By Brenda Bouw
The downward spiral of global stocks, which has pushed Wall and Bay Streets into bear territory, has portfolio managers reviewing their strategies of how to protect investors in the short term while maintaining long-term investment goals. In Toronto Thursday afternoon, the S&P/TSX Composite Index was flirting with its biggest drop since 1940. The Globe and Mail spoke with a handful of Canadian portfolio managers about their approach during this next leg of the market downturn.
Terry Shaunessy, president and portfolio manager at Calgary-based Shaunessy Investment Counsel Inc., says the speed of the downturn “has been remarkable” as compared with other market sell-offs in history.
His concern is that investors will make a big “but quite understandable” mistake of selling their investment amid the turmoil.
In a note to clients on Wednesday, Mr. Shaunessy also cited the risks of trying to find the right time to get in and out of the market in a correction. “Market timing doesn’t work, but rebalancing does,” he wrote. ”It is nearly impossible to time a market rally, but the process of rebalancing – reducing fixed income and buying equities – always works.”
He says he believes the safest place to be today is global balanced portfolios. “A mix of fixed income and global equities offers the best combination of downside protection and eventual upside capture,” he wrote, adding that while markets are down more than 20 per cent in the past three weeks, a 60/40 benchmark portfolio was down approximately 10 per cent (as of March 10) “and will benefit from the coming rally.”
Daniel Goodman, president and chief executive of GFI Investment Counsel Ltd., says he’s adding to his personal long term savings “and not because I see an imminent bounce.
“I know that with the fullness of time, this will play out and normalcy will return to the great businesses we own,” he says, adding that his firm has “successfully avoided areas or industries that face obsolescence risk or lack pricing power and our clients have benefited tremendously.”
Mr. Goodman says his firm doesn’t invest in fads, “so we are confident that we aren’t going to face permanent loss of capital with our investments.”
In a note to clients on Monday, Mr. Goodman tried to ease investor fears by saying that, while nobody can accurately forecast the length and overall severity of the current market turmoil, “we can say with extreme conviction … that this too shall pass and as difficult as it may be, the best course of action is to maintain a high-quality portfolio of best in class businesses.”
He said that his clients stayed invested during the 2008-09 financial crisis and during the market downturn in late 2018. “All of you are significantly better off for it,” he wrote.
Mr. Goodman also told clients that the firm will remain pro-active “to identify any unique opportunities.”
Anish Chopra, managing director at Portfolio Management Corp., says his firm is looking at “numerous opportunities to buy high-quality names,” amid the significant market declines.
“Some companies and industries have been hit harder than others and we are assessing whether to rotate out of certain companies and industries and into others,” he says, without offering specifics, citing “compliance reasons.”
He also called the coronavirus is “a global tragedy for humanity.”
While it’s impossible to forecast the future for markets, Mr. Chopra said more clarity about the spread of the coronavirus “will certainly help markets better assess the economic fallout.”
He advises investors to stick to their financial plan, or review and adjust it as needed.
“Markets have been very kind for a long time and now the risks to investing in equities are very apparent given the recent market moves,” he says.
Kash Pashootan, CEO and chief investment officer at First Avenue Investment Counsel Inc., sees some short-term trading opportunities, but believes equities have further downside from here.
“The velocity of change is rapid and so defence can turn into offence quickly,” he says. “We are preparing to see this market bottom soon.”
Meantime, Mr. Pashootan says he’s also relieved, in part, to see the sell-off “only because we believe upcoming corporate earnings misses are going to be shocking. Without this sell-off, stock prices would need to pay the piper later.”
He believes many investors are mistaking this sell-off as market volatility “when, in fact, it’s justified declines due to the destruction of earnings in upcoming quarterly results.”
He sees COVID-19 having a material impact on demand, spending, corporate earnings, economic growth and will lead the U.S. to a recession.
“It will not be the end of the world but don’t fool yourself by not accepting that this will impact all sectors of the economy and has global market reach,” he says. “Welcome to 2008 version 2.”
Jason Del Vicario, a portfolio manager at HollisWealth in Vancouver, says his firm has a strict stop-loss strategy. “For every security we own, we have two prices; if the first is breached, we sell 50 per cent, if second is breached, we sell 100 per cent,” he says.
Over the past two weeks, his firm has stopped completely out of names such as Mastercard Inc., Facebook Inc, Starbucks Corp. and Badger Daylighting Ltd. and stopped 50 per cent out of companies such as Open Text Corp., Boyd Gaming Corp. and Kirkland Lake Gold Ltd.
“We have deployed the proceeds into mostly cash,” he says, evenly split between Canadian and U.S. dollars.
They’ve also doubled their position in iShares Gold Trust to 8 per cent from 4 per cent.
He also says they took the “unusual step” of selling 40 per cent of its holdings in the iShares 20+ Year Treasury Bond ETF “which we’ve been a big proponent of as a hedge as it went parabolic.” He says it was sold near the highs.
“We also sold the remaining half of our treasury positions today [Thursday] because they stopped acting like hedges and we are hearing there are huge issues and risks in the repo market,” he says. “I now see the NY Fed has added $1-trillion to help alleviate the liquidity issues there.”
Mr. Del Vicario believes the situation is worse than 2008. “In 2008, we didn’t see the markets tank this much this quickly until the fall of 2008 and there was time prior to that to put one’s ducks in a row,” he says. “What is amazing to me is we are seeing this volatility before any real economic or corporate earnings releases that start to demonstrate the full impact of this virus/downturn. I will also note that this started with risk assets at all time highs both in absolute terms but more importantly value-wise as well.”
He says they’ll get back in if or when one of two things happens: securities he likes, or the market in general, “demonstrate strength and clear previous levels of resistance. So the opposite of our stop-loss discipline in effect.” Or, if prices get to levels where he feels the company or stock is “quite undervalued from a historical perspective.”
Sean Oye, a portfolio manager with Nicola Wealth in Vancouver, says his firm has been active in its U.S. and Canadian funds with call and put options “to take advantage of the high option volatility premiums on high-quality names.”
For instance, he says Canadian Banks “look very attractive” right now having fallen between about 22 per cent and 37 per cent. “When oil prices dropped over 20 per cent this week, most bank stocks fell by a similar amount despite only having about 2 per cent in total gross oil and gas loan exposure,” Mr. Oye says, adding that bank stocks are paying dividend yields of more than 5 per cent.
He also says waste-management companies, which are domestic-focused and considered essential services regardless of the economic environment, are attractive. ” Many of the waste companies we follow are off 15 [per cent] to 20 per cent from their recent peaks,” Mr. Oye says. “The large public waste companies have a long history of paying dividends, buying back shares and making accretive acquisitions in distressed environments.”
Over all, he says he believes that the markets could face a ‘W-shaped’ recovery, “where we still may see some further downside from here, followed by fiscal stimulus packages providing a temporary boost to market, then a nervous market in the fall due to the U.S. election, followed by a recovery assuming the incumbent Party stays in office.”
Mr. Oye said the overall strategy of his firm’s equity funds has been consistent “as our portfolio tends to focus on quality names that have low leverage and reasonable valuations relative to earnings growth. We don’t try and time the market per se by making large sector shifts in our funds, but we do take opportunities to high grade the portfolio as opportunities present themselves.”
Christine Poole, CEO and managing director at GlobeInvest Capital Management Inc. in Toronto, says the coronavirus contagion will continue to disrupt commercial activity and dampen consumer spending because of cancelled travel and events. “It is difficult to forecast when the level of COVID-19 cases will peak,” she says. “However, based on the experiences of China and South Korea, the outbreak should eventually dissipate, aided by containment policies.”
Ms. Poole says monetary and fiscal policy responses will help to buffer the negative impact of the virus and collapse in oil prices. “We expect economic growth will slow significantly over the first half of the year with a potential for a back half recovery assuming the coronavirus is a transitory issue,” she says. “Nonetheless, until there is more clarity on its evolution, uncertainty prevails resulting in elevated stock market volatility exacerbated by algorithmic driven trading activity.”
She adds that the speed of the market correction “and wide price gyrations in the broad market indices has significantly dampened investor sentiment and increased investor angst.”
Ms. Poole is encouraging her clients to focus on the long term given their portfolios include “high quality, financially sound companies that can weather the economic cycle.”
She says the firm is finding attractive value in many income and growth stocks “and deploying available cash at a measured pace on pullbacks.” She says some income stocks they’re buying include utilities such as Algonquin Power and Utilities Corp. and Fortis Inc. and growth stocks such as Brookfield Asset Management Inc. and Microsoft Corp.