WHAT A YEAR! Dividends included, the US market went up 32%, the euro index went up 22.5% and the Tokyo market went up 54% (although 26% in USD). The emerging markets in general have not done as well though (some markets are actually down for the year). Many economists were surprised by the strength of stock markets around the world, considering the anemic growth exhibited by some major economies. This brings up an interesting question: do stock markets predict the economy or is it the other way around? While economists used to comment ironically that “the stock market has predicted 7 of the last 5 recessions”, we’d like to point out that economists have predicted none… or almost! The bottom line is: if you are in the forecasting business, make sure you forecast often…
Talking about forecasting, many of you would like to know what we think for 2014, especially after such a good 2013. Let us remind everyone that we are not in the forecasting business. However, we do believe that, although history does not repeat, it does rhyme. So we compile stock market data (such as past performance) and see what the numbers tell us in terms of probabilities. This is what the numbers are telling us:
- Since 1871, whenever the US market has a 5 year return of 17% annually and long term interest rates has gone up the last year of the 5 (which is the case for 2013), the return for the following year varies between -22% to +12%.
- Since 1871 again, whenever the US stock market goes up more than 25% and long term interest rates go up the same year (like 2013), the return for the following year has been between -22% and +24%.
So, anything is possible in 2014. Therefore, the best strategy is always to be selective and prudent. As we have said for many years, without the help of interest rates going down, stock selection is the most important part of a winning strategy.
POTENTIAL WORLD CHANGING EVENTS…..
There are two events that we have picked out in 2013 that could have a major impact over the next several years:
- The shrinking US trade deficit due to a significant increase in exports that followed a minor renaissance of US manufacturing, a drop of US energy consumption and a surge of petroleum production.The US is now the top petroleum producer of the world, followed by Saudi Arabia and Russia. Combined with a decrease in energy consumption, petroleum imports have dropped from over 12 million barrels a day to 6.5 over about a 9 year period, helping reduce the trading deficit;
- The China rural land reform approved by the Chinese leaders during their third Plenary Session in November 2013. The objective here is to give farmers more property rights, allowing them to lease, sell or mortgage their land. If applied successfully, it will release an enormous amount of capital that is tied up now in rural lands. From an economic standpoint, this reform will change the face of the credit market in China.
LUCK AND INVESTMENT
After a year like 2013, we, money managers, have the tendency to attribute our success to our own doings, our insights and our talents. The reality is that we should not underestimate the amount of luck involved. The investment business, like golf, is a very humbling activity. We invest our portfolios according to our expectations of certain future events. For us to be right and make money, not only does our view of future events have to be right, events that should happen have to actually happen on schedule. But when investing, it’s hard enough to know what will happen, let alone when it will happen. Many things, other than our thorough analysis, hard work, skills and insights, affect our performance. These things, beyond our knowledge and control, play a huge part in outcomes.
Not only does investment success depend on the right selection of securities, it also depends on a beneficial environment and thus a good degree of luck. No one gets it right every time. That is why we diversify, hedge and limit leverage. Our ultimate goal is to be able to achieve, over a long period of time, an above average return that proves the superiority of our strategies beyond randomness.
WHERE TO GET LUCKY?
The investment industry is composed of a lot of very bright people, ranging from analysts to portfolio managers and investment bankers. Markets have become a lot more efficient than before, meaning free lunches are tough to come by. Most of the time, we don’t think we can have any value-added in analyzing a big cap security covered by a large number of financial analysts.
However, we believe that markets, although mostly efficient, can be cyclically inefficient from time to time (like 2008-2009). Moreover, some are less efficient than others. Those are the areas where we have more chance to get “lucky” if we apply our analytical skills and patience.
TWO NEW PRODUCTS TO BETTER MEET YOUR INVESTMENT OBJECTIVES
Thanks to your continuing support, our assets under management have recently grown past the $1B mark. As we are sure you are aware, most of you have multiple accounts (regular investment accounts, RRSPs, RESPs, TFSAs etc.). Up until now, we have always managed your assets on a segregated basis, i.e. account by account, security by security. As the number of clients and accounts increases (which is a good thing), it becomes important for us to make sure that every account is treated equally and fairly.
Unfortunately, it is becoming more and more complex and difficult for us to achieve that goal: due to their size, smaller accounts like RESPs and TFSAs (and smaller sized RRSPs and regular accounts) are being disadvantaged in terms of diversification, which is one of the most important factors in controlling risk.
In order to facilitate the management of your assets and not disadvantage any account or client, we are in the process of launching 2 pooled funds with no management fees: Claret Equity Fund and Claret Income Fund. Their respective titles are self-explanatory. The other possible advantages: First, some clients with restrictions from their employer will not have to report every purchase and sale. Secondly, these will be Canadian funds and even though they will hold international securities, they will not be subject to US inheritance tax. Thirdly, certain investments cannot be replicated in every account and it could therefore be included in these funds.
We will be getting in touch with you to make sure that your needs and objectives are met, either through the segregated method or through the pooled fund method. IN THE END, IT IS YOUR CHOICE AND WE WILL MANAGE YOUR ASSETS THE WAY YOU WANT.
The Claret Team