Over the last few months my key ‘soap box’ rant has been recession proofing client portfolios. The only 100% recession proof strategy is to go to cash BUT that will give you returns of 1-3% over the next 1-3 years while you wait for and then wait out the recession. Generally investors remain in cash even after the end of a recession since they fear the damage is not over.
Stocks have actually risen during 4 out of the last 9 recessions. And stocks were positive 6 out of the past 9 times in the year leading up to the start of a recession, dispelling the myth that the stock market always acts as a leading indicator of economic activity.
All of which is to say, is that, in general, stocks tend to perform below average in the year leading up to and during a recession and perform above average in the 1, 3, and 5 years following the end of a recession (with the usual caveats that there are always outliers and this is a small sample size).
In order to reduce the volatility risk for clients investment portfolios we have begun to include PRIVATE equity and debt which has exhibited less volatility during periods when equity markets are in decline. While these investments will have less liquidity (30-90 days versus 3 days for stocks/bonds and mutual funds) the returns can be more consistent. Most pension plans have significant exposure to both PRIVATE debt and equity.
The chart below shows a traditional asset allocation of cash-bonds-equity and how that would change adopting our asset allocation suggestions.
While the main purpose of these changes are to reduce the volatility of investment portfolios (producing more consistent returns) the inclusion of PRIVATE DEBTcould also improve overall returns since ‘loans’ tend to generate higher returns than investment grade bonds at this time.
The largest negative of instituting these changes for clients (many of you have already started these changes) is the additional paperwork that is required. Each time we re-position a client account a small tree is sacrificed.
Some of you also have an OPPORTUNISTIC sleeve of equities and you portfolio would look slightly different (see below)
*Opportunistic trades are targeting higher total return and/or shorter time frames
(for those looking for current suggestions in this category please contact me by replying to this e-mail)
These are a few examples of recent deals in our PRIVATE DEBT offering (TREZ CAPITAL). Trez Capital has various LOAN portfolios giving distributions between 4 and 8%. The portfolio giving the 4% cash flow is an EXCELLENT alternative to GIC’s since the return is better and you have 30 day liquidity.
Most of our PRIVATE equity at this time is APARTMENT buildings in with exposure to Ontario and out west (Manitoba, Saskatchewan and Alberta). These opportunities provide regular cash flow between 5.5% and 6% PLUS potential for increases in the unit price over time (Centurion recently increased their unit price by close to 4% so those that have invested in the last 3-4 months have received distributions BUT have also seen their original investment increase :)
The unit above is an example of a unit in the Centurion REIT portfolio.
On a slightly different note I wanted to include an analysis of our key CORE tactical balanced fund holding. I recently read the report for OMERS pension plan and in it was the return on the portfolio for the last 10 years. Many people I talk to ‘believe’ that pension plans have vastly superior returns to mutual funds. The following shows a slightly different story. The REAL benefit of a pension plan is consistent deposits over a long period of time. Most Canadians do not contribute to their RRSP’s (personal pension plan) in the same manner.
For those of you who have made it this far (give yourself a pat on the back) I encourage you to contact the office and arrange a time to meet with me so that we can review your portfolio, make changes if needed and update your current financial income analysis. As the summer winds down perhaps you can set some time aside in September-October to meet.
Enjoy the rest of the summer and I hope to see you soon
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‘historical analysis does not reflect future returns’