It was the best of times, it was the worst of times…

 

Thankfully, this incredibly challenging year is coming to a close. While we're certainly not out of the woods yet, there is reason to be hopeful for the new year that lies ahead. Positive vaccine results with fast-tracked approvals and distribution efforts coupled with certainty (for the most part) in the US presidential election should bring positive economic results in 2021. Unfortunately, this journey towards brighter days will begin in the face of the grim COVID-19 statistics we expect to see over the course of the next few months.

 

Our Colling Group (CG) strategies have had an excellent year with each of our strategies delivering results well ahead of the broader markets. Undoubtedly, the resiliency of markets continue to be a surprise for most investors. As I've mentioned in previous updates, the shear magnitude of the coordinated global stimulus efforts by governments around the world enabled markets to look past the economic hole created by the COVID-19 shut downs and job losses. It also serves as a reminder that the economy is not the stock market and divergences can be wide, particularly in the short term. Our investment process helped us avoid the sectors most negatively impacted by this crisis and capitalize on those who thrived in the face of economic uncertainty. It is also important to remember that global markets entered 2020 on solid footing supported by strong economic growth around the world. If the path to recovery remains on track, the positive equity results this year will be justified. The greatest challenge will be making our way through the next few difficult months.

 

While our economic outlook remains positive for 2021, we are more cautiously optimistic in our view of equity market performance next year. Objectively, our view remains constructive and our asset allocation model favours equities over bonds. That said, we also recognize that, for a significant portion of the market, much of the positive operating results we expect in 2021 may have in fact already been priced into equity values. As you know, the market is a forecasting vehicle and has looked through the economic abyss of this year. Just how far ahead it has extended its view and if the resultant pricing of equity value is reasonable remains to be seen.

 

We continue to watch interest rates closely as a key data point within our outlook. Overall rates remain low but we are seeing a steepening of the yield curve (term structure of rates from 0 to 30 years). Market forces have pushed 10 year and 30 year rates higher over the past several weeks. Ultimately, this is a good sign for future economic growth as a positively sloped curve (long rates > short rates) is a sign of confidence. Additionally, it is a positive backdrop for the financial sector in particular, which is a group we believe needs to return to a market leadership position in the next leg of this market expansion. The challenge, of course, is that if rates go materially higher, it can negatively impact operating margins and lead to a reduction in the valuation multiples that investors are willing to pay for high growth companies in sectors like technology.

 

Overall market sentiment remains positive, if not a bit frothy. This fact gives us pause, at least in the coming few weeks as we close out the year. Overly enthusiastic investor sentiment adds near-term risk to markets as prices can often get pushed to "overbought" levels. Efficient markets will generally correct this state through either price (market correction) or time (multi-week sideways consolidation). However, we believe that any correction would likely create a buying opportunity for long-term investors. As most of you know, we discourage any attempt at wholesale market timing for long-term portfolios. Such an action only adds risk to the portfolio strategy and would likely reduce returns over time. We believe that a properly designed multi-asset class strategy will be able to weather market storms and deliver strong, positive risk-adjusted returns over the long run.

 

While our equity allocations performed well this year, so too did the majority of our alternative allocations, including the more pure hedge strategies such as Merger Arbitrage and Market Neutral. We continue to feel these non-correlated strategies will serve us well in the year ahead. We have reduced the average duration in our fixed income strategies to be below 3 years and maintain our primary allocation in high quality investment grade bonds. Additionally, we have maintained a modest allocation to mortgage-backed securities and high yield bonds. Allocations to more niche or speculative areas such as Bitcoin et al remain outside of our core recommendations at this time. There may be a time for these but we are not currently comfortable with the overall risk/reward equation. One challenge we are faced with currently is the relative weakness of the US dollar; we do see continued weakness through year end and will look to hedge some of our exposure where possible.

 

Throughout 2020, we maintained our investment discipline and long-term outlook and were rewarded. We look forward to putting this year behind us and greatly anticipate a slow return to normalcy, or a reasonable version thereof. As always, please give us a call or email us anytime if you have any questions.

 

On behalf of my entire team I would like to thank everyone for their continued confidence and wish all of our client's families all the best during the holidays.