Good afternoon,

 

For long-term clients of ours, it will be no surprise that there is an increased level of correspondence from our team when there are more ‘question marks’ than usual in the world. The recent events in Ukraine certainly qualify as this sort of event in its scale and maybe more importantly, its unpredictability. I’ve been reluctant to write about it before today for that reason as I’ve been waiting for some level of clarity or resolution. That likely shows my age, that even at 43 I have little experience with any conflict that involves more than one military superpower. I was 11 years old when the Berlin Wall came down 1989 and 13 years old when the dissolution of the Soviet Union was finalized in 1991. Therefore, I have had the luxury of a life that has generally been peaceful, especially as a Canadian citizen. Our dinner table debates would centre around whether Canada had a place in its involvement in wars in Afghanistan or Iraq, where the enemy of our country wasn’t capable of any meaningful response to us or our friends.

 

Today feels different for the obvious reasons. Although, again it feels as if the western world is pitted against someone that we share very few ideological similarities with; this time our enemy has a much higher capability to counter any use of force that could be brought against it. That is what makes predicting the outcome of today’s conflict in the Ukraine so difficult. Allies of Ukraine are hamstrung in their response, knowing escalation on the battlefield has consequences that should be unthinkable but continue to percolate. It’s why the only thing that has been appreciating in value are commodities whose supply could likely be disrupted if there is further escalation, namely oil and natural gas. Gold, silver and bitcoin have also appreciated in value but the argument for them being a viable store of long-term value is for another day.

 

You will see portfolio returns for February that continue to be weak – down anywhere between 4% and 7% for the year so far. They have also underperformed the TSX because of its heavy weighting in the energy and precious metals sectors. However another way to spin it is that portfolios are still up between 15% and 20% since the start of 2021, right? I realize that will likely offer little comfort, but what should offer meaningful comfort to us is that earnings data for the companies in our portfolio have been excellent, and estimates for continued growth have been solid as well. I am thankful that we have businesses that generally should be little affected by continued conflict. So at this point, all that’s happening in your portfolio is shares of high quality companies going on sale. But the companies themselves are still run by exceptionally talented management teams that, in my estimation, will continue to execute much the same way I will – by taking advantage of meaningful opportunities as they present themselves. You and I as shareholders then get to reap the benefit, eventually.

 

On the topic of what I’m doing about the conflict from a portfolio perspective: I have NOT been adding any gold or energy positions to our portfolios, and I will not be doing that. My position remains that chasing returns in shares of commodity-based companies is not the type of investing that our clients rely on us for. Those companies are better bought when they are out of favour because of pandemic-related lockdowns (which means I hope we never own such companies ever again) and are being panic-sold. Instead, I’ve used weakness in our market generally to trim positions in names that I don’t love, to take advantage of names that look more attractive because of recent declines. I’ve added shares in both our managed strategies in a packaging company that looks undervalued now, despite an impressive track record of earnings growth and solid expectations of that growth continuing. I have admittedly raised a bit more cash in portfolios lately as well, as I don’t know whether we’ve seen the worst in equity markets already and I like having some dry powder in case further declines present themselves. Markets do tend to be irrational, as we know.

 

In the meantime, we can be thankful that we live in a country that is not in a direct conflict. We can say prayers for everyone in our world that isn’t as lucky as we are and we can maintain the perspective that at times like this we are simply spectators hoping for an outcome that will spare as many lives as possible. For any of you that know people in Ukraine or have family there, on behalf of our entire team I pass along our prayers for you and your loved ones.

 

Best regards,

 

George Wright, CIM, FMA