February 2025 Memo
Stocks had a sharp rebound in January while bonds rose more modestly. It's interesting to note that in the past six months (roughly since The Federal Reserve started easing interest rate policy), stocks and bonds have both dropped together in two of those months. Looking back 24 months, we observe that stocks have fallen nine months…and guess what? Bonds also fell every one of those months. Diversification is accomplished by owning assets with prices that are influenced by different factors and thus their prices move separately – when one zigs, another zags. With bonds and stocks mostly moving in the same direction the past couple years, the traditional bond/stock portfolio is not providing sufficient diversification benefits. Hence, for years, we have strived to build portfolios that diversify beyond traditional bond and stock models. That strategy has proved beneficial during this period of high stock-bond correlations.
We know the topic on everyone's mind is tariffs and politics. We don't have any special insight (or a crystal ball). What we do have is a thorough understanding of the portfolios we manage and the ever-changing market we operate within. The reality is that when valuations on "riskier" assets are high, as they are today (specifically stocks and high-yield bonds), prices are more susceptible to shocks of all types (not just tariffs). Our response is to increase the quality and diversification of portfolios.
In early January we wrote, "One doesn't need to divine the future to expect elevated volatility in both stock and bond markets. Managing volatility/risk is a core objective of our strategies, as such, we believe we are well positioned to navigate the expected turbulence.". A month of Donald Trump's Presidency, has affirmed our understanding of the current investment environment and portfolio strategy.
Portfolio Strategy
Liquid Fixed Income
Spreads on corporate bonds are approaching record tight levels (i.e. valuations are high). This is most apparent and/or concerning at the lowest-rated segment, high-yield bonds. Hence, bond portfolios have gravitated toward higher-quality and more liquidity.
Yields from higher-quality, more liquid corporate bonds are compelling versus cash.
We remain cautious on long-term government bonds because we do not believe yields compensate investors for the risk of inflation and government deficits.
Private Credit
Our opportunity set continues to improve in this space, in both breadth and quality. We will maintain our healthy exposure given the relatively predictable, attractive potential returns.
Public Equity (stocks)
Given high valuations, high concentration and the expectation of higher volatility resulting from political uncertainty, we remain cautious and happy with an underweight exposure.
Despite high concentration in the 10 largest companies, the S&P500 remains the most compelling opportunity for core stock exposure. We believe it is quite simply, they highest quality portfolio of companies. Through the S&P500 investors receive diversification across sectors and global revenue exposure. It also captures a healthy blend of current earnings and growth (i.e. future earnings).
Private Equity
Our experience investing in private equity over the past decade enables us to take advantage of the revolution we are currently observing in private asset investing. For decades private asset exposure was mostly limited to large institutions. This market is evolving at a rapid pace to enable individual investors to participate.
We believe exposure to private equity allows investors to hold less publicly traded stocks, which could lower portfolio volatility and gain exposure to a more diverse set of business. Given current public market dynamics described above, we believe this is an excellent time to allocate to private equity.
Real Estate
Some sectors have maintained strength (industrial, rental housing, travel/leisure), while others are seeing valuations bottom (office, retail). Diversified real estate is beginning to look attractive for more conservative investors.
Infrastructure
Infrastructure assets have predominantly only been available to large institutional investors. These are attractive as they tend to be long-life, relatively stable assets with prized characteristics like inflation protection. Like the rest of the private asset universe, the best asset managers are now tailoring their infrastructure strategies to individual investors. We are busy conducting due diligence on expected offerings.
Commodities
Consistent with our objective to hold a more diversified portfolio of assets during periods of heightened volatility, an allocation to commodities can improve portfolio return dynamics and help mitigate risk.
Long-term tail winds for commodities such as geo-political strife, energy transition, infrastructure demands including manufacturing reshoring and trade wars all contribute to our belief a modest exposure is reasonable.
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, management fees and expenses all may be associated with mutual fund and/or exchange-traded fund ("ETF") investments (collectively, "the Funds"). Trailing commissions may be associated with mutual fund investments. ETF units are bought and sold at market price on a stock exchange and brokerage commissions will reduce returns. Please read the fund facts or summary documents and the prospectus, which contain detailed investment information, before investing in the Funds. The indicated rates of return (other than for money market funds) are the historical total returns for the period, compounded for mutual funds, including changes in unit value and reinvestment of distributions. The indicated rate of return for each money market fund is an annualized historical yield based on the seven-day period ended as indicated and annualized in the case of effective yield by compounding the seven day return and does not represent an actual one year return. Index returns do not represent ETF returns. The indicated rates of return do not take into account sales, redemption, commission charges, distribution or optional charges, as applicable, or income taxes payable by any securityholder that would have reduced returns. The Funds are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer and are not guaranteed or insured. Their values change frequently. There can be no assurances that a money market fund will be able to maintain its net asset value per unit at a constant amount or that the full amount of your investment will be returned to you. 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.
Index returns are shown for comparative purposes only. Indexes are unmanaged and their returns do not include any sales charges or fees as such costs would lower performance. It is not possible to invest directly in an index.
Links to other websites from this document are for convenience only. No endorsement of any third party products, services or information is expressed or implied by any information, material or content referred to or included on, or linked from or to this Website.
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.
We know the topic on everyone's mind is tariffs and politics. We don't have any special insight (or a crystal ball). What we do have is a thorough understanding of the portfolios we manage and the ever-changing market we operate within. The reality is that when valuations on "riskier" assets are high, as they are today (specifically stocks and high-yield bonds), prices are more susceptible to shocks of all types (not just tariffs). Our response is to increase the quality and diversification of portfolios.
In early January we wrote, "One doesn't need to divine the future to expect elevated volatility in both stock and bond markets. Managing volatility/risk is a core objective of our strategies, as such, we believe we are well positioned to navigate the expected turbulence.". A month of Donald Trump's Presidency, has affirmed our understanding of the current investment environment and portfolio strategy.
Portfolio Strategy
Debt
Liquid Fixed Income
Spreads on corporate bonds are approaching record tight levels (i.e. valuations are high). This is most apparent and/or concerning at the lowest-rated segment, high-yield bonds. Hence, bond portfolios have gravitated toward higher-quality and more liquidity.
Yields from higher-quality, more liquid corporate bonds are compelling versus cash.
We remain cautious on long-term government bonds because we do not believe yields compensate investors for the risk of inflation and government deficits.
Private Credit
Our opportunity set continues to improve in this space, in both breadth and quality. We will maintain our healthy exposure given the relatively predictable, attractive potential returns.
Equity
Public Equity (stocks)
Given high valuations, high concentration and the expectation of higher volatility resulting from political uncertainty, we remain cautious and happy with an underweight exposure.
Despite high concentration in the 10 largest companies, the S&P500 remains the most compelling opportunity for core stock exposure. We believe it is quite simply, they highest quality portfolio of companies. Through the S&P500 investors receive diversification across sectors and global revenue exposure. It also captures a healthy blend of current earnings and growth (i.e. future earnings).
Private Equity
Our experience investing in private equity over the past decade enables us to take advantage of the revolution we are currently observing in private asset investing. For decades private asset exposure was mostly limited to large institutions. This market is evolving at a rapid pace to enable individual investors to participate.
We believe exposure to private equity allows investors to hold less publicly traded stocks, which could lower portfolio volatility and gain exposure to a more diverse set of business. Given current public market dynamics described above, we believe this is an excellent time to allocate to private equity.
Real Assets
Real Estate
Some sectors have maintained strength (industrial, rental housing, travel/leisure), while others are seeing valuations bottom (office, retail). Diversified real estate is beginning to look attractive for more conservative investors.
Infrastructure
Infrastructure assets have predominantly only been available to large institutional investors. These are attractive as they tend to be long-life, relatively stable assets with prized characteristics like inflation protection. Like the rest of the private asset universe, the best asset managers are now tailoring their infrastructure strategies to individual investors. We are busy conducting due diligence on expected offerings.
Commodities
Consistent with our objective to hold a more diversified portfolio of assets during periods of heightened volatility, an allocation to commodities can improve portfolio return dynamics and help mitigate risk.
Long-term tail winds for commodities such as geo-political strife, energy transition, infrastructure demands including manufacturing reshoring and trade wars all contribute to our belief a modest exposure is reasonable.
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, management fees and expenses all may be associated with mutual fund and/or exchange-traded fund ("ETF") investments (collectively, "the Funds"). Trailing commissions may be associated with mutual fund investments. ETF units are bought and sold at market price on a stock exchange and brokerage commissions will reduce returns. Please read the fund facts or summary documents and the prospectus, which contain detailed investment information, before investing in the Funds. The indicated rates of return (other than for money market funds) are the historical total returns for the period, compounded for mutual funds, including changes in unit value and reinvestment of distributions. The indicated rate of return for each money market fund is an annualized historical yield based on the seven-day period ended as indicated and annualized in the case of effective yield by compounding the seven day return and does not represent an actual one year return. Index returns do not represent ETF returns. The indicated rates of return do not take into account sales, redemption, commission charges, distribution or optional charges, as applicable, or income taxes payable by any securityholder that would have reduced returns. The Funds are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer and are not guaranteed or insured. Their values change frequently. There can be no assurances that a money market fund will be able to maintain its net asset value per unit at a constant amount or that the full amount of your investment will be returned to you. 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.
Index returns are shown for comparative purposes only. Indexes are unmanaged and their returns do not include any sales charges or fees as such costs would lower performance. It is not possible to invest directly in an index.
Links to other websites from this document are for convenience only. No endorsement of any third party products, services or information is expressed or implied by any information, material or content referred to or included on, or linked from or to this Website.
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.
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