RowanOak Commentary – October 16, 2020

US Election Thoughts:

Every time I think this bizarre year can’t get any stranger, it gets even more surreal and at a speed that is hard to keep up with. The market is understandably in a state of unease as we brace for the US election. But with only a few weeks left before the election, the market is laser focused on fiscal policy right now, and there appears to be some positive momentum on that front.

The president’s re-election was already low and falling following the last debate, as were the odds of the Republicans keeping control of the Senate. In other words, a Biden win and a blue wave, with all the potential policy implications that this implies, are likely priced in already.

But we all know how wrong the polls were in 2016, and this being 2020, we should be prepared for any outcome. Perhaps the market will just float in a state of suspended animation until election day, but on the surface, it seems to be taking the odds of an election upset, a potential Democratic sweep, in stride.

Last Quarter:

September, as expected, was a difficult month, with markets in North America and abroad down pretty much across the board. Despite this correction, which came after two very strong months, markets were left with overall gains for the quarter despite the disappointing September, and the reasons why come from the same place—the pandemic.

Looking Back

• The course of the pandemic. The third quarter started with the pandemic beginning a second wave. The daily spread rate and the daily case rate both increased, as the virus spread around the country. The testing situation also deteriorated, with rates for positive tests increasing. During the quarter, though, the spread rate and the number of new cases steadily decreased, as control measures took effect again.
• Economic recovery pushed forward. The decline in medical risks during the quarter helped push the economic recovery forward as well. Businesses started to open again, and job growth came back in a big way. On top of that, federal stimulus payments put money in the pockets of those most affected by layoffs. This relief helped consumer confidence start to recover, and it brought business confidence back to pre-pandemic levels.
• A rise in medical and economic risks. And then came September. Last month, the infection rates started to creep up again, on the reopening of schools and universities, slowing and starting to reverse the medical improvements seen in the prior two months. Job growth slowed substantially, leaving roughly half of those who lost their jobs facing a much slower recovery, at the same time as the federal stimulus payments stopped. With the rise in both medical and economic risks, markets dropped in the first half of the month, only to partially recover toward the end. While most of the third quarter was positive, the growth trends showed signs of slowing, and even reversing, during the past month.

Looking Ahead

• Which brings us to the present. What can we foresee in the fourth quarter? A rocky ride in October? October could be difficult. While we entered the month with positive momentum, the same risks that hit markets in September are still with us. Medical risks continue to rise, as outbreaks in many places around the world continue to worsen and case growth continues to tick higher. The economic risks are also still very much in play, as job growth continues to slow and federal stimulus remains off the table. We also face risks from the pending election in November. Beyond the current medical and economic risks, political disruption is very possible. In fact, the markets are betting on a turbulent month that could well extend through the rest of the year. Looking at the fourth quarter as a whole, there are a lot of reasons to expect volatility. And of course, there are risks outside North America such as trade, China, and Europe. The rest of the year may be a rocky ride.
• Rising risks. While there are no signs the markets will turn immediately, the risks are rising and will likely take effect at some point. Looking back at the third quarter, we should be grateful for all the tailwinds. But looking forward to the end of the year, we need to be aware they won’t last forever and that the calendar is looking increasingly unfavorable.
• Volatility ahead. That said, periods of market volatility are normal. In fact, they are healthy, as they allow adjustment to changing conditions. The risks we are now facing—medical, economic, and political—have waxed and waned over the year, so a difficult quarter will be nothing new. In fact, after the election, there is a good chance next year will look much better. We will have to wait and see, but for the moment, be prepared for volatility—but remember that it will pass.

RowanOak’s Positioning:

Technology continues to dominate and is responsible for most of the market returns Year-To-Date (YTD). Whether a fund or an investor’s portfolio is positive YTD or if it is still underwater almost entirely depends on one factor: what is the technology weighting? Most technology companies don’t pay dividends and are extremely volatile, which is why we currently have little technology companies in our portfolios. The S&P 500 index has a technology weighting of 28%, while the TSX has only 10%. Of that 10% tech weighting, only one company (Shopify) accounts for 50%. Therefore, Shopify (one company alone) represents 5% of the TSX index.

*Yields and returns are as of September 30 for Series F versions
*Premium Yield Plus has just a 25% equity weighting, of which 18.1% is invested in Tech
*Reference: Dynamic Mutual Funds

COVID-19 presents an ongoing headwind to the global economic recovery. However, consistent and unstinting support from independent central banks, together with coordinated fiscal policy has eased the path through a deep global recession and allowed investors to look ahead to a period of recovery and rebuilding.

There’s always an issue for the world to be concerned about. We concentrate on managing focused portfolios, both in North America and globally. Using Warren Buffetts “Value” philosophy as a foundation, our managers look for best-in-class stocks with the most significant upside and cash flow. That process has been tested through some of the worst bear markets in history, so we stick to that discipline and process with little deviation. It’s one thing to have a discipline and process, but it’s also another thing to be able to stick to it when things aren’t going well. I’ve been through enough bear markets to know that it’s the discipline and process that leads to winning over time.

I believe duration is the key and time is the key variable. There are numerous products today and numerous features of the market today that probably didn’t exist 20 years ago – ETFs or high frequency traders for example, that make the short-term volatility significantly more extreme as we saw in March of this year. If you’re really investing for the next 10 years and you’re really looking for capital appreciation coupled with cash flow, the style I have spoken about is your opportunity over time. There are opportunities for deep value managers, and I think it’s important to be balanced between both growth and value styles, which we construct into our portfolios. But as an investor, the advantages you have are duration and time, and not timing the market or chasing returns. The market volatility has become faster and faster, and the ability to time or trade around this is becoming ever more difficult. It’s never been a better time to be a long-term investor, and I think that is truer today than it was even 20 years ago. Our portfolios have been constructed to focus on high quality dividend growers, alternative assets, and getting paid tremendous yields.

Office News:

Client Portal. National Banks Client Portal has been recently revamped and its new and improved layout deserves a look. Visit our website rowanoakwealth.com and hover over “Member Login” at the top right-hand corner. Choose “National Bank Portal” and this will take you directly to the same site where you can access your account holdings, monthly statements, tax slips, etc. Same username (8 numeric username provided to you at time of set up) as you have always used to access this site. We encourage you to spend 5 minutes surfing it as this improved client reporting NBIN has implemented will give you original purchase data regarding your investments. Have a look and let me know what you think. I am always curious with your feed back to better understand what you like and dislike so we can continually improve our service for you.

Pooled Fund Update. I, along with you I’m sure are chomping at the bit to get our Pool to market, as the savings projected are substantial. We have been working diligently with the OSC, legal departments and Portfolio Managers to bring this to you. We have rounded 3rd base and will be rolling this out very soon. Launch date is expected to be the end of November. You will be the only clients in Canada that will receive these reduced fees on your funds to which are normally sold individually through regular investor channels. We look forward to running a report, showing your cost savings, advantages and potential higher cash flow.

Reminder to acknowledge the IPS. Last month, your customized Investment Policy Statement (IPS) was sent for acknowledgment via email. While most have already completed this, there are still a handful that have yet to open and review the document. If yours is still outstanding, please take 10 minutes to review. Call and/or email with any questions.

10% Free Unit Switches. For those clients that still have DSC funds remaining, we will be processing any remaining free unit switches available in December and then again in January for 2021.

I hope that everyone had a very nice Thanksgiving and were able to spend time with loved ones. Our offices are open should you wish to meet in person; however we continue to offer on-line meetings given the current state of affairs. Keep safe.

Best Regards,

Paul Rowan
President, Chief Executive Officer
Chairman of Investment Committee