Full episode: Market Call for Monday, November 30, 2020
Mike Philbrick portfolio manager at ReSolve Asset Management
As we close the decade investors face quite a dilemma. Recency bias has fed into an overconfidence bias which in turn is feeding a herd bias. This “doing-it-because-everyone-else-is-doing-it” financial market creates price-insensitive buyers. These buyers look to price as the confirming factor for decision-making, so higher prices beget higher prices regardless of valuations.
In the current environment broadly adopted asset classes like North American equities are expensive. As prices continue rise, so do risks. Further correlations have the potential to spike and these “crowded trades” can create liquidity cascades where prices can fall precipitously. Longer term, the returns to the bond portion of investors portfolios cannot repeat the last 20-year run. Many investors ask, “how can I invest in bonds at these low rates?” Investors may not realize assets such as real estate, infrastructure, and dividend stocks are all priced using a discount rate derived from the risk-free rate of bonds. In other words, all of these asset classes are potentially expensive. At ReSolve we do not want to be problem identifiers: we want to be problem solvers. The current set of circumstances is not about being afraid, but about being prepared.
To be successful, investors will need to look to less familiar asset classes and strategies which are structurally non-correlated and provide true diversification. They will need to harness the rebalancing premium by having a thoughtful way to rebalance this portfolio of diverse assets and strategies. The potential rebalancing premium can be up to 2.5 per cent yearly in excess returns.
iShares MSCI China A ETF (CNYA NYSE)
China’s domestic “A” share stock market is the second-largest in the world by market capitalization. The Chinese economy is the second-largest in the world and yet the “A” share market represents only 0.73 per centt of MSCI Emerging Markets Index. This index is scheduled to increase this allocation for the next 10 years to an anticipated 16.9 per cent by 2028.
Every global portfolio and portfolio manager in the world will be chasing China’s domestic stock market for the next 20 years. This market has an exceptionally low correlation to North American stocks, providing significant diversification.
Horizons US Marijuana Index ETF (HMUS NEO)
HMUS provides exposure to a basket of North American publicly-listed life sciences companies with significant business activities in or significant exposure to the U.S. marijuana and hemp industries. In 2018, the U.S. legal marijuana market size was approximately US$9.01 billion; it is expected to grow more than threefold to US$31.1 billion by 2042. Many of these U.S.-domiciled companies have opted for Canadian securities listings to take advantage of full capital markets support, since marijuana use is fully legal in Canada.
Horizons ReSolve Adaptive Asset Allocation ETF (HRAA CSX)
HRAA is a globally diversified strategy that combines advanced diversification, systematic long/short global macro and dynamic tail protection to provide investors with an all-weather investment solution. It provides exposures to a global portfolio of equities, fixed income, currencies and commodities. The use of machine learning helps formulate forward-looking views for key risk factors. ReSolve applies a proprietary dynamic volatility program that can go modestly long and short volatility futures to help protect against rapid market selloffs, when a long volatility exposure may be one of a few profitable asset classes.
PAST PICKS: MARCH 25, 2020
Both of these ETFs represent asset classes that are exceptional diversifiers for traditional Canadian portfolios. Both assets are held as hedges against uncertainty and produced steadier performance than equities during the pandemic.
Vaccine potential has caused a rotation into more inflationary growth assets. However, rates are expected to remain near zero until 2023, the economy remains impacted by the virus, new lockdowns are either ongoing or imminent and it could be another year before the vaccine can be fully deployed. There is still good reason to hold core positions in these assets.
Sprott Physical Gold Trust (PHYS TSX)
- Then: $18.63
- Now: $17.91
- Return: -4%
- Total return: -4%
Horizons U.S. 7-10 Year Treasury Bond ETF (HTB ETF)
- Then: $67.60
- Now: $63.21
- Return: -6%
- Total return: -6%
Total return average: -3%