December 2024 Memo
Market Commentary
Leading up to the US election, there was noticeable concern amongst investors. To many it seemed like a lose-lose situation where on the one hand, the validity of the election could be questioned or on the other…former President Donald Trump won. As it turns out, investors had nothing to fear (with the caveat that I'm speaking as an investor and that Trump hasn't even take office yet). Two months later, the stock market's record run has continued and accelerated, bond yields have stabilized, and investor sentiment is high. November was one of the strongest months on record for our strategies on both a relative and absolute basis.
Given high valuations on riskier assets like stocks and high-yield bonds, coupled with the wide range of relatively safer investments that currently offer attractive potential returns, we believe it is an excellent time to own a highly diversified portfolio of quality assets.
Portfolio Strategy
Private Credit
The information contained herein has been provided by Constellation Wealth Management and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance.
Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the fund facts and prospectus, which contain detailed investment information, before investing. Mutual funds are not guaranteed or insured, their values change frequently and past performance may not be repeated.
Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS.
Constellation Wealth Management is part of TD Wealth Private Investment Advice, a division of TD Waterhouse Canada Inc. which is a subsidiary of The Toronto-Dominion Bank.
All trademarks are the property of their respective owners.
®The TD logo and other TD trademarks are the property of The Toronto-Dominion Bank or its subsidiaries.
[1] Blackstone Credit Fund (BCRED), https://www.bcred.com/ and Oaktree Strategic Credit Trust, https://osc.brookfieldoaktree.com/osct
[2] https://www.economist.com/finance-and-economics/2024/06/27/american-stocks-are-consuming-global-markets
[3] https://www.morningstar.ca/ca/report/fund/performance.aspx?t=0P000075R6
Leading up to the US election, there was noticeable concern amongst investors. To many it seemed like a lose-lose situation where on the one hand, the validity of the election could be questioned or on the other…former President Donald Trump won. As it turns out, investors had nothing to fear (with the caveat that I'm speaking as an investor and that Trump hasn't even take office yet). Two months later, the stock market's record run has continued and accelerated, bond yields have stabilized, and investor sentiment is high. November was one of the strongest months on record for our strategies on both a relative and absolute basis.
Given high valuations on riskier assets like stocks and high-yield bonds, coupled with the wide range of relatively safer investments that currently offer attractive potential returns, we believe it is an excellent time to own a highly diversified portfolio of quality assets.
Portfolio Strategy
Debt
Liquid Fixed Income- Throughout the rate-hike cycle, long-term government bonds never reached an attractive yield to compensate for the long-term risks. As evidenced by the inverted yield curve (short term bonds having higher yields than long-term). Because the market never priced in high long-term rates, long-term bonds are not enjoying their typical price appreciation when central banks start cutting rates. We have held minimal exposure to this segment of the bond market.
- Short and medium-term corporate bonds have continued to offer healthy excess yields, minimal sensitivity to interest rate changes and minimal default risk. With yields in the mid to high single-digits, this segment continues to provide excellent risk-adjusted return prospects, hence our healthy allocation. As an added benefit, this space tends to trade at a discount to par, so there is potential tax-efficiency.
Private Credit
- Early this year we added to private credit, a red-hot asset class seeing substantial attention from institutional investors (Canada Pension Plan Investment Board anticipates they will double exposure in years to come). Thus far, the investments have delivered as anticipated, approximately 10% annual distributions and a steady market value[1]. A series of events and conditions transpired to make this asset a unique opportunity to earn excellent risk-adjusted returns.
Equity
Public Equity (stocks)- We have consistently added to US stocks over the past few years. Specifically, to the S&P500. Our thesis was the US's long-term structural advantages – dynamic, innovative and respect for capital to name a few. This thesis has been supported in recent years through the evolution of artificial intelligence, a robust US economy and continued dominance of US companies on a global scale. A recent study in the Economist stated that since 2008, US corporate profits are up 162%, while the rest of the world is down 2%.[1] I believe that's compelling evidence of US economic exceptionalism if there ever was one.
- Our allocation to a growth fund, Dynamic Power American Growth, has delivered strong performance in recent months (up 42% in the past three months).[2] Patience and discipline to our strategy has proven valuable.
- Private equity returns have lagged public stocks over the past couple years, which is rare over longer periods. However, this is reasonable considering how higher interest rates have impacted merger and acquisition activity and caused valuations to adjust downward over time. Looking out, we are optimistic about the long-term outperformance of private equity to continue.
- Lower borrowing costs were already helping fuel an uptick in merger and acquisition activity. Expectations of lower regulatory burdens under a Republican government should provide another tailwind for increased deal activity. New opportunities for individual private wealth investors should ensure this asset is a staple in portfolios going forward.
Real Assets
Real Estate- Real estate values have leveled out. Lower rates will help further and likely push values up over time. Our exposure has been quite small for the past few years. Relative to other multi-asset portfolio managers like big pension funds, we are pleased to have substantially less exposure than most.
- Commodities have had a painful run despite what seems to be secular shifts toward higher demand – reshoring (de-globalization), energy transition, geo-political tensions, increasing environmental regulatory costs to produce. Our commodity exposure is modest, and it is adaptive, it can profit from prices going up or down, thus moderating returns when commodity price changes are muted.
The information contained herein has been provided by Constellation Wealth Management and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance.
Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the fund facts and prospectus, which contain detailed investment information, before investing. Mutual funds are not guaranteed or insured, their values change frequently and past performance may not be repeated.
Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS.
Constellation Wealth Management is part of TD Wealth Private Investment Advice, a division of TD Waterhouse Canada Inc. which is a subsidiary of The Toronto-Dominion Bank.
All trademarks are the property of their respective owners.
®The TD logo and other TD trademarks are the property of The Toronto-Dominion Bank or its subsidiaries.
[1] Blackstone Credit Fund (BCRED), https://www.bcred.com/ and Oaktree Strategic Credit Trust, https://osc.brookfieldoaktree.com/osct
[2] https://www.economist.com/finance-and-economics/2024/06/27/american-stocks-are-consuming-global-markets
[3] https://www.morningstar.ca/ca/report/fund/performance.aspx?t=0P000075R6