Recap & Outlook: It was all a dream?
Welcome back to the Pathfinder Investment Outlook. It is now our 9th year writing for Pathfinder. We have been writing this note in various formats since 2007. By now, you have received our year-end mandate reports and a lot has changed since our last outlook. Stocks markets have since capitulated on the worst Christmas Eve ever; they have rallied back but have yet to cross previous highs. There are a couple of items that we would like to note regarding this:
- At the end of last year, we wrote that we could not see a recession on the horizon. We also concluded that the recent drop in markets was emotional rather than empirical and that based on the data we follow, the US economy was still strong. Slowing … but strong.
- We still do not see data that reflects concern with respect to a recession. Furthermore, financial conditions continue to remain supportive. What has not been supportive is political dysfunction. This is what we believe has caused the most recent market distress which was more related to investor expectations than any real economic or fundamental developments. Figure 1 presents 2-year swap spreads, which are a good indicator of financial systemic risk. In this chart, lower is better. As you can see, risk remains low.
- There has been a sea change in the messaging of the US Federal Open Market Committee (FOMC), which is the organization that manages US interest rates. At the end of the year, FOMC Governor Jerome Powell gave a speech which markets interpreted as hawkish, or potential interest rate rising. This caused financial markets to swoon. Soon after, he and other members of the committee added dovish, or interest rate remaining unchanged, commentary and investor expectations changed for the better. The market then rebounded.
“This means that” we continue to focus on our investment process and the businesses that we own. For example, this past Monday, the investment team met with Barry Perry, CEO of Fortis Inc (TSX:FTS). FTS is one of our portfolio companies. It generates and distributes electricity and gas for its customers. It also generates lots of cash for its investors (i.e. us!). This is a firm firing on all cylinders, in our opinion. It is also priced to perfection in the stock market. Hence, any more upside and we will look to take some profits. None of this analysis has anything to do with shutdowns, trade deals, tweets or Brexit… but everything to do with fundamental investing.
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 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.