Fear Driving Markets

Michael Rudd, CFA | President, CEO and Portfolio Manager

Over the past few weeks, we have been studying and writing about geopolitical events because of their recent takeover of press headlines. Set to release next week is one more note on the subject, but for this week, we are discussing financial markets in general.

In 2019, equity markets around the world rose to new heights. Due to last year’s high prices, our team had a difficult time buying stocks. For that reason, our mandates had between 10-40% cash depending on the strategy. In January, the markets continued to race higher and we continued to experience opportunity cost from the cash drag in our portfolios. At the same time, we noted a growing problem in China with a new virus. The market continued to ignore this development (i.e. “that’s a problem over there and not here”) until recently when the virus spread, and domestic North American investors began to consider the issue “real”. Fear and panic have since ensued.

  • We highlight equity and fixed income market performance over the past two years in Figure 1. As you can see, there has been some volatility, but current prices have only stepped back to where they were in October 2019. While this is a correction, (we have had 4 since the Great Recession of 2008) it is not yet a true bear market.
  • While we do have to respect the fact that this, like any other major disease or war, will be a tragedy for many 10,000’s of people, we should also remember the world and economy will continue after this has been resolved.
  • There is potential that we will enter a traditional demand/supply recession. In our opinion, this is long overdue and will provide a great opportunity to use our cash to reposition our portfolios for the next cycle.

“This means that” while we remain concerned about the human cost of COVID-19 and the potential for a global recession, we also remain focused on our investment process. The businesses that we partially own (i.e. our equity positions) will continue to operate month in and month out, irrespective of stock market volatility. It is important to maintain a long-term perspective. Being prepared and level-headed will hopefully allow us to position our portfolios with excellent quality companies over the coming months.  This will serve us well in the future.

Pathfinder Asset Management Ltd. | Equally Invested™
1320-885 W. Georgia Street, Vancouver, BC V6C 3E8
E info@paml.ca | T 604 682 7312 | www.paml.ca
Sources: Pathfinder Asset Management Limited

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.

*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Pathfinder Real Fund are presented based on the masters series of each fund. The Pathfinder North American Equity Portfolio and The Pathfinder North American 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 North American Equity Portfolio (January 2011), Pathfinder North American High-Income Portfolio (October 2012) Pathfinder Partners’ Fund (April 2011), Pathfinder Real Fund (April, 2013), and Pathfinder International 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.