Client Question…
This week during our Investment Committee meeting we discussed a question that has been asked more recently of the Pathfinder Counselling Team. With valuations so high, should I reduce my market exposure and hold more cash?
Our first comment was that, while we recognize markets are at all time highs, specifically with respect to widely published indices, high valuations are mostly due to the strength of US technology stocks. Figure 1 demonstrates this. The S&P Equal weight index, the simple average of returns is much lower that the regular S&P Index, which is market cap weighted and by definition over emphasises the largest companies in the world (i.e. the Fab 7). In our opinion, there is still a lot of value out there. That is why our PMs and analysts continue to look for good companies.
Our second comment was that because of our investment process, our portfolio managers have already reduced equity exposure across all mandates. Below we list the differences from “the market” for each mandate and Figure 2 represents the details as well:
• North American: 9% cash, 22% defensive stocks
• Partners Fund: 10% cash, 20% hedged
• Conviction Fund: 0% cash, 3% hedged
• International Fund: 15% cash, 10.5% hedged
• Resource Fund: 30% cash
This is the benefit of active management. Most publicly available mutual funds are mandated to be 100% invested at all times (mostly for operational & marketing purposes). At Pathfinder we are Equally InvestedTM and do not have that restriction.
“This means that” for a client who has a blend of 50% of our equities and 50% of our funds, their current market exposure is 75%. We have already reduced of our risk.
National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.
Changes in Leverage. We are increasing the asset ceiling to 2.0 times the market value of equity for Pathfinder International Fund and Pathfinder Conviction Fund to be consistent with Pathfinder Partners’ Fund and Pathfinder Resource Fund.
For more information, please follow the links above to review the fund term sheets.
*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Partners’ Real Return Plus Fund are presented based on the masters series of each fund. The Pathfinder Core: Equity Portfolio and The Pathfinder Core: High Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder Core: Equity Portfolio (January 2011), Pathfinder Core: High Income Portfolio (October 2012) Partners’ Fund (April 2011), Partners’ Real Return Plus Fund (April, 2013), and Partners’ Core Plus Fund (November 2014).
Pathfinder Asset Management Limited (PAML) and its affiliates may collectively beneficially own in excess of 10% of one or more classes of the issued and outstanding equity securities mentioned in this newsletter. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor PAML can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your portfolio manager, who can assess all relevant particulars of any proposed investment or transaction. PAML and the author accept no liability of any kind whatsoever or any damages or losses incurred by you as a result of reliance upon or use of this publication.