Foresight - Spring 2021

President’s Message

I am not sure that Happy Covid New Year is the appropriate phrase, but, indeed a year it has been! The physical office facility here has remained open throughout, albeit with only two people during the first quarter. Seventy-five percent of our Team have worked remotely. It was coincidentally fortunate that we had undergone a massive upgrade in our technology just three months before Covid erupted. A few of you have crossed the physical threshold over the past year, but mostly, we have phoned, emailed and zoomed our way in keeping in touch with you.

The markets, of course, started their Covid response with a large negative correction last March. After some time on the side-line, we decided to jump in. Within a 4-6 week period, we bought equity positions in pretty well every family account. The overall market has been very robust since April.

We delayed our annual Strategic Planning meeting from June to September. Top of our agenda was preparing the firm for the next generation and, at the same time, maintaining continuity. We were extremely blessed to have Michael George, Gary’s son, appear unexpectedly over the horizon. Mike, Gary and Don are thoroughly enjoying working together.

The extra manpower, and new energy, provided a fillip to a robust period of innovation. Since December, we have dreamed multiple new ideas, then designed them, built them and beta-tested them. Today, they are all good-to-go and will be rolled out across all portfolios. The coherent theme of all of them is enhanced portfolio management. One of these innovations addresses my favourite, most-difficult analytical question in life: “What’s not there”? We can now apply this diagnostic to any portfolio at any time. The Master List is completely dynamic; thus it can be changed in a moment, to reflect present realities in differing market conditions.

It looks like Covid Year Two will continue to hamper our “institutions” through 2021. Our Annual Spring seminar series and Trivest Travels! event are both cancelled, and we are doubtful about our Annual Fall Retreat to Whistler. On the positive note, we reached out to a number of you in February with a book give-away and we aspire to continue the successful P.I.E.R. events this Summer. We are working on other initiatives as well.  

My New Year’s resolution a year ago was to write my first – and last – book. The book is entitled “The Ploughman and the Astronaut-the Evolutionary Journey to WealthNess”, and is about Family financial planning. As such, it aspires to be the magnum opus of my forty-five year career working with all of you. It is an exhilarating experience to reflect back on all of our meetings, conversations and financial decisions. Together, we have been blessed and embellished by the many words of wisdom from my fellow authors. I have given myself two years as a time budget. In closing, whilst physically apart, you remain very much in our minds and hearts. 

 A Global Approach….

At Trivest, we take a global approach to investing in equity markets as part of our diversification strategy. Volatility in these international investment returns can be exacerbated, or  mitigated, by currency fluctuations. When investors buy an investment in a country, or ‘union of countries’ (as in Europe), they also implicitly are buying the underlying currency. At the end of an investing year, the investor’s return is equal to that foreign market’s return, plus-or-minus the exchange conversion back into the investor’s home currency. Therefore, for a  Canadian investor, an appreciation of the loonie is “bad”, ie lowers the international return. As you can see below, in any given year, the cross-currency exchange movements between two countries can be significant.

The following chart shows the last five years of exchange fluctuations:

					Historical Annual Change in Canadian Exchange Rates From Canadian dollar to:
	2020	2019	2018	2017	2016
US $	+2.01%	+5.04%	-7.81%	+6.77%	+3.08%
Euro	-6.56%	+7.06%	-3.25%	-6.21%	+6.07%
Japanese Yen	-3.16%	+3.76%	-9.99%	+2.95%	+0.09%

 (“+“ means a rise of the Canadian $)

We continue to augment your foreign content with a list of international ETFs that are “hedged” to remove the currency impact of international investing, and they span geographic regions and industrial sectors. You may see them on your NBIN statement by their ticker symbols, including XHC,  XCD, XGI, XQQ, VUS, XEH, XIN, CJP, XSP, XSU and VEF.

The shaded returns across the diagonal in the chart below show the calendar 2020 domestic equity price returns (ie excluding dividends) in the major economies. All of the other entries include the currency impact on these returns to show the effective returns for investors who are branching out internationally from their own domestic market. The U.S. market performed exceedingly well, while Europe performed poorly, with Canada and Japan in between. The left hand column shows the 2020 currency-adjusted returns for a Canadian investor branching out across the globe.

Quarterly data that we track show that, over the past 14 years, the U.S./Canadian foreign exchange movements contributed approx. 8% of the overall return.    

				Annual Equity Index Price Returns that include Foreign Exchange Changes – Calendar 2020
Country/     Equity Index	Canadian Investor	American Investor	European Investor	Japanese Investor
Canada /TSX 60	5.56%	7.57%	-1.00%	2.40%
U.S./S&P 500	16.43%	18.40%	10.16%	13.36%
Europe/Euro 350	4.23%	6.19%	-2.79%	0.70%
Japan/Japan 150	13.52%	15.56%	6.89%	10.26%

The following chart shows on the right the last five years of simple price returns for a Canadian investing around the world. It also shows, on the far left column, the 16 year annual compound returns (2005-20). The difference between that and the Domestic International returns column to its immediate right, highlights the 16 year geometric currency impact on Canadians investing internationally. You can see that these 16 years of currency volatility have added to the Canadian investor returns abroad.

Canadian Investor International Returns 2005-2020

	Cdn   16 yr cpd	Dom Int’l 16 yr cpd	2020	2019	2018	2017	2016
TSX 60	6.40%	6.40%	5.56%	18.11%	-10.50%	9.78%	17.70%
S&P 500	10.04%	8.69%	16.43%	24.08%	2.28%	15.49%	6.52%
Euro 350	5.49%	4.97%	4.23%	15.99%	-9.65%	17.37%	-6.12%
Japan	5.07%	3.58%	13.52%	12.62%	-5.4%	17.26%	-2.69%

Investors have an affinity towards high returns. It makes them feel better, and fortifies their feeling of financial comfort. Investment management isn’t just about generating returns.... it is about generating returns relative to risk. Risk-and-return operate asymmetrically...meaning that achieving higher returns probably means that one has taken on more risk, but conversely, taking on more risk does not guarantee higher returns. One of the sub-characteristics of a portfolio is its volatility: how much does it fluctuate in value – in the short run, but more importantly, in the long run. One of the markers for this is the statistical measure called standard deviation. In the following chart, we have calculated the 16 year standard deviations from the historical return data in the Annual Equity Index Returns chart. The numbers on the right represent the standard deviation for each of the geographic domestic markets. The numbers on the left represent the standard deviation for a Canadian investing in those markets, factoring in the currency aspect. 

Standard deviation	Canadian investor	Domestic Int’l
TSX 60	15.60%	15.60%
S&P 500	12.40%	16.12%
Euro 350	15.59%	18.22%
Japan 150	14.17%	22.26%

Here, we see that the 16 year currency fluctuations acted to reduce the volatility for a Canadian international investor. This analysis can be fine-tuned by creating a mock portfolio where a Canadian investor invests across all of these geographic markets (simulating what we actually do). This mock portfolio would contribute a 16 year annual compound equity price return of 7.32% to a balanced portfolio, with a standard deviation of 12.2%. The dividend yield adds approx. 2 1/2%. Always beware of “lies, damned-lies and statistics”! These analyses are only based upon the 16 years that we have been tracking this data. Prudent investing always needs a long term perspective.

                  Twelve month sectoral results for 2024

The chart below shows our annual report on how the industrial sectors performed in Canada, the U.S. and globally for 2020 (Annual historical comparatives on sector data can be found on our website). These are price returns, which means they include the price appreciation (or decline) year-over-year, but exclude dividend income (approx. +2 1/2%). The Canadian results are reported in our domestic currency. The U.S. S&P returns are reflected in USD rather than our currency, so that the foreign exchange movement does not contaminate a comparison. Global returns of course reflect a myriad of the world’s currencies, which here are consolidated in USD; thus, there is some foreign exchange element to that data. The top line “WHOLE INDEX” return data in the chart below result from applying sector weightings to the sector returns. These weightings are different in the three regions. In the small capital market of Canada, the breadth (number) of players in a particular sector can be quite thin. Thus, the results of the few can significantly impact that sector’s return. This is particularly true in Canada for Consumers, Health and Tech.   

Covid-2020 was a robust year globally, largely led by the U.S. Canada and Europe significantly lagged. Almost all sectors across the globe did well, with the exception of Energy and Financials. Several Canadian sectors significantly lagged the robust global results, including Health Care, Consumer Discretionary and Telecoms. Alternately, two Canadian sectors outperformed global results: Utilities and Technology. The Canadian index has a significant weighting in the under-performing Financials and Energy sectors, thus the poor 2.2% return overall. The lagging Canadian sectors of Consumer Discretionary and Healthcare are ones into which we deploy very little.

Throughout the year, we were monitoring these sectoral movements and chose to realize the appreciations in those leading sectors at various points in the year (notably Health, Tech and Materials). The March Covid crash created an intra-period buying opportunity which we took advantage of and, thus, got some returns greater than the year-over-year returns in the chart.

For the year 2020 SECTOR	Annualized Price Returns for S&P Global 1200 Index Sectors (in US dollars)	Annualized Price Returns for US S&P 500 Index Sectors (in US dollars)	Annualized Price  Returns for Cdn. Composite Index Sectors (in Canadian dollars)
WHOLE INDEX	13.1%	16.3%	2.2%
Energy	-34.1%	-37.3%	-30.8%
Materials	19.7%	18.1%	19.5%
Industrials	9.3%	9.0%	15.3%
Consumer Discretionary	27.1%	32.1%	14.4%
Consumer Staples	5.1%	7.6%	2.8%
Health Care	10.9%	11.4%	-23.6%
Financials	-5.3%	-4.1%	-2.9%
Information Technology	42.6%	42.2%	80.3%
Telecommunications	20.4%	22.2%	-8.3%
Utilities	2.0%	-2.8%	10.6%