Foresight - Summer 2025

There is no doubt that investor anxiety has become the predominant theme since the ongoing, and constantly changing, series of proposed US tariff policies and opposing court challenges. With this anxiety has come increased volatility in global financial markets. As we have discussed in the past, volatility is both down and up. Portfolio returns have remained strong over the last year across all asset classes, as you will see elsewhere in this issue. While positive returns “banked” last year are welcome, investors’ mindset is focused on where are we going forward. Concerns of global slowdown and recession, higher inflation from tariffs and stagflation (the combination of higher inflation and slower growth) dominate the daily news cycle. While there is no shortage of concerns going forward, we note that the current state of global uncertainty is due to a single strategy implemented by the US Administration. While this trade policy is concerning and could have significant implications for global trade going forward, we argue that this is different from the Covid pandemic of 2020, which saw the “overnight” shutdown of the global economy with no known path forward. During the Covid years, we experienced supply chain disruptions, inflation jumping to levels we haven’t seen in thirty years, the end of the ten-year very low interest rate environment (in which interest rates increased from near 0% to 5% at the fastest pace ever experienced) and, lest we forget, two global equity bear markets. Over these last five years there has been no shortage of concerns and yet, at writing, the US S&P 500 Index is 75% higher than it was at its then-all-times highs at the end of the 11-year bull market pre-Covid in February 2020. 

In the Winter 2022 and Fall 2024 Foresight issues, we wrote about the theme of de-globalization as an investment trend for security of supply chains after the 2020 Covid pandemic. Investment in regional/local manufacturing to ensure security of supply chain of critical products (food, healthcare, technology) is one of the major investment themes that we see driving global growth in the coming decade and beyond. Time will tell if the use of tariffs is an effective tool to motivate reinvestment in US manufacturing. Economists seem unconvinced that the current US tariff policy is likely to do so without an increase in US inflation and interest rates, with the potential knock-on effect of a slowdown in the US economy. The good news is that, if in fact consensus proves to be correct, the US can reverse its tariff policy as quickly as it was implemented. While we agree that tariffs are not an effective way to spur long term investment in the security of critical supply chains, the US tariff policy has done an excellent job of waking up the global community to reevaluate potential new customers abroad as well as investment in their local economies. Locally in Canada, we have been addressing inter-provincial trade barriers.

If US tariffs do result in a slowdown in global growth, causing a global recession and a third bear market in equities since February 2020, our portfolios should benefit from the recession hedge we put in place in February 2023. At that time, we took advantage of the increase in bond yields and, after ten years of maintaining a very short bond duration portfolio, we moved 20% of the bond portfolio out to the long end of the duration ladder as a future recession hedge. In a recession, interest rates tend to fall, resulting in an increase in bond prices. By their nature, long duration bonds have larger pricing swings for given rate changes. Not knowing when the next recession might occur, we put this hedge in place so that when it did, we would be able to sell these long bonds at a substantial capital gain and buy equities on sale.

THE EQUITY SIDE

Amidst the analysis of numbers herein trying to find grounding in the current maelstrom, we have been drawn back to Nick Murray’s Apocalypse du Jour phrase, which in turn led us back to his 2009 book Simple Wealth, Inevitable Wealth. There is a treasure trove of timeless wise counsel, including a few herein:

• “A portfolio is not a plan – it is a means to a plan. (Attaining) the plan is the investor’s benchmark, not the market index or their neighbour’s results”

• “Not outliving the income from your capital is a financial goal; out-performing the market is not”

• “The only crisis to worry about and give attention to is a retirement income crisis: and we want to see this coming BEFORE it arrives”

• “All successful long term investing is goal-oriented and therefore planning driven. Unsuccessful investing is market-oriented and performance driven”

• “You will never make a good investor…who is fundamentally and incessantly afraid of the future”

• “You proudly operate without a market outlook”

• “Patience is the decision not to do something wrong”

• “Your chosen asset allocation can prove-ably achieve your financial goals over the long term; it cannot be expected or judged to do so for all time periods, because it simply cannot”

Volatility is the headline each and every market day these days. Needless to say, the mantra of the wise investor is to not focus on these short term perturbations. Once again, we find Vladimir Lenin as an unlikely source of present-day perspective: “There are decades when nothing happens, and there are weeks when decades happen”. That said, in this issue, we will seek some wisdom from how the sum of the short terms play out to make the long term.  

We have several metric systems which keep us abreast of stock market and portfolio movements. As a benchmark, we have been doing quarterly analysis for 18 years on a particular portfolio to give us long term perspective from short term return insights. The portfolio is, however, more conservative than most portfolios and, accordingly, its 18 year, annual compound return has been 5.4%. Over that period, 74% of the quarters had positive returns. Of the negative returns, 42% had back-to-back negative quarters, and 31% had three bad quarters in a row and the remainder was only a solo bad quarter. On the other hand, there was one run of 16 positive quarters in a row. The highest single quarter was 7.2% and the lowest  was -4.9%. The average quarter was 1.4%. The average positive quarter was 2.36% and the average negative quarter was –1.35%. Over the 18 years, cash income and price appreciation contributed approximately equally to the overall return, with the remaining 10% contributed from currency fluctuation against the Canadian dollar.

In the Spring issue, we reported on portfolio results since January 2021. We noted then a ninety year history being made from June 2022 to February 2023 because both fixed income and equity returns were negative in seven of those nine periods. Rolling forward another quarter, we are seeing the opposite: positive returns in both from November 2023 to June 2024 and healthy rolling returns in both from July 2024 through April 2025… fixed income averaged 7.3% and equity 19.1%, for a combined 13.8%.

The following graph updates 4+ years of rolling one-year returns (light line) and 3-year annual, compound rolling returns (dark line). The three year annual compound return to February 2021 was 6.20%...and four years later to April 2025 was 6.34%! And remember…. that included 7 bad periods which made 90 year history! And, lastly, remember that three-year periods are not metrics of long term investing!

 We have another monitoring system which tracks the month-over-month equity price movements, using approx. fifty portfolios as benchmarks. This graph tracks these monthly movements for Canadian and foreign equities for the period July 2024 to April 2025.  Directionally, the two markets followed each other every month except February. Directionally, the two markets see-sawed every month over the ten months. 

 Turning to the sway of American politics and longer term perspective – follow the S&P500 benchmark average price returns since 1953 in various political environments:

More recently, the geometric returns of the S&P 500 for the earlier Presidential terms of Trump and Biden were 62% and 65% respectively. Of final note, compare the short-term returns in the Biden quarter for the Fall of 2024 and the Trump quarter for the Winter/Spring of 2025…2.04% vs 2.08%!

If you are seeking an interesting read with the benefit of long term historical perspective, try History for Tomorrow by Roman Krznarik and A Capitalist Manifesto in Defence of Global Capitalism by Johan Norberg.

THE FIXED INCOME SIDE

In a world where so much focus is on global equity markets, investing in fixed income securities can often be an after-thought. Most investors’ eyes glaze over at the first mention of bonds! However, fixed income securities are an essential component of a well-diversified portfolio, as they offer relative stability, cash income, and the potential to reduce risk/volatility. All of our client portfolios have an allocation to fixed income securities, commonly with a baseline of 40%, which may be adjusted higher or lower in the circumstances of the particular investor.

Every asset class that an investor considers has its own list of risks. In the case of fixed income, it includes risks over liquidity, credit default (loss in capital), forward inflation, reinvestment risk upon maturity, reinvestment risk of the periodic coupon payments, taxation burden and pricing volatility. An investor can deploy multiple strategies to manage each of these risks...maturity selection, staggered maturity ladder, debt rating and kinds of instruments to name a few.   

The typical fixed income portfolio is largely allocated to Canadian government bonds, with a US Treasury component when the portfolio includes US$. We manage a “10% thermostat” target of the fixed income portfolio for a collection of securities known as “Alternative-D”, which is a hybrid in that they tend to have qualities of fixed income and of equities. When they are delivering as to plan, they tend to give yields higher than the conventional, conservative government instruments. That said, sometimes they can deliver negative surprises, like the stock market. Accordingly, we diligently restrict this asset class to that maximum of 10% of the fixed income portfolio.

In the Summer 2024 Foresight, we wrote that “rising interest rates in Canada over the last few years have increased investor interest in High-interest Savings Account ETFs (HISA) and GICs.” Canadian banks did an incredible job of marketing GICs last year when interest rates were elevated. Since then, the Bank of Canada scaled back its policy rates in seven of its last eight meetings, taking it from a peak of 5% last summer to 2.75% currently. Accordingly, many investors saw their one year 5% GICs turning over in 2025, reinvesting at half the yield.  

Over thirty+ years, our fixed income strategy has changed and evolved. Today, 85% of our fixed income portfolio is deployed in a selection of bond ETFs, which are baskets of bond holdings that reflect some theme in answer to the various “risks” cited above. 

We also use both HISA ETFs and GICs (12% of fixed income) and have a “10% thermostat” on GIC holdings in any portfolio. Today, our largest bond ETF holding (54% of fixed income: 60/40 federal/provincial gov’t bonds) is the i-Shares 1-5 Year Laddered Gov’t Bond Index (“CLF”).      

Thanks to Covid, March 2020 is etched in our minds along with other significant events of the modern epoch, like 9/11. Equity markets quickly imploded in March 2020, dropping by 33%. While it appeared that the world was ending … Nick Murray’s Apocalypse du Jour….. it rebounded spectacularly within six months. If an investor had the wisdom and fortitude to buy that Spring (and, in this case,  receive a very large reward in those six months), it begged the question: buy with WHAT? The answer is cash, but where does the cash come from? If the investor had to sell (beaten-up) stocks (securing  a loss) to buy beaten up stocks, they didn't get anywhere. As discussed in the front page editorial, in the absence of a cash reserve, if fixed income assets were able to be liquidated quickly and profitably, the proceeds fund purchasing the beaten up stocks. And so, we see another potential reward from the strategic asset allocation discipline of investing.