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Sprung Investment Management Commentary - 3rd Quarter, 2017

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It has been ten years since the great financial crisis. In the US, the S&P 500 peaked on October 9, 2007. The Canadian market continued its upward trajectory into the following year peaking in June as energy stocks were buoyed by high oil prices. While the bull market leading up to 2008 had duration of about five years, the current bull market has gone on for ten years without any significant setback.

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Sprung Investment Management Commentary - 3rd Quarter, 2017

  1. 1. THIRD QUARTER 2017 RETROSPECTIVE AND PROSPECTIVE Ten Years Later It has been ten years since the great financial crisis. 10 King Street East, Suite 801 Toronto ON M5C 1C3
  2. 2. 10 King Street East, Suite 801, Toronto ON M5C 1C3| Phone: 416.607.6642 | www. SprungInvestment. com | P a g e | 2 Sprung Investment Management our focus is to create investment portfolios for our clients that enable them to achieve their unique, long-term investment goals. In this endeavour, we strive to act with the utmost integrity, utilising all of our analytical skills, knowledge and intuitions. PRIVATE CLIENT FOCUS Sprung Investment Management is an independent discretionary investment management firm that serves the investment needs of high net worth private clients including business owners and entrepreneurs, professionals, family trusts, estates, and private charitable foundations. OUR PEOPLE At Sprung Investment Management, the investment team collectively has over 120 years of diversified investment experience. All of our principals hold the Chartered Financial Analyst designation and as such adhere to the CFA Institute Code of Ethics. Each has made a commitment to continuing education. RISK PERSPECTIVE We understand that our clients have worked hard to get where they are and we appreciate that they don’t want to lose it. As the chosen stewards of their investment assets, our risk management approach is to preserve their capital by purchasing under-valued securities, with a margin of safety that we expect will deliver income and capital appreciation over the long term. PERFORMANCE Sprung Investment Management has a track record of low volatility of returns since company inception in June 2005. This has served our clients well over this relatively difficult investment period that includes the bear market of 2007- 2008. Our performance numbers are available by request. CLIENT SERVICE At Sprung Investment Management, satisfying our client’s financial needs is our top priority. Each and every client is special and receives individual attention and customized investment advice based on his/her specific objectives and risk tolerance. Our principals are always available to speak directly to clients. INVESTMENT STYLE In building equity portfolios, individual security selection is based on “bottom up” research that is value- driven and often contrarian to current popular thinking. We assess quality and continuity of return on equity, current price relative to intrinsic value, economic value added and quality of management. Although our typical investment horizon is two to five years, we constantly evaluate our current holdings against new opportunities that may offer better value. Our view is that a strong sell discipline is a critical component to long-term investment success. Our investment approach on the fixed income side is to conduct rigorous credit analysis in the context of future economic and interest rate expectations.
  3. 3. 10 King Street East, Suite 801, Toronto ON M5C 1C3| Phone: 416.607.6642 | www. SprungInvestment. com | P a g e | 3 THIRD QUARTER 2017 RETROSPECTIVE AND PROSPECTIVE Ten Years Later “In economics, things take longer than you think they will, and then they happen faster than you thought they could.”- Rudiger Dornbusch It has been ten years since the great financial crisis. In the US, the S&P 500 peaked on October 9, 2007. The Canadian market continued its upward trajectory into the following year peaking in June as energy stocks were buoyed by high oil prices. While the bull market leading up to 2008 had duration of about five years, the current bull market has gone on for ten years without any significant setback. Global stock markets generally continued their upward bias in the third quarter of 2017. The US market gained 4.5% as measured by the S&P 500 Total Return Index in US dollars. A strong Canadian dollar had the effect of subduing that return to 0.5% when expressed in Canadian currency. With the exception of Spain and the UK, European markets were positive. Asian markets were very strong in US dollar terms with the Hong Kong market up 6.9% and China’s market up 4.9%. The Japanese market was pulled into positive territory by a very strong September (up 3.6%) bringing the quarter to 1.6%. Resource heavy markets such as those of Latin America, Australia and Canada improved as commodity prices generally improved. The Toronto Stock Exchange recorded an advance of 3.7% led by Energy (5.7%), Consumer Discretionary (4.2%) and Financials (3.7%). . Canadian Dollar US Dollar Q1 Q2 Q3 Q4 YTD Q1 Q2 Q3 Q4 YTD Toronto Stock Exchange 2.4% -1.6% 3.7% 4.4% S&P 500 5.0% 0.4% 0.5% 5.9% 6.1% 3.1% 4.5% 14.2% MSCI EAFE* 5.4% 2.3% 0.8% 8.7% 6.5% 5.0% 4.8% 17.2% 91 Day T-Bill 0.1% 0.1% 0.1% 0.3% CUBI** 1.2% 1.1% -1.8% 0.5% CDN/US dollar 0.8% 2.5% 4.0% 7.6% * Europe, Asia and Far East Index ** Canadian Universe Bond Index
  4. 4. 10 King Street East, Suite 801, Toronto ON M5C 1C3| Phone: 416.607.6642 | www. SprungInvestment. com | P a g e | 4 Global economic growth continues to strengthen in both the developed and emerging economies although at subpar levels compared with traditional recoveries. As central banks have cautiously raised interest rates, bond prices have come under pressure. Wage demands in the developed countries have not accelerated as inflationary expectations have remained low and productivity improvements have been driven by technology. In this environment, central banks may temper their enthusiasm to normalize interest rates and reduce their bloated balance sheets. Both the International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD) are forecasting modestly better growth in 2018. Among the advanced economies, Canada has posted strong growth primarily due to higher commodity prices. The Canadian dollar has appreciated against other currencies as our interest rates have gone up faster than other countries. This strength in the Canadian dollar has served to lower the returns from foreign investments. In this environment, stock markets have continued to advance. The S&P 500 in the US has hit new highs surpassing levels from before the economic crisis. Valuation levels have also hit high levels making the search for new investment ideas challenging. Overall, we have been taking more profits than reinvesting funds, causing cash levels to increase. A number of factors could come into play that would precipitate a more meaningful market correction than we have seen in the last ten years. Foremost in Canadian concerns has been the resumption of NAFTA negotiations. Since the Brexit vote and the start of the Trump presidency, a backlash against global free trade has been evident, causing uncertainty in the business community, thus dampening the appetite for capital investment. Other geopolitical factors are also of concern. North Korea’s nuclear threat and heightened discord with the US has been very prominent in the headlines as have tensions in the Middle East, Venezuela, Spain, Russia and the Ukraine. Monetary concerns in Greece, Italy, Spain and Portugal have not gone away. Technology is also having an increasing impact on businesses and consumers. Disruptions in the retail trade are changing the way supply and delivery systems operate. The hotel and taxi industries are threatened by innovations such as Uber and AirBnB. Financial technology is changing traditional banking. Artificial Intelligence (AI) threatens to cause massive changes in employment. Demographics are also going to have an affect on employment and retirement as well as government finances. As the population ages, the growing shortfalls in funding for health care and pensions will become critical. All of these factors lead us to exercise caution and prudence in our investment practices. We will continue to scour for well financed, well managed and reasonably priced companies in which to place our funds.
  5. 5. 10 King Street East, Suite 801, Toronto ON M5C 1C3| Phone: 416.607.6642 | www. SprungInvestment. com | P a g e | 5 THIRD QUARTER 2017 FIXED INCOME COMENTARY “Be thankful we’re not getting all the government we’re paying for!” ~ Will Rogers Fixed income markets have started to react to the shifting winds of interest rate policies. With two rate hikes so far this year and indications that the Federal Reserve will be slowly unwinding its quantitative easing program, the trend seems to be firmly in the tightening mode. In light of this, markets are now considering the increasing likelihood of one more hike in December by the Federal Reserve. As we have stated in the past, much depends on economic variables both domestic and international. Similarly, the potential impact of geopolitical events can have outsized shock effects on markets. While President Trump has not been much of a supporter of Chairman Yellen, whose term expires in January 2018, it may well be that a steady hand at the tiller will win the day. As Vice Chair Stanley Fischer has recently resigned due to personal reasons, there are now two other vacancies in the Reserve. Filling the Board to its full complement in a short period with members who may not be as well known in the markets, could cause turbulence. In Canada, Governor Poloz’s seven year term has three more years to run. Influences on his decision making may well be coming from domestic economic factors which may be heavily influenced by the impact of changing trade agreements and taxation policies. The situation in Europe remains unclear. Chancellor Merkel’s majority has been significantly reduced by the ascendancy of the nationalist AfD party. Their ascendancy may not directly affect her ability to form a government; however it will influence her political decision making going forward. Increased caution will likely be the German approach to a number of vexing European issues. The enormity of the Brexit project is starting to sink in and indications are surfacing that there may not be enough time for an orderly negotiated divorce. The spectre of a disorderly breakup is definitely focusing the attention of various financial institutions and international corporations who are making their own alternative plans in the absence of a clear direction from officials. The total return performance of the bond market as measured by the FTSE TMX Canada Universe Bond Index for the third quarter was a decline of 1.8%. 91-day Treasury bills returned 0.1% over the same period. The benchmark ten-year Government of Canada bond yield increased by 0.35% over the course of the quarter to end with a yield of 2.1%. During the third quarter the Canadian dollar appreciated by 3 cents from 77.1 cents US to 80.1 cents US.
  6. 6. 10 King Street East, Suite 801, Toronto ON M5C 1C3| Phone: 416.607.6642 | www. SprungInvestment. com | P a g e | 6 Our Team Michael Sprung, CFA: Chief Investment Officer msprung@sprunginvestment.com • Chief Investment Officer • More than 30 years experience in Canadian Investment industry, overseeing portfolios up to $2.5B • Senior level positions with YMG Capital Management, Goodman & Company, Ontario Teachers’ Pension Fund, Ontario Hydro and Cassels Blaikie & Co. • Frequent contributor to BNN-TV,Globe & Mail, National Post and Money Sense Fred Palik, CFA: Vice President, Fixed Income fpalik@sprunginvestment.com • Extensive experience in fixed income management in a variety of senior positions, primarily in the insurance and hospital sectors. • Member of the Toronto CFA Society and the CFA Institute. Lois O’Sullivan, CFA: Vice President loiso@sprunginvestment.com More that 25 years experience in investment management. • Co-founder of Sprucegrove Investment Management, specializing in international markets. • Senior level roles at Confed Investment Counselling and Confederation Life Insurance Company. • Fellow of the Life Office Management Institute (FLMI), the Toronto CFA Society and the CFA Institute. Joie P. Watts, CFA, FSCI: Vice President & Portfolio Manager jpwatts@sprunginvestment.com • Over 30 years of progressive experience in the securities and investment industry. • Senior level roles at Burns Fry Limited, Merrill Lynch Canada and Nesbitt Thomson. • Managing Director of Instinet Canada Limited for over 10 years • CEO of Shorcan ATS Limited, a specialized marketplace for equity dealers trading as principal. Robert D. Champion, MSEd: Vice President, Client Services rchampion@sprunginvestment.com • Joined Sprung Investments Management in 2012 after severalyears with SuccessfulInvestor Wealth Management. • Prior to that, he had a fifteen-year career in OEM industrial sales. • Manager with investment-publishing division of MPL Communications in the 1980s and early 1990s. MPL publish Investor’s Digest and Investment Reporter. Stay connected withSprung InvestmentManagement: Twitter https://twitter.com/SprungInvest Twitter handle @SprungInvest Facebook http://www.facebook.com/SprungInvestment Linkedin http://www.linkedin.com/company/1699967 Google+ https://plus.google.com/+Sprunginvestment/ See Michael on BNN Market Call http://www.sprunginvestment.com/videos/