From the Desk of Neil McIver
First and foremost, I wanted to thank you very much for your trust and confidence in the careful work we do for you here at McIver Capital Management. It is appreciated by each member of our group. That sentiment is particularly true in a year such as 2020 was. I am proud of the high caliber of clientele we serve and the high level of confidence you displayed in us during a difficult year.
The dramatic volatility we have experienced in 2020, particularly as the fear of the virus washed in during March, has not been seen since volatility began being measured almost 30 years ago. There were single days when the markets fell by over 10%.
Despite this, your sophisticated portfolios did what they were built to do, which was to dampen that volatility and maintain value using advanced negative correlation. During the worst of the correction, with markets down as much as -38%, the model portfolios were off less than half of what the markets had lost.
On April 29th the Investment Committee at McIver Capital Management made the decision to use the correction to rebalance the model portfolios back to their original structure, which always has the effect of buying the components of the portfolio which have fallen the furthest. We also made a number of adjustments to the individual positions. Those decisions were well timed and continue to pay dividends in your portfolio. During 2020 your portfolios performed extremely well and maintained the low volatility (standard deviation) as they were designed to do. The solid performance in 2020 comes on the heels of an excellent 2019.
||2020 Performance (net to client)
||Annualized Standard Deviation
(net to client)
|P1 – Very Conservative
|P2 – Conservative
|P3 – Conservative Value
|P4 – Conservative Growth
|P5 – Growth
Please click here to see the full performance table
In addition to the primary models, our McIver Capital Management Vancouver Growth Portfolio (VGP) had yet another tremendous year, delivering a +22.68% return in 2020. I will be highlighting this high-performance portfolio in an upcoming letter to you. Please do note that this portfolio is not suitable for everyone.
Where Do We Go From Here?
As President Obama famously said, ‘elections have consequences,’ and this most recent U.S. election eventually and certainly will. It is no secret that equity markets prefer less regulation and lower taxes. However, much of what will happen next will be mechanical and not yet be influenced by the new American administration.
As I discussed in the CKNW Money Talks radio segment sent to you in December, the massive level of monetary and fiscal stimulus governments are pouring into the economy will continue to distort the markets. This distortion will take the form of hard asset inflation into the foreseeable future. Hard assets include stocks, gold, real estate, art, and classic cars, to name a few. The mechanics of this are fairly basic; when governments print (by print we mean artificially create) large amounts of money, the relative value of that cash falls in direct relation to the value of hard assets. This mechanical shift takes place primarily because cash becomes abundant and virtually free. It is by no means rare. On the other hand, hard assets are rare, and it will take more and more of that abundant cash to purchase them.
This suggests that hard assets need to be held in order to offset the devaluation of cash. We at McIver Capital Management have been building these positions into your advanced, mathematically optimized portfolios, for many years. These hedging positions have been, in effect, portfolio insurance against the printing of cash by central banks and potential inflation. While the value of holding these positions has certainly been realized over the past 12 months, we will continue to assess and potentially adjust these positions as events unfold. We are confident in our current model portfolio structure and our ability to adapt to potential market conditions.
For those who are retired, from a planning perspective, these mechanical movements clearly suggest that you should not hold on to excessive levels of cash. Generally, we suggest a maximum of 2 years’ worth of your expenses to be held in cash. If you have any questions on alternatives to holding cash, please do not hesitate to email or call me, or any member of our team.
There are other mechanical factors which should add value to your portfolios in 2021. With the pending widespread dissemination of the new experimental vaccines, various lockdowns will end, increasing the velocity of capital in the economy. The accompanying decrease in general anxiety may well combine with a broadening real economic recovery to push prices higher.
Are Markets Too High, And How Will This All End?
When markets rise in any asset class, including stock and real estate markets, prices always seem too high. In the stock market we can apply metrics to help analyze how expensive, or cheap, the overall market is. An example would be the market price-to-earnings (PE) ratio. This is the ratio of all the corporate earnings generated by the market, to the overall value of the stocks in the market, at current prices.
The lower the price-to-earnings ratio, the less expensive the market. From this perspective, the markets do seem expensive, but far from overvalued. The forward PE for the S&P 500 is currently at 25x earnings, which is above the long-term average of 17x earnings. However, this ratio is being distorted by tech behemoths such as Apple with a forward PE of 34x earnings, and Amazon trading at 94x earnings. This is to say nothing of popular stocks such as Tesla which has a forward PE of 354x earnings.
By comparison, Royal Bank and JP Morgan Chase have forward PEs of just 12x earnings and Alimentation Couche-Tard has a multiple of 13x, all positions in our model portfolios.
This difference also highlights one of many reasons we are seeing a rotation take place in which the momentum behind the big tech position is waning, while we are seeing strength in base commodities, industrials and financials. Keep in mind that while many tech companies have doubled over the past year, many sectors, such as Canadian banks and financials, have yet to recover and reach their high from February of last year.
This rotation and broadening of the market advance is positive and healthy and a sign that the market will likely continue to push higher with plenty of opportunity along the way.
How this all ends is a more complex issue, with many variables which have yet to surface. It very well may end in tears, and with systemic inflation.
But rest assured that we will be monitoring this economy and these markets carefully. I’m confident that we have the systems, tools and abilities to properly navigate the waters ahead.
Consistently Working in our Clients’ Best Interest