Trip to Asia & Macro Update
We recently took a trip to Asia (Japan and China) to attend a conference put on by Daiwa Securities, go on a site visit and do some marketing and client visits. We wanted to discuss our experience and also write about some of the things that we learned, but so much has happened over the last few weeks with respect to the macro and geopolitical environments that we felt that we should address that before starting the series discussion.
As a group, the investment team collectively finished our annual review and Outlooks at the end of February. As a generalization, we believed that the global economy was relatively strong, inflation was moderating, and employment was generally robust. We were somewhat concerned about higher valuations in some segments of the market but also noted that there were other parts where there was clear opportunity. Our view was constructive, with the provision that it could be adjusted with any dramatic change in policy from the new administration. Well… that seems to have happened, mostly because of what appears to be a building trade war, self-generated by the new administration. It initially started with what we assumed to be negotiating tactics used to reorder trade agreements between Canada, US and Mexico but has since spread to China, Europe, Australia and this week, potentially “all goods coming into the US”.
Whether or not tariffs are “good” or “bad” is a complex debate that we cannot cover in the note this week. Our focus is rather the impact on the stock market and the potential effects on the cash flow of companies that we own in our funds and mandates. There are a couple of issues with this. The tariffs seem to be on and off again and changing in magnitude, almost in real time. This makes it difficult for the managements of the companies that we own to adjust their businesses. It also is difficult for investors to interpret the magnitude and duration of the impact of the tariffs. Just this week for example, the FOMC held rates steady (Figure 1) and one reason Chair Powell noted was the potential transitory nature of the tariffs… welcome news for the equity markets, but not for the US President, who wanted rates lowered.
“This means that” we will continue to remain disciplined with our investment philosophy. Most of our mandates have raised cash and increased our exposure to defensive companies. We will continue to run our operations in the same way as always, and hope to be able to pick up some great bargains with all the volatility.
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.