July 2017


With this commentary, we plan to communicate with you every month about our thoughts on the markets, some snap-shots of metrics, a section on behavioural investing and finally an update on MacNicol & Associates Asset Management (MAAM). I hope you enjoy this information, and it allows you to better understand what we see going on in the market place.


The stock market is filled with individuals who know the price of everything, but the value of nothing.”

– Phillip Fisher




Quarterly Market Commentary:

During the 2nd quarter of 2017, investment markets around the world were a mixed bag. Developed market risk assets in Canada and other resourced-centric markets like Brazil lost ground while financial markets in the United States, China, Japan and India set the pace by steam rolling forward. It Europe, equities were broadly flat while German Bunds moved higher, then lower, then higher and then lower again. Currency considerations were a hot topic and ubiquitous through-out many discussions on investment performance, especially for Canadians. The breathtaking run up by the Canadian Loonie is something even we on the MAAM investment team were left scratching our heads over. Has the Canadian economic situation really improved that much? More on that in the ensuing pages. For the time being, we encourage readers to view a currency as the “stock” of a nation in as much as both asset classes sometimes get a little bit ahead of themselves on nothing more than pure speculation.


Perhaps an even bigger surprise thus far in 2017 has been the failure by the US dollar to rise even higher though we suppose all good things must come to an end eventually. But broad outperformance is likely moving away from the United States into Europe and Asia, and the MAAM investment team is closely monitoring developments and assessing the feasibility of non-North American investments in client portfolios. Ultimately as Portfolio Managers we earn fees not for prudent asset allocation and not copious amounts of clairvoyance. Yet we feel that tomorrow’s markets will be driven by less expensive valuations, monetary policy and early stage economic expansion.



We never really knew what to make of US President Donald Trump.

The juxtaposition of our public [and private] views on President Trump were at times as wide as the Toronto lanes of Highway 401. Like portions of many GTA roadways under construction, our views of President Trump would narrow materially with each passing twitter tweet. Our own personal views notwithstanding the last 100 days have taught us that President Trump will have a much lower impact on the global economy than originally conceptualized by markets. However, it is hard not to like the sounds of deregulation. And so from a business confidence perspective it is likely that Trump’s twitter tweets on toiling and tinkering with the US regulatory environment have far greater a sectoral impact than will his tax and health care system revisions, or promises of fiscal largesse to crumbling US infrastructure.


It seems like forever since the words “growth” and “Europe” were used in the same sentence by Economists or Portfolio Managers. Like us, many readers of MAAM publications will know that the Eurozone was in the financial news for all of the wrong reasons since the global financial crisis, which was a solid 9 years ago. The good news is that it would appear as though the trend in real Eurozone GDP growth is back and set to eclipse the mark last set in 2008. Encouraging economic momentum, a receding risk of a populism fueled break-up and more confidence in the banking system have encouraged businesses to invest in their future, which has translated into a pickup in credit growth. The MAAM investment team is monitoring Europe closely for potential investment opportunities as the eye of the storm has moved on. Substantial post crisis slack in the Eurozone economy means that there will be a lengthy “catch up” prior to inflationary pressures becoming punishingly hot. Therefore, as with all of our investment decisions, the MAAM team will take time to carefully assess the merits of any potential Eurozone investment we make, noting its expected return and potential for risk to our clients’ capital.



Uh, oh Canada?

 Canadian equity markets just can’t catch a break in 2017.


Regular readers of our Monthly and Quarterly Commentaries will know that Canadian equity markets are concentrated. So to the uninitiated or new clients we offer a brief guide. One-third of our entire equity market is dominated by financials, those oligopolistic institutions Canadians love to hate…eh. Another quarter of our equity market is comprised of energy companies, those oligopolistic institutions OPEC and US Shale producers would appear to love to hate. For some like me who lump energy and materials stocks into the broader natural resources basket, the weighting is now closer to one third. Taken together, financial and resource stocks account for more than half of the S&P/TSX Canada’s benchmark index for equities. That means the other seven (7) sectors combined don’t carry as much weight as financials and resources do. Now that presents investors with an interesting dilemma.


If financials and resources stocks are strong, there is a good chance that the Canadian equity mutual fund or ETF you bought will perform well. But if only financial or resources stocks are strong well then Canadian equities aren’t as appealing. You better hope that mutual fund you invested in truly is as active as your sales person would have you believe. As for the uber-cheap ETF you bought? Well chances are it is cheap for a reason. At MAAM we are active managers and we practice the art [and science] of safe harbour investing. We know that the best way of making our clients’ money is by not losing it in the first place. This is why we are gradually selling into strength for existing clients and being intentionally cautious and defensive with new clients. At some point the winds of change will begin to blow and market leadership will shift from ultra-high growth tech stocks into names that represent superior value.


Today’s high technology names after all will be tomorrow’s consumer products companies and the multiple of earnings investors will be willing to pay for them will reflect that tectonic shift. We also combined conventional and alternative investments like no other manager and were one of the first to implement alternative assets into client portfolios on a firm-wide basis. Alternative assets provide critical diversification that is often badly needed by Canadian investors. So what does the future have in store for Canadian equities? We would divulge the answer of that to you were it not for the fact that we just don’t know. The job of a Portfolio Manager is not to provide endless supplies of sure fire clairvoyance. Instead, good Portfolio Managers put their clients’ interest first by focusing on the long-term and protecting capital.


For now, the MAAM investment team will continue to scour the markets looking for opportunities both domestically and globally while always putting our clients’ interests first.


Fun while it…lasted?

[Tax-free Savings Accounts: January 1st, 2009 – ???]

The Canada Revenue Agency earlier, just about mopped the floor of the stock exchange with tax free savings accounts [TFSA’s] and Canadians were not impressed. Got a hyperactive tax-free savings account that you trade excessively [with a modicum of success] and think the fruits of your mental labour are tax sheltered?


[So did we]


Unfortunately, the CRA is taking an aggressive stance on TFSA’s in certain situations, and as this Quarterly Commentary goes to print a number of Toronto Law firms are reporting a rise in cases where clients have been audited and compelled to pay taxes on capital gains earned within a TFSA.


At issue is whether the beneficial owner of a TFSA is an individual or a professional investor. Right now no clear guidelines on what distinguishes the two exist. If you happen to have a couple of successful trades materialize in your tax-free savings account, the CRA may assume you are a professional investor who is carrying on a business. That could lead to an audit and potentially more tax bills down the road. That’s a real concern to many Canadians.


But CRA is going on vague guidelines issued before MAAM even existed.



The guidelines, which date back to 1984 talk about things like volume of trading, the investment’s holding period, the taxpayer’s knowledge of the stock market, the tax payer’s profession, the time spent researching and trading securities and whether the taxpayer market’s his or her ability to trade securities. But the issue remains that a clear standard does not exist.


In times like these it is reassuring to have the right type of financial advisor working for you.


We’re big fans of independent professional financial advisors. We think many Canadians who need them may not even know they need them. At MAAM we work closely with many of Canada’s most respective and trusted financial advisors. If you are not sure whether you need a financial advisor or have the right one, come talk to us. We’ll gladly refer you to a number of our most trusted partners so that you can make that choice for yourself.


A trusted financial advisor may not necessarily be able to weave in and out of the income tax act of Canada with surgical precision, but there are people who can, and they’ll know whether you need to engage those people based on your overall situation.


For now, many of the cases are before the courts so time will tell just how far the Government wants to take the Tax Free Savings Account issue. But you can be sure that working with a trusted financial advisor will always keep you ahead of the curve.







Some market observers say that widely forecasted corrections rarely happen. We buy that. But we have also been warning investors about blindly piling into the latest tech laden ETFs or mutual funds because we felt valuations were stretched, and then hyper-extended. The above chart from Yahoo Finance shows the performance of FAANG stocks [Facebook, Amazon, Apple, Netflix and Google] against the broader NASDAQ market over just the past 90 days. But don’t let the narrow focus above fool you as we provide longer-term context below. All five stocks – and the tech heavy NASDAQ index – hit a brick wall in early June [red arrow] and we suspect more damage is in the offing.

VXN is a measure of volatility in the tech heavy NASDAQ while VIX is the ubiquitous metric of broader stock market volatility. Our readers’ attention is drawn to the right hand side of the upper chart. Volatility in tech stocks is tearing away from broader market volatility [upper graph, red arrow]. For – at least – the past 10 years, the volatility of tech stocks and the markets as a whole was nearly indistinguishable.


So why the concern?

Well the lower chart shows that the spread between tech stock and overall stock market volatility is at a high not seen since the very early innings of the 2000s. And back in those days, something really, really bad happened to tech stocks that were “priced-to-perfection” by credulous investors. We won’t know for a little while whether this most recent bout of seasickness in tech stocks is the correction that investment newsletter writers have been warning about or more of a shot-across-the-bow but the MAAM team is watching this story very closely.



Why Real Estate?

At MAAM, we are big believers in alternative assets. Nearly one quarter of most client portfolios at MAAM hold an allocation to our Alternative Asset Trust. The trust, through its underlying limited partnerships hold positions in hedge fund strategy, private equity investments and – most heavily – in private and public real estate investments.


Why the heavy focus on real estate?

Well for one thing our desire for lower volatility and higher income hasn’t changed but in this low rate environment it is no longer coming from traditional sources. Clients and prospective clients are also becoming discouraged with traditional means of investing.  Bond yields are negligible and equities are increasing volatile.  Real estate is an income generator, has a low correlation to other asset classes and can act as an inflation hedge over time (as rents get adjusted upwards). Moreover, real estate can provide investors with capital appreciation in markets with favorable demographics and supply constraints.


With that said, real estate investing is not a liquid investment and is not for the impatient, and investors should anticipate waiting at least 7 years or a full market cycle to fully reap the benefits. Keep in mind that for the most part, we are not investing in real estate directly nor are we operating the real estate ourselves.  We are investing in the Sponsors and their vision for the future. Therefore, we focus on an experienced team with strong financial, operational and strategic capabilities.


While real estate (currently) makes up half of the alternative asset trust’s value it is important to note that MAAM clients are not invested exclusively in real estate. We take a diversified approach such that at the individual client level, exposure to North American public and private real estate investments is a more suitable 12%.


Ramblin Man – Greg Allman [1947-2017]

A little over a month after the Quarterly Commentary went to print the world said good-bye to Greg Allman. The southern rock pioneer was a Rock and Roll Hall of Famer and an icon in his native Georgia and birthplace Nashville, Tennessee. Greg’s voice was as distinctive as any in Southern rock and he entertained adoring fans for decades. As huge fans, we were sadden to learn that Greg had lost his battle with Liver cancer. Though Greg struggled with addictions he will forever be remembered for his amazing voice and amazing talent. Some days, after markets close and the stacks of research reports and meetings take pause for yet another evening, this Portfolio Manager – like many others I am sure – ends his day with the southern style and southern sass of Greg Allman…and we might even eat a peach or two while doing it…


Canada Turns 150!!!

It’s hard to believe 150 years have gone by since the confederation of our great nation. Though our roots go back a lot further than July 1st, 1867…the mid-point in the year is the time to celebrate all that Canada represents and the bright future we have. Though our equity markets are challenged by lower commodity prices and a debt laden consumer, as Canadians we must stand tall and stand proud for all that our nation represents domestically and on a global stage. At MAAM we pause to recognize the outstanding mark that Canada has left on the world and hope that our flame will burn brightly for all of eternity.


MacNicol & Associates Asset Management Inc. 


July 2017