Twelve months ago, our May market commentary opened with a recap of the macroeconomic challenges that we endured early in 2022:
- Geopolitical conflict
- Supply chain challenges
- Rapidly rising inflation
Twelve months later, Russia/Ukraine remains an unfortunate humanitarian issue but no longer appears to impact financial markets. Similarly, supply chain issues continue but most industries and consumers have adapted. Inflation peaked late in 2022 and is slowly coming down. Today’s substantive issue is the impact of high short-term interest rates…a direct reaction to the issues of 2022. The United States Federal Reserve increased the Fed Funds rate by 5% over the prior 13 months, the largest and swiftest increase in US history.
The relative calm has generally been welcomed by public equity markets, with broad equity markets up 9% since the end of 2022 and 18% since they bottomed out in mid-October. The negative volatility that we wrote about 12 months ago has been replaced by positive volatility since then, with broad equity markets up over 8% since April 2022.
Is recent equity market optimism justified?
Objectively assessing whether recent market movements are appropriate is certainly not straightforward and definitely not a conversation that often ends with consensus. From our perspective, public markets tend to overreact on both the upside and the downside. We acknowledge that it often takes several months, quarters, or even years to conclude with conviction that market movements were reasonable or whether markets were overvalued or undervalued at any point in time.
At WealthCo, we believe a disciplined approach, in both good times and bad, is the foundation to long-term investor success. We spoke about discipline 12 months ago when headlines were full of doom and gloom. And we speak about discipline again today. There are reasons to be optimistic as we approach the summer of 2023…along with reasons to be cautious. Reported corporate earnings continue to be strong and labour reports continue to be robust. However the rapid rise in short-term interest rates is becoming problematic in certain leveraged sectors. Careful underwriting and prudent valuations are the order of the day over the next few months as we watch the Fed walk its tight-wire in an attempt to curb inflation while avoiding a recession and further problems within the US banking sector.
“If there is one theme that I hear from our investors more often than any other, it is their desire to be able to sleep at night with the confidence that their investments are being professionally managed. Peace of mind is extremely important to them.”
David Udy, WealthCo’s Founder and Chief Executive Officer
Our Commitment to Peace of Mind
Dave Makarchuk, WealthCo’s Chief Investment Officer, reminds readers of the fundamental cornerstones of WealthCo Asset Management’s commitment to process and peace of mind:
1. We are more concerned about downside protection than upside capture
“We have built our portfolios relatively conservatively,” Makarchuk shares. “We’re OK being a little behind the market when returns are soaring so long as we’re well ahead of the markets when they are falling…over the long term we believe that’s the best way to meet our client’s investment objectives.”
“Our relative performance in both 2022 and so far in 2023 has been aligned with expectations,” Makarchuk says. “Our lower risk profile resulted in very strong relative returns last year but has also resulted in softer relative returns this year. Hot markets like we’ve seen over the last few months aren’t generally going to be our sweet spot and I believe that our investors understand that. We’re in it for the long haul with an objective of a less bumpy ride along the way. Hopefully this approach helps investors sleep a little easier at night.”
2. We take our fiduciary responsibility very seriously
A fiduciary is an individual or institution that is entrusted with the management of assets on behalf of another person or entity. During volatile financial times, this fiduciary role becomes even more important as we leverage our expertise to help our clients navigate uncertain times and make sound financial decisions on their behalf.
“We are committed to treating each of our investors equally,” says Makarchuk. “A new, small investor receives equal priority to a large, legacy investor.”
3. We won’t make speculative investments
While speculative investments such as crypto-currency have the potential for high returns, they also come with a high degree of risk. Risk that the WealthCo investment philosophy does not support.
“We will never put our client’s money in speculative investments without a sound thesis and plan for the return of capital,” Makarchuk says. “Investments in things such as crypto-currencies are non-starters for us. If individual investors have some play money that they can afford to lose and want to see what happens in the crypto market, that’s up to them. But we’ll never do it…the economic rationale just doesn’t make sense.”
4. Client assets are held independently
100% of client investment assets are held in external trusts that are independent of WealthCo. That means that clients can rest easy knowing that their funds are not vulnerable to any firm financial risks at WealthCo.
“RBC Investor Services Trust acts as both the custodian and trustee for all investments that WealthCo makes on behalf of our clients,” Makarchuk explains. “National Bank Investment Network holds the client units of the RBC accounts. Together they bring confidence for our investors that the WealthCo funds are properly valued and accounted for.”