If one were to consider the idea of “stock returns” for a moment, one could come up with some materially different data points. This year, there were some very strange results in equity markets which demonstrate how government actions can dramatically distort investment portfolios. For example, the Venezuela Stock market returned 3,610% in local currency (just a little under Bitcoin!!) this year while the Argentinian, Ukrainian, Mongolian and Kazakhstan markets all returned over 70% in local currency. Those markets have significant political influence and would be considered strange outliers. We have presented the best and worst performing markets (excluding the outliers) in the chart above (in Canadian currency). This list is very different from those that made the list last year. While most equity markets did well this year – of the 96 that we track only 10 were below zero – Asian and European based Emerging Markets countries were the best performing group. This is a significant difference from last year where commodity-tilted markets outperformed after significant underperformance in 2015.

As you can see, depending on how you look at the data, there are a variety of ways to judge what broad equity returns look like over a very short-term (1-2 years). What is interesting is that if you look at the same return statistics over multiple years, the best returning countries contain none of the same names. For this reason, we focus on very long-run returns of developed global stocks as our goal for portfolio performance. The MSCI World Equity index in US dollars over the last 40 years has returned about 9%. It is also similar in other major currencies. Thus, increasing our time horizon and attempting to beat that return with less risk seems like a good goal for investors.

Our Investment Thesis:

The Core 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 (note it is the same as above) 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” in this part of the portfolio to allocate 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 correlation between each fund. As a generalization, the funds are able to use derivatives, leverage, shorting, physical commodities, privates and 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 Core 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.

CORE: EQUITY

This is the blue-chip part of your portfolio. It should generate long-run equity returns with less volatility.

CORE: HIGH INCOME

This is the same blue-chip portfolio above but tilted to higher dividend paying stocks.

PARTNERS FUND

This fund invests in high-torque, early-stage companies that have the potential to generate superior returns.

REAL RETURN PLUS FUND

This fund was created to protect and grow purchasing power.

CORE PLUS FUND

This fund exploits global themes and hedging with an objective to generate superior risk-managed returns.