a strong 6.49% return (19.47% annualized). Like most Canadians, I don’t see this on my statement, as the healthy returns have been eroded when looking at the holdings in Canadian dollars. (Roughly 2% decline (+6.49% equity selection, -8.49% USD decline)). Some readers might be wondering what type of consideration is given to currency hedging. This is an interesting and highly debated topic among portfolio managers. There are highly regarded global portfolio management firms that are dead set against hedging with the belief that over the long run, the cost of hedging currency erodes portfolio returns. We don’t often see such rapid currency swings especially for the first world developed countries so one can argue that a blanket, “no hedge” policy isn’t a bad thing for long term investors. That said, hedging might keep investors “feeling” better in the short-term so they can become better long-term investors. Investors need to remember that meeting long-term financial objectives is no longer possible using GICs and government bonds. To see tax and inflation adjusted returns, we need to stomach a certain level of volatility whether it be security or currency related. While the loonie could climb a little further, history shows that most markets drop too much and climb too much before reverting to the mean. The portfolio’s disciplined security selection approach will not change. We will continue to buy companies with (i) strong fundamentals, and (ii) showing upward pricing momentum. When we strip currency out of the equation, the investment approach has once again worked this year. When the loonie eventually reverses its trend, investors holding US securities will be rewarded. PS. A strong loonie can hurt Canadian stocks too. More on that next week. Have a good weekend! Daniel Popescu CFP, CIM, FMA, FCSI President & CEO “I have prepared this commentary to give you my thoughts on various investment alternatives and considerations which may be relevant to your portfolio. This commentary reflects my opinions alone and may not reflect the views of Harbourfront Wealth Management. In expressing these opinions, I bring my best judgment and professional experience from the perspective of someone who surveys a broad range of investments. Therefore, this report should be viewed as a reflection of my informed opinions rather than analyses produced by Harbourfront Wealth Management Inc.” Disclaimer – This information transmitted is intended to provide general guidance on matters of interest for the personal use of the reader who accepts full responsibility for its use and is not to be considered a definitive analysis of the law and factual situation of any particular individual or entity. As such, it should not be used as a substitute for consultation with a professional accounting, tax, legal or other professional advisor. Laws and regulations are continually changing, and their application and impact can vary widely based on the specific facts involved and will vary based on the particular situation of an individual or entity. Prior to making any decision or taking any action, you should consult with a professional advisor. The information is provided with the understanding that Harbourfront Wealth Management is not herein engaged in rendering legal, accounting, tax or other professional advice. While we have made every attempt to ensure the information contained in this document is reliable, Harbourfront Wealth Management is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or as to the outcome to be obtained from the use of this information, and is without warranty of any kind, express or implied. The opinions expressed herein do not necessarily reflect those of Harbourfront Wealth Management Inc. The particulars contained herein were obtained from sources we believe to be reliable but are not guaranteed by us and may be incomplete. The opinions expressed are not to be construed as a solicitation or offer to buy or sell any securities mentioned herein. Harbourfront or any of its connected or related parties may act as financial advisor or fiscal agent for certain companies mentioned herein and may receive remuneration for its services. The comments and information pertaining to any investment products (The Portfolios) sponsored by Willoughby Asset Management are not to be construed as a public offering of securities in any jurisdiction of Canada. The offering of units of The Portfolios is made pursuant to the Offering Memorandum or Simplified Prospectus and only to investors in Canadian jurisdictions. Important information about The Portfolios is contained in the Offering Memorandum or Simplified Prospectus available through Willoughby Asset Management. Commissions, trailing commissions, management fees, performance fees and expenses all may be associated with investments in The Portfolios. Investments in The Portfolios are not guaranteed, their values change frequently, and past performance may not be repeated. Historical annual compounded total returns including changes in unit value and reinvestment of all distributions do not take into account sales, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Unit values and investment returns will fluctuate and there is no assurance that The Portfolios can maintain a specific net asset value. Harbourfront Wealth Management Inc. (“Harbourfront”) has relationships with related and /or connected issuers, which may include the securities or funds discussed in this commentary and are disclosed in our Statement of Policies Regarding Related and Connected Issuers. This policy is included in your new client package, on our website, or can be obtained from your investment advisor on request.