EQUALLY INVESTED… WHAT THIS MEANS:

We believe we have created a better platform for money management. Our inception as a family office led to the creation of our Equally Invested™ culture: This means that everyone at Pathfinder invests in the same portfolios and funds and pays the same fee as our clients. Also, we (employees), along with our families are the largest investors at Pathfinder so your portfolios are invested right alongside ours.

January 2020

This year, equity market returns rallied back from a what was almost a bear market. At the end of 2018, major global equity markets hit a low, with a top to bottom drop of almost -18% in the MSCI All Country World Index. From almost the beginning of the year, equity markets rallied back just under 25%. We believe that both the drop and the subsequent rebound caught most investors by surprise.
We will address all of this in our various mandate reviews, but we reference a few simple statistics here for your consideration:

• We normally chart the best and worst performing markets for the calendar year. We decided to present the previous year’s results as well. In the figure above, green and blue bars are returns from 2019, while grey are from 2018.
• We track 93 different equity markets. In 2018, 72 were negative for the year while in 2019 only 17 were. Indeed, there was a large global “snap back” experienced by almost all equities markets.
• One item that we noticed was at the tail end of the positive and negative returns emerging market countries tended to make up most of the names. New Zealand is the only developed country to make the top list (Brazil is large but technically is an emerging market economy). We also noted that the negative markets from last year continued to be negative again.
• Broad developed markets did very well this year. The United States was up 31% in USD terms. Canada and developed international markets were up just below 20% in local currency terms.

At Pathfinder, we draw a clear distinction between our Core Portfolios (segregated stocks, bonds and cash) and our Pathfinder Funds (our private specialty pooled funds). The investment profiles of these two “baskets” are quite different. The North American Equity Portfolio is managed to produce broad, equity-like market returns but with less risk. The Pathfinder Funds have specialty mandates and are very different vs. a traditional long-only blue-chip portfolio. Our investment thesis is that the combination of these two baskets should produce results that are better than broad equity markets for any given risk level when combined in various mixes, based on client objectives. Bending between these two baskets and treasury bonds, where appropriate, allows your portfolio manager to target essentially any return and risk level that is appropriate to your situation and financial goals.

Our investment thesis:

The North America Equity Portfolio is the blue-chip part of your portfolio. It should generate long-run equity returns. We select stocks from a list of high-quality, stable cash-flowing companies and allocate to cash when we feel there is too much risk in financial markets or when stock prices are too high (the two are not the same). We also use a 9% long-run cost of capital (similar to the long run return of global equities as represented by the MSCI World Index) as one of the more significant valuation tests when we consider adding a company as an investment into our portfolios. If we are doing our job correctly we should generate equity like returns with less market risk. We then use the “budgeted risk” saving in this part of the portfolio to allocate capital to the Pathfinder Funds.
The Pathfinder Funds are more aggressive by comparison and are managed for performance (either absolute or relative). Furthermore, each of the risk profiles and investment processes are quite different. This is by design so that we do not introduce a high level of correlation between each fund and the Equity Portfolio. As a generalization, the funds are able to use derivatives, leverage, shorting, trade physical commodities, own private companies and typically have higher position concentration. Each fund has its own mandate and a short one-line description is outlined on the next page. Over the coming weeks, you will receive portfolio manager reviews that will dive into more detail about each fund.
The diversity of risk profiles among each of the mandates at Pathfinder allows our Portfolio Managers and Investment Counsellors to custom blend a portfolio for each client, depending on their needs and investment goals. Less risk taken in the North American Portfolio allows for the budgeted risk to be spent elsewhere. Much of this is accomplished by diversifying asset classes, management strategy and differentiation.
With respect to risk, most people think of risk in terms of losing money. Other more institutionalized investors think of risk in more relative terms – i.e. their portfolio’s return against a benchmark. In the latter case, the absolute return is less important than the relative return. If you have read much of what Pathfinder has written over the years, you would know that we are not big believers in benchmarking. We are more concerned about buying the best companies that we can find and taking a real investment position, rather than hugging widely published index weights (investors can do this cheaply on their own by using Exchange Traded Funds). Thus, risk minimization for us comes from our process and our process allows us to customize this for each client.