Let’s Put It Into Perspective

Good day,

Unless you’re hiding under a rock, you’re seeing equity markets selloff around the world.  As usual, it’s uncertainty that markets hate.  While the message from China is that they’re having some success in containing the virus locally, the spread in other parts of the world has worried investors.  I don’t believe the market expects a global catastrophe, but it simply can’t assess the extent of the economic impact the virus will have.   

A recession is not out of the cards, but we need to remember that a recession is defined as 2 negative quarters of GDP and in many past instances, equity markets have actually climbed during such periods.  Virus aside, the backdrop of the US economy remains strong and there’s no question that investors will aggressively jump back into stocks once we hear some positive news. 

This brings us to the topic of timing.  We know that trying to predict peaks and valleys is a futile exercise and as such, selling equities today is likely not a good idea, despite the fact that further selling could occur.  As I’ve written in the past, defensive portfolio management is about preparing rather than reacting.  So, how have we prepared for this market downturn plus the many more to follow during the balance of your investment career?

This is a great reminder of why our clients have chosen to have their investments managed at an independent institution rather than a bank-owned investment dealer or other large, sleepy conglomerate.  It is estimated that retail investors in Canada hold an average of less than 1% in private securities and the balance in typical publicly traded securities such as stocks and bonds and/or their proxies (mutual funds and exchange-traded funds).  As of last month’s figures, firm-wide, Harbourfront holds over 25% of its assets in private securities such as private debt and real estate.  Some of our individual advisors’ allocations to privates are much higher than that, and now that we have access to yet another private pool, we estimate this number will climb as our firm gets closer to the pension model of 40/40/20 (40% public equities, 40% private lending and 20% real estate). 

As I type this the S&P 500 (the largest equity market in the world) is down just over 14% from its peak in just a few trading days, meanwhile, our private securities have once again had a positive month.  To be clear, my suggestion is not to abandon equities as diversification will always be important, but if we can generate ‘equity-like’ returns without the volatility of the public space, learning from the pension funds and increasing allocations to privates while decreasing that of publics, makes a lot of sense. 

So why haven’t the masses caught on?  Because retail assets in Canada are primarily held at bank-owned firms and other large investment dealers.  This used the be the case in the US as well, but the shift to forward-thinking independent firms continues to rise amongst the high net worth investor.  Private securities are scarce at bank-owned firms and despite low-interest rates and volatile equity markets, the 60/40 (stocks/bonds) old way of investing continues to be the norm.  Banks have never innovated.  They entered the investment business by purchasing the investment dealers that the entrepreneurs originally built, they launched ETFs after they saw the success of Blackrock and iShares, and the list goes on.

In times like these, we’re proud to have disrupted our industry by launching Canada’s first multi-strategy, multi-advisor private debt pool and making pension style investing available to all our clients.  To date, this vehicle is exclusive to Harbourfront clients and will likely stay that way given future capacity constraints.  While bureaucracy and red tape continues to keep such investments out of the portfolios of your friends and family, over the next 5-10 years, we will likely see the banks start to take notice. 

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.”

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