As we celebrate a successful first six months with Wellington-Altus Private Wealth, we would like to extend a sincere “thank you!” to all our clients that trusted us with their financial future. It’s hard to believe it’s been only six months. It’s a testament to this outstanding organization that it feels like home already.
Although our investment strategy and service model remain fundamentally the same, there have been countless small improvements to all aspects of our business. Most importantly, we have more time and better resources focused on you, your portfolio and your objectives. As always, we welcome your feedback.
Our full collection of Monthly Portfolio Memos since May is now available on our website, Newsroom – Constellation Wealth Management. Follow us on Instagram, Facebook and LinkedIn for more frequent market observations and educational content (links at bottom).
Have a great weekend,
Tom, Galit & Victor
Market Commentary
October was another strong month for markets, bringing it to six consecutive positive months for the S&P 500 and for our benchmarks of choice, the Vanguard Growth, Balanced and Conservative Income ETF portfolios.
Third quarter earnings have surprised to the upside, growing at 11% year over year, led by Information Technology and Communication Services. Artificial intelligence (AI) continues to drive significant investment, which is accruing disproportionately to a few of the largest companies. Exposure to the AI narrative has remained critical to performance for equity investors. Indeed there are some vulnerabilities, but we believe it’s important to “make hay while the sun shines”.
Markets were helped along by further 25bps rate cuts from both the Bank of Canada (BOC) and the US Federal Reserve (the Fed). We believe lower rates will help the beleaguered housing market and have a positive impact on merger and acquisition activity, which will stoke private equity.
Since “Liberation Day”, returns have been spectacular. Now, many ask us if the market is in bubble territory. We don’t know, nor does anyone else. Luckily we don’t have to in order to effectively manage portfolios. Unlike the Blue Jays, we have the resources to protect our lead. We are further diversifying portfolios, reducing exposure to expensive assets and moving higher up the quality spectrum.
Chart of the month
Either the United States is way out over its skis, or the rest of the world needs to build a lot of data centers to catch up. The question remains whether AI will live up to the hype, but there’s no doubt that the rapid buildout of AI infrastructure in the U.S. has driven tremendous economic growth and market returns.
Content Recommendation
This is a longer one, but a great one! Jon Gray, leader of the largest private asset manager in the world, Blackstone, puts on a master class of what’s happening in the economy and markets right now. Don’t miss when he discusses “maybe the best asset in history”, the New York City taxi medallion.
Blackstone’s Jon Gray on the Economy, AI as “The Main Thing,” and Where to Invest Now
Portfolio strategy
Debt
Liquid fixed income
- Yields on government bonds have dropped even further following BOC and Fed rate cuts, further diminishing the investment prospects. We have minimal government bond exposure in portfolios.
- Corporate bond spreads (investment grade and high yield) remain near record lows; thus our portfolio has moved to perhaps its most conservative positioning.
Private credit
- Private credit naysayers are doing their best to stoke fear following the default of a couple of heavily indebted companies. Ironically, these companies were primarily backed by bank financing, not high-quality private credit managers. In fact, one of our credit managers was short one of the failed companies, correctly identifying the poor lending practices.
- Our private credit portfolio remains strong, generating excess yield versus traditional fixed income.
Equity
Public equity (stocks)
- Q3 earnings have been particularly strong from big tech. These companies continue to grow revenue and earnings, driving stock prices higher.
- The current price earnings ratio of the S&P 500 is an eye-watering 32, compared to the 15-year average of 18.
- Never underestimate the stock market’s ability to surprise to the upside, but also be prepared for volatility and some disappointments at these elevated valuations.
- We are actively monitoring and adjusting exposure to the most volatile sectors and stocks.
Private equity
- Huge pent up deal demand following years of depressed activity.
- Deal activity is increasing rapidly – mergers & acquisitions, initial public offerings, take-privates…we are seeing all forms of deal-making.
- Lower interest rates are bullish for private equity.
- We believe all this points to a promising outlook for private equity, just as our opportunity set has grown substantially.
Real assets
Real estate
- Valuations in commercial real estate seem to have bottomed.
- We believe there is a case building for diversified real estate exposure in the most conservative portfolios as bond yields fall and equity valuations peak.
Infrastructure
- As inflation continues to run above target, infrastructure maintains its alure.
- Combining long-term contracts and competitive advantages with secular growth industries/companies is a winning formula.
We are pleased with our recent infrastructure investment with KKR, we expect it to deliver stability, diversification, inflation protection and healthy returns.