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Apr 05, 2018

Simplicity in Times of Turbulence

This blog discusses the volatility we've experienced shortly into 2018 with the equity markets. Amidst all the confusion and chaos, how do investors best position themselves for this turbulence?

Saket is the Portfolio Manager for our U.S. Equity Pool. Prior to joining us, Saket worked with an emerging market private equity firm and emerging market hedge fund. His previous experience also includes working as a software engineer and co-founding an investment firm. 

Each day as I go home, my three year old daughter eagerly waits for my return. While my inclination is to believe that she missed me throughout the day, the truth is that she is simply elated as I can now take her to the park where she can enjoy her favorite roller coaster ride. I wish I could say the same for myself and other participants in the equity markets as it has been one heck of a ride so far this year. To highlight this, we show the year-to-date return trend for the S&P 500 in Figure 1 below.

Figure 1: The rollercoaster ride of the S&P 500 (year-to-date returns)

The rollercoaster ride of the S&P 500 (year-to-date returns)

Source: Capital IQ

It appears that the market cannot separate the noise from key issues and what really matters. January began with a lot of optimism as investors were expected to ride the wave of global synchronized growth and increased earnings due to lower taxes in the US. In February, the narrative changed to higher expected inflation due to fiscal stimulus from the tax reform and the market started worrying about more than three interest rate hikes by the Fed. As companies reported earnings, investors started realizing that a large part of the benefits from the tax reform will be competed away. As a result of these concerns, the market corrected by approximately 10% within a span of ten days. The subsequent recovery was short lived as worries about tariff hikes and trade wars took the steam out of the rally in March. In fact, the varying narratives on Friday, March 23rd and Monday, March 26th are shown in Figure 2 as examples of the fast changing nature of market sentiment that we have observed so far this year.

Figure 2: The fast changing nature of market sentiment in headline news (March 23 and March 26)

The fast changing nature of market sentiment in headline news (March 23 and March 26)
The fast changing nature of market sentiment in headline news (March 23 and March 26)
Source: CNBC

Amidst all of this confusion and chaos, I cannot help but reminisce about the play time with my daughter. Every now and then, she tries new rides – only to discover that the excessive turbulence prevents her from enjoying the ride. Invariably, she goes back to her tried and tested ride which she can comfortably relish. It reminds me of da Vinci’s famous quote – “Simplicity is the ultimate sophistication.”

In our opinion, this is what investing is about – knowing your strengths and following your investment philosophy relentlessly. Amidst the volatility we have seen in the market, we have remained focused on continuing to execute our investment process. As Ric Palombi, our Director of Research, mentioned last quarter, “we do not and cannot manage the volatility, but have and will continue to use it to our advantage”. We took advantage of the price moves to eliminate our positions in stocks with inferior risk/reward and deploy capital in stocks that offer a more compelling value proposition today. We sourced funds from our holdings such as Citigroup and Williams Sonoma by selling them at lucrative prices and reasonable profits. Kraft Heinz, Starbucks, AGNC and Fabrinet are examples of new positions that we initiated over the last few months. We deem that at current prices, we are getting these businesses at valuations that would allow us to generate healthy rate of returns over our investment horizon.

We wish we had a crystal ball to predict how things will eventually play out and how the markets may shape up. The reality is that investing is a probabilistic exercise wherein various scenarios could play out. Our job as capital allocators is to position the portfolio in a manner that allows us to be prepared for these outcomes and that increases our chances of outperformance. As the market has given us opportunities, we have embraced them to increase our capital allocation to these areas. In my mind, our investment process is similar to my daughter’s favorite ride – one that she is familiar with and enjoys. Needless to say, during any turbulence, we latch onto it even more tightly.

This is a snippet from our Q2 Quarterly Outlook Commentary being released this week. Our clients will automatically receive this commentary, where we discuss:

  • Confusion on the impact of the new mortgage regulations and IFRS9 on the Canadian market
  • US market turbulence and how we're taking advantage
  • European uncertainty and where we're finding value
  • How we're utilizing active management in fixed income to create value
  • Profiles of companies we have recently purchased


If you are not a client and wish to receive a copy, contact us at [email protected], or at (403) 234-0005.