January 2025 Memo
Despite a resoundingly positive tone, markets posted declines across multiple asset classes in December (and into early January). Stocks softened after ripping higher in November. Bonds also fell as reality set in that President Elect Trump's policies are likely to be inflationary and comments from the Federal Reserve poured cold water on those betting on aggressive rate cuts in 2025. Once again, conservative indices suffered similar losses to the more aggressive allocations thanks to bonds and stocks falling largely in line with one-another (which we have been concerned about for years). Our strategies demonstrated the benefits of private asset exposure, low bond duration and generally more diversification.
December softness aside, 2024 was another exceptional year for most investors. We are impressed with how our strategies managed alongside an incredibly strong, yet concentrated, equity market, despite our more diversified model that tends to be underweight public equity (stocks). As a reminder, our objective is to optimize returns for the long-term, rather than maximize in the short-term. We believe the best way to accomplish this is to model our strategies after the best institutional portfolio managers in the world (think pension funds, insurance companies, endowments, and the ultra-wealthy). Our strategies increasingly look and behave more like these institutions. Enhanced diversification provides us with comfort as we navigate an environment characterized by uncertain geo-politics, a concentrated and expensive stock market and persistent above-target inflation.
Valuations and inflation are two critical themes we believe will partially define markets in 2025. Geo-politics are always top of mind for most (understandably right now), however, the impact on markets is notoriously difficult to predict. 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.
Private Equity
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.
https://www.economist.com/finance-and-economics/2024/06/27/american-stocks-are-consuming-global-markets
December softness aside, 2024 was another exceptional year for most investors. We are impressed with how our strategies managed alongside an incredibly strong, yet concentrated, equity market, despite our more diversified model that tends to be underweight public equity (stocks). As a reminder, our objective is to optimize returns for the long-term, rather than maximize in the short-term. We believe the best way to accomplish this is to model our strategies after the best institutional portfolio managers in the world (think pension funds, insurance companies, endowments, and the ultra-wealthy). Our strategies increasingly look and behave more like these institutions. Enhanced diversification provides us with comfort as we navigate an environment characterized by uncertain geo-politics, a concentrated and expensive stock market and persistent above-target inflation.
Valuations and inflation are two critical themes we believe will partially define markets in 2025. Geo-politics are always top of mind for most (understandably right now), however, the impact on markets is notoriously difficult to predict. 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.
Portfolio Strategy
Debt
Liquid Fixed Income- I recognize I sound like a broken record here; long-term rates have surprised many and moved higher despite The Federal Reserve cutting short-term rates. 10-year US Treasuries are currently yielding 4.78%, up from 4% on January 8th, 2024.[1] The result is that 2024 was another lack-luster year for long-term bonds. This is validating our long-held belief that long-term bond yields were too low and may not fall materially even as central banks cut short term rates.
- 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.
- We believe that core, traditional portfolio assets are faced with challenges. Stocks appear relatively expensive, government bonds may struggle with persistent inflation and fiscal deficits and investment-grade corporate bonds are trading at high valuations (tight credit spreads). We believe private credit will continue to provide excellent diversification and solid returns going forward. Our opportunity set continues to improve in this space, in both breadth and quality. We will maintain our healthy exposure.
Equity
Public Equity (stocks)- Valuations appear elevated and the stock market has become highly concentrated in a handful of US technology companies. Given the fundamental strength of these companies this is not as alarming as it may seem on the surface. Nevertheless, we think the current conditions of the public stock market is a strong argument for an allocation to private equity.
- We have consistently added to US stocks over the past few years. Our thesis remains that the US enjoys long-term structural advantages – dynamic, innovative and respect for capital to name a few. 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%.[2]
- Although the US stock market has outperformed and is increasingly concentrated, we believe both are justified and mostly the result of fundamental, durable drivers rather than speculative activity. Premium assets are commanding premium prices.
Private Equity
- There are widespread expectations of a surge in merger and acquisition activity in 2025. This could be a windfall for private equity.
- Given the spread in recent performance and valuations of public equity (stocks) versus private equity, we believe it is an excellent time to add exposure to private equity.
- We anticipate multiple new private equity opportunities for our portfolios in 2025.
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 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.
- Renewed inflation concerns, higher interest rates, geo-politics (tariffs, conflict) may all be contributing to positive returns from commodities after a cooling-off period. As if often the case, a commodity allocation has performed well during a softer period for stocks and bonds.
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.
https://www.economist.com/finance-and-economics/2024/06/27/american-stocks-are-consuming-global-markets