Five Questions for Bill Richardson Part 1
Hello everyone. Hope all is well. Throughout the week, I get questions from clients and from investment advisors from our firm that invest in the two portfolios I manage (Willoughby Investment Pool & Northgate Equity Strategy). The old adage is that if one person is asking a question, many others may be wondering the same thing. As a result, we have created a new program called 5 Questions for Bill Richardson and hope to run it every 2 weeks. Below are some of the questions received over the past couple of weeks. Feel free to share with family and friends. Hope you enjoy it. Have a great weekend.
In this session, we are going to focus on what we have experienced with financial markets since the end of February when the world changed due to the Coronavirus
1. We are now 14 weeks since markets started to become more volatile due to the Coronavirus. Can you talk about what you have seen in financial markets since late February?
Since late February, major markets like the S&P 500 have gone through three phases – Reaction to COVID-19, Recovery and Uncertainty. Just to be clear, we view this as an “Event-Driven Decline” which is much different from an “Economic Driven Decline” like we had in 2008. In the Reaction Phase, markets and most stocks suffered significant losses. To use the S&P 500 as an example, we had four weeks of double-digit declines, resulting in a decline of 36% from the February highs. During the final 2 weeks, we had outright panic with investors selling anything and everything with few buyers looking to buy. This results in artificially low prices and for a very brief time, there were some tremendous bargains and many investors who couldn’t take the heat, liquidated their holdings at prices they now regret.
From March 23rd to April 17th, we had four weeks of upward surging markets with two double-digit return weeks and total returns of almost 29% but those rallies levelled off but still drifted higher with gains in the 6% range as investor watch the recovery and try to make sense of things such as what future earnings will look like over the next couple years and how to value companies in the Post Coronavirus culture.
Let’s talk for a moment about stock market indices. Although simple to follow, indices like the S&P 500, Dow Jones Industrial Average and TSX 60, don’t always give an accurate view of financial markets. Most indices are what is called Cap Weighted which means that bigger companies like Amazon, Microsoft and Apple have much higher weightings that smaller companies. For example, these three companies account for one-third of the performance of the NASDAQ 100 index. So goes Amazon, Apple and Microsoft, so goes this index.
Since March 23rd, many technology companies have done extremely well to produce great year-to-date returns. Amazon (+30%), Netflix (+30%), Zoom (+138%), Activision Blizzard (+18%) and Microsoft (15.92%) are a great example of companies we own that have benefitted from shutdowns. Airlines stocks, like Air Canada (-66%) and cruise lines, like Royal Caribbean Cruises (-59%) have fared poorly.
It has been a stock picker’s market and great stock pickers, like Noah Blackstein at Dynamic Dynamic American Fund Growth (+25%) have done well in 2020. We own his fund in Willoughby and Northgate and individually for clients.
2. You are the portfolio manager for two of Harbourfront’s flagship funds – Willoughby and Northgate. Can you talk about these two funds to give our viewers an overview of these funds?
Willoughby is a balanced fund (80% Equities and 20% Bonds) and Northgate is a pure equity fund (100% equities). Most clients hold one or the other and sometimes both funds as they are very efficient. In other words, you get broad diversification and active management in a single solution. Some of our clients also hold the individual stocks, etfs and mutual funds contained within the strategies.
3. An email from the President of Harbourfront was recently sent out to clients recognizing how well the funds have performed compared to other Canadian balanced and North American equity funds. Can you talk about what has contributed to the success of these funds?
We were very proud of our performance in 2019 when Willoughby ranked #1 against all Canadian Balanced Funds with a total return of 19.6%. Northgate was only launched in February so it didn’t have a full year of performance last year and missed a very strong January and the first part of February, but it ended the year up 12%, which compared favourably against major index returns. Both portfolios are positive year to date while the TSX is still down close to 10%.
The key to our success last year was our focus on historically strong sectors, like technology, healthcare, industrials, consumer and financial sectors while avoiding volatile sectors like energy and basic materials that tend to go sideways over time. There is a very good selection of companies in those sectors and they are, what we believe, better quality investments for most conservative-minded investors. So better longer-term performance, less volatility, and a better comfort factor of owning companies whose names most people recognize…names like Amazon, Netflix, Mastercard, Lululemon, Royal Bank, etc.
4. Some people are talking about a second down wave in the market as profits are going to be under pressure with shutdowns and business disruptions. What are you plans to protect portfolios in case this happens?
It is very difficult to dispute the idea that there may be a second wave of the virus and/or more trouble in financial markets so we continue to monitor things closely. We are starting to see a rebound in some of the stocks that got beaten up the most in the downturn which is positive. We are watching our technical indicators very closely and selling positions when they break through our limits which will help to reduce the downside if they continue to fall. Maintaining this discipline and not panic selling in this environment has benefitted performance. Owning good companies in the portfolio that stand to benefit in the new environment like Amazon, Netflix, Zoom, etc make it easier to maintain that discipline.
Moving on to currency, when the stock markets declined in March, the Canadian Dollar also dropped. This is a benefit to Canadian investors as it acts as a buffer to the market declines. While a declining Canadian Dollar benefits performance, a rising Canadian Dollar is a headwind to performance. This may be opposite to what many people think, especially our Snowbirds that feel good about their trip down South when the Canadian Dollar goes up, but it does have a negative impact on their portfolios. One of the advantages of the funds (Willoughby and Northgate) is that we can hedge the currency risk of a rising Canadian Dollar. If the market and/or oil continues to rise, the Canadian Dollar will likely also rise. Hedging against a rise in the Canadian Dollar can further help to protect the portfolio. So far this year, our hedging strategy has added to the performance of both portfolios.
5. In every market, there are risks and opportunities. We’ve talked about risks. What companies will come out of the pandemic strong and produce great results going forward and which ones are you worried about? How are you structuring portfolios now?
Amazon and Netflix are great examples of companies we own that have done well during the crisis. We already mentioned Zoom which has been booming since the lockdown began. There are still tremendous bargains out there. The question we must ask ourselves is whether a stock is a bargain because the market has over-reacted and sent the stock price lower than it should be or if the stock is cheap because it has a high chance of going out of business or struggling in the new economy.
Thanks for reading this version of “5 Questions for Bill Richardson”. If you enjoyed reading it and would like to share your thoughts with Bill, give him a call at 705-797-4950 or by email at firstname.lastname@example.org. If you know anybody who might benefit from these articles, please forward it to them.