We would like to first thank our clients for their continued trust and commitment throughout this difficult economic period.  We are blown away by the confidence and poise many of you have expressed during these extremely volatile markets. The majority of our communications have been with clients desiring to take full advantage of these market levels.  This is a huge compliment and true testament to how our clients perceive our commitment to our investment process.  

At this time, we would like to provide an update as to how the different asset classes have performed on a year to date basis in 2020 with our Risk Parity Strategy.  

Figures below are as of market close on March 20th, 2020:

Long Term US Treasuries                                    

(converted to CAD)                                         +30.28%

Long Term Canadian Bonds                       +2.92%

 Emerging Market Bonds                             -9.28%

Canadian Equity                                             -31.81% 

US Equity                                                          -32.13%

Emerging Market Equity                              -22.85%

Precious Metals (Gold & Silver)                    -10.2%

Energy                                                               -62.74%

Private Energy                                                  -6.7% 

Private Equity                                                   +1.30%

Private Debt                                                      +1.13%\

Private Real Estate                                          +0.15%

It is important that we outline our strategy going forward.   From our initial discussions and consultations with our clients with respect to our Risk Parity Investment Strategy, it was illustrated that from time to time throughout the market cyclewe would be doing some rebalancing and restructuring to take advantage of the separation of prices between risk assets and their non-correlated counterparts.  

For example, as you can see above, US Treasuries increased in value opposite to the fall in equity markets.  Although, the movements do not exactly counteract, it clearly illustrates the power of owning non-correlated assets within a portfolio.   

History clearly shows that the opposite will occur once markets turn around and begin their eventual recovery.  For these exact reasons, we feel it is prudent to begin stepping into risk assets at this time.

What is important to note is that this does not mean we liquidate 100% of our non-correlated assets altogether, as that would expose our clients to far too much risk should markets continue to move downward in the short term.  And it will also provide more gun powder for us to take advantage of even better equity prices at that time by rebalancing out of those non-correlated assets once again.

Upcoming changes to our Risk Parity Investment Strategy: 

(1)   Add investment to both US and Canadian equities at these valuations over the coming weeks.

(2)   Reduce ourallocation to Canadian Long-term Bonds, Emerging Market Bonds, and US Treasuries in order to capitalize on their stronger prices relative to equity markets. 

(3)   Add investment to Gold and Silver in anticipation to the massive stimulus packages that are set forth to occur over the next several months. 

(4)   Add investment to energy in order to take advantage of once in a generation pricing of commodity prices.  The energy industry cannot sustain itself at current levels and will be forced towards higher prices at some point in the future.  This will ensure we take advantage of that restructuring trend upward. 

(5)   Closely monitor our alternative assets classes. Should equity markets continue to move lower over the coming weeks we will have the potential to reduce exposure to private assets and then deploy capital to equity markets should the opportunity present itself.  

The most important perspectives at this time:

1.    Investor who acted on these types of opportunities vastly outperformed over the long term relative to their peers who simply waited for market prices to recover. 

2.    It is absolutely impossible to time the bottom of any market.  Or the eventual top of any market.   

3.    It is evident that enhanced fiscal and monetary stimulation is the number one priority of governments at this time. Although these actions certainly do not change things overnight, history has proven that it leads to economic growth over the long term. 

4.    The Investment process and proper diversification is all that is controllable within portfolio management.  Over 95% of investment returns are provided through those two principles.  Leaving only 5% from security selection.  That is why we obsess our commitment and focus to those core two areas that provide the most value for our clients.    

Our team will be in contact to execute on the rebalancing recommendations specific to your individual investment portfolio over the following week.

Should you have any questions regarding the strategy outlined above or anything else with respect to your accounts we can discuss them together when we connect over the coming days.

Make sure to enjoy this time with your loved ones and stay safe.

This too shall pass. God bless.

 
Todd McLay

Portfolio Manager

Precedence Capital – Gravitas Securities Inc.

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DISCLAIMER:

This communication is not to be considered a formal recommendation or solicitation for securities, investments, or portfolio management.   Each client of Precedence Capital and Gravitas Securities may carry a unique allocation of investments and securities and may not match that of which is represented above and includes their own specific risks.  None of the above information should be considered binding. Any specific client recommendations will be communicated appropriately to each individual as required. Performance figures are provided by Canoe Financial, ICM Capital, Skyline, Trez Capital, Bridging Finance Ltd., Kensington Capital Partners, Next Edge Capital, Centurion Asset Management., First Source, Rospen, Timbercreek Asset Management, Rise Properties Ltd, Ryan Mortgage Fund, ICM Capital Management)  This Performance chart is for illustration purposes only and is not intended to reflect or guarantee future values orreturns.  Please refer to your annual Investment Performance Report as the official record of account performance.

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