Tyler Marche
MBA, CFP, FCSI
March 31, 2021
A REQUEST
Welcome to the 19th edition of Marche Monthly. Since October 2019, we’ve been bringing you stories about our long-time wealth management strategy, which in essence is to buy companies that:
• We understand.
• Have strong balance sheets.
• Are trading at a discount to their intrinsic value.
• Are predominantly in regulated industries.
• Predominantly pay dividends.
Here is our request: if our message has been resonating with you, feel free to share it with someone you care about, and feel free to refer them to us. It is our honour to take care of you, and we will take care of them in the same way.
HAVE YOU NOTICED?
What is our primary goal? The priority we put above all others?
Preservation of capital. That’s why I see bonds as an inappropriate investment vehicle for long term investors and addressed this issue in the February Marche Monthly. In that edition, I used the example of a 10-year bond that pays one percent (without coupon payments). If interest rates rise by just one percent, the value of that bond should go down by 10 percent. Which means that you have to hold the bond for the full ten years just to break even, except that inflation and taxes mean that you are practically guaranteed to lose money.
Have you noticed what’s happened since February? Interest rates have gone up significantly. As of March 19th, a Canada 10-year bond had gone down 8.42% for the year. Meaning the person who bought that bond at the start of the year will now have to wait 8.5 years to get their money back.
The picture for long-term bonds is even worse: the Canadian long-term bond index is down 12% so far in 2021.
It’s clear: if you have a long-term time horizon, unfortunately in this interest rate environment bonds will not preserve your capital, especially after taxes and inflation.
All of this reinforces our strategy of focusing on the kinds of companies listed in the bullet points above. That kind of portfolio, customized just for you, is destined to better preserve and grow your savings.
BUYING CANADIAN
In last year’s July edition of Marche Monthly, I talked about my enthusiasm for buying Canadian companies. It was not an approach based on any kind of patriotism, but instead, as always, a clear-eyed look at what is happening in the markets. And what is happening in the Canadian markets this year is keeping my optimism alive: while the S&P 500 index in the United States is up 4% so far this year, the Canadian stock market is up 8%, outperforming the US significantly.
So we continue to own more Canadian companies than American ones. And I continue to find more businesses that we want to own: dividend-paying companies with strong balance sheets in regulated industries.
But wait: isn’t Canada’s slow vaccination rollout, compared to the US, a threat to our competitiveness vis-à-vis that country? I see that as of March 13th, 2.6 million Canadians, in total, have received at least one shot of vaccine. Compare that to our American friends, who gave jabs to 4.6 million people on March 13th alone.
If you are a Canadian manufacturing company, competing with a US factory for a big order, there’s no question that at this moment, you are at a disadvantage, because on average more workers in the US factory will be vaccinated. So the costs and risks to the Canadian company are much higher.
But investing is not a short-term game. Before long, Canada’s vaccination rate will be comparable to the US. In the meantime, these few months don’t matter to the bigger picture, as demonstrated by the outperformance of the Canadian market: the market itself is telling us that our lagging vaccination rate is not a concern.
KNOW THE FACTS
By the way, getting a COVID-19 vaccine will not affect your insurance coverage. Contrary to misinformation being shared online, receiving a COVID-19 vaccine will have no effect on the ability to obtain coverage or benefits from life insurance or supplementary health insurance.
If you have any further questions, let us know, and we can bring in Andrew Sipes, our Estate Planning Specialist, as appropriate.
THE LOONIE
Another sign of Canadian competitive strength is our dollar, which has quietly outperformed most other major currencies so far this year. In fact, it is possible that some of the competitiveness advantages the US has enjoyed over Canada could fade in the coming years. Consider that the States is considering its first major tax increase in nearly 30 years, to partially fund some of the massive stimulus already unleashed and even more that is yet to be announced.
In any case, none of the Canadian companies we own will be impacted by the fact that we are behind our neighbours to the south. And finally, keep in mind that Canada’s GDP grew by almost double digits in Q4 of last year, another sign that a recovery is very much underway.
GOING GLOBAL
The recovery is happening not just in Canada but also on a global basis, and we are pleased with our positioning in both domains. Over the last year, we have added to positions in large companies with global footprints. We own companies like Visa, Mastercard, Alphabet and Johnson & Johnson, all of which have been excellent performers – and we expect they will continue to be so.
Disney is a particular success story. Now at $193, it was $86 just a year ago. Why such an upswing? They have some of the classic markers we look for, including great management and a strong balance sheet. Both of which allowed them to, for example, offset the weakness in their theme park and cruise ship operations by driving growth in Disney+, a streaming service for the vast content of Disney, Pixar, Marvel, Star Wars, National Geographic and others.
Although not a global company, Air Canada is another success, up approximately 50% since we first started purchasing it at the end of 2020 on the basis that international travel, which the airline depends upon for profits, will eventually rebound.
INTEREST RATE OPPORTUNITIES
Interest rates have recently gone up, but they are near historic lows, moving some of our clients and also their businesses to capitalize on the great opportunities they present, especially after I wrote on the subject last month. For example, for individuals and business owners, the insurance world is offering some attractive alternatives to bonds and other fixed-income investments – solutions that give you the same returns as the stock market, without any of the volatility, in the right circumstance.
As well, a number of clients have been refinancing their personal and business debt. They have recently renewed or restructured their borrowings, including mortgages, at historic low rates.
If you would like to investigate the opportunities available to you, just let us know.
TAX SEASON
It’s the height of personal tax season. Is there anything you or your accountant would like to discuss with us, with regard to taxes, estate or financial planning in general? Reach out anytime.
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We don’t speak jargon. We’re all about uncomplicating your life, so we speak plain English. If there is someone you care about – someone who would appreciate this simple and straightforward approach – please feel free to share this message with them or put us in touch.
Want to discuss any aspect of this month’s blog, or any other issue on your mind? Have a story idea? I am always happy to receive your call or email.
Tyler Marche, MBA, CFP, FCSI
Your life, uncomplicated
1-416-974-4810