This year has been unprecedented in so many ways. Alongside the healthcare crisis and the political drama, global economies and capital markets were placed unwillingly onto a rollercoaster ride that still hasn’t ended. It’s been a period when investors’ emotions, namely fear and greed, have been tested. As 2020’s final chapter runs its course, we’re pleased with the outcomes achieved for our clients in this volatile year. We look forward to meeting our clients in the new year (virtually for now) to provide a personalized portfolio review of 2020 and to elaborate on our outlook and strategy for 2021.

The success we achieved in our managed portfolio was a result of several important factors that were inherent within our team and surfaced when it counted most:  teamwork, discipline, communication, staying informed, and execution.

Through 2019, as global economies were reaching a cyclical peak (evidenced by multi-decade low unemployment, rising interest rates, and high valuations across various capital markets) our experience led us to gradually alter asset allocation by reducing equity exposure. This focus on economic cycle research resulted in our managed portfolio entering 2020 with an equity exposure in the low-30% range. When the pandemic hit, and markets went into a tailspin, our managed portfolios did not decline as much as the broad indices. This defensive positioning allowed for an asset allocation shift back toward equities. Throughout the year we have been net buyers of equities and our model portfolio’s equity weight has more than doubled to the present 67%, reflecting our constructive view for 2021. Recognizing, planning for, and reacting to turning points in the economic cycle are hallmarks of experienced wealth managers.

Navigating the challenges of 2020 was beyond the skillset of a single individual. Throughout the year, the team’s investment committee met weekly to review economic and Covid-19 data, debate ideas, and form consensus on a forward strategy. Through this forum, for example, we aggressively purchased Canadian and U.S. bank positions where none existed at the beginning of the year.

Investments in gold equities, Costco, Keysight Technologies, and SolarEdge were standalone ideas that emerged from the team’s vetting process. Our forward-looking orientation can be credited for adding airline and hotel companies in anticipation of one or more vaccines. And more recently, we have materially increased the portfolio’s international exposure. While it may have been tempting to retreat into a “wait and see” strategy this year, the execution of our investment strategy resulted in the busiest year ever when measured by the aggregate dollar value and quantity of trades, and contributed to overall portfolio performance. With a few weeks still to go in the year, we have already executed over 50,000 trades representing over $500 million of transactions on behalf of our clients in 2020.

Parallel with executing a well-researched investment strategy, the team’s external communication was enhanced from a monthly newsletter to weekly communications to keep clients abreast of our outlook, evolving government tax and benefit initiatives, broad wealth management topics, and insightful interviews. We also quickly adapted to virtual portfolio review meetings and monthly webinars to keep clients informed.

2020 was a difficult year in many respects, but our team embraced a myriad of challenges and persevered. Like many of you, we’re optimistic about 2021 and look forward to the occasion when we can meet face to face!

A look ahead to 2021….The dawn of a new economic cycle is the basis of our positive outlook 

At the time of writing, global Covid-19 infection rates were climbing even as the first of many vaccines are being approved by regulators. News of high efficacy rates of vaccine candidates has lifted equity markets over the past month, with economically sensitive sectors and those most impacted by the virus-induced lockdowns and travel restrictions outperforming the “stay-at-home” sectors that prospered from the onset of the pandemic. We expect this “rotation” should continue into 2021 and we have positioned our managed portfolio to benefit from a global economic reopening. As explained below, we don’t expect all sectors and regions to perform uniformly in 2021.

While it may take several months for widespread vaccination, we think the economic recovery will gain momentum as 2021 unfolds. In addition to the easing of lockdowns and restrictions that will put economies on a gradual path to normalcy, economic growth should also be boosted by additional fiscal stimulus (including infrastructure spending), a continued low-interest-rate environment, and improved global trade sentiment under a new U.S. administration. Using past economic recoveries as a guide, investor risk appetite tends to improve during this renewal phase.

Compared with our conservative stance 12 months ago, our managed portfolio is now overweight equities as we position for a global economic rebound. Although we are optimistic in our outlook, we expect the economic recovery will be punctuated with occasional setbacks. We intend to use instances of volatility to enhance our asset allocation.

Our outlook for 2021 includes:

• Equities – Most global equity markets have been rallying since late-March and returned to positive year-to-date performance in recent months. The large weighting of technology stocks in various indices and their strong performance in the post-pandemic period has had an outsized impact on major indices such as the S&P500. A closer examination of various economically sensitive sectors such as Financials, Real Estate, Materials, Industrials, and Energy, reveals that record-breaking market performance has not been experienced by these sectors. With many technology companies trading at high valuations and perhaps already pricing in significant future growth, we expect investors will seek out undervalued sectors that are likely to witness earnings recovery in 2021/2022. A sizable differential in valuation, combined with a likelihood of improved trade sentiment, favours international equity markets over the U.S. Included in our current positioning is a large (and growing) international allocation, overweight positions in Financials, Real Estate and other economically sensitive sectors, and an underweight position in Technology. We recently made an initial investment in clean energy (see SolarEdge below) and continue to seek further opportunities in this growing segment.

• Bonds/Interest Rates – With few exceptions, most global central banks have cut short-term interest rates to near zero. While many have committed to keeping rates low for the foreseeable future, a widening global economic recovery will gradually remove pressure on central banks to provide unprecedented amounts of liquidity to the financial system. We expect medium and long-term interest rates to rise modestly in 2021, suggesting that bond returns may face headwinds. Our managed portfolio has virtually no exposure to government bonds, with corporate and international bonds representing the majority of our exposure.

• Commodities – Commodity prices typically perform well at the early stages of an economic recovery as demand outstrips supply. This may be the case with base metals, agricultural commodities, and construction materials, but unlikely for oil. We currently have exposure to fertilizers and precious metals, are looking for an opportunity in base metals, and have chosen to avoid oil for now. We think the latter may be suffering from growing oversupply conditions that may result in an extended period of depressed prices.

• Foreign currency – The U.S. dollar and U.S. Treasury bonds are safe havens during times of crisis. Under a global economic recovery scenario, and with US$4 trillion of additional money supply issued to fund this year’s deficit, the U.S. dollar has been losing appeal versus global currencies and we expect this trend to continue into 2021. While we continue to own U.S. investments, we do so with the expectation that they will outperform on a currency-adjusted basis. Increasingly, we have been allocating incremental equity exposure to international markets, such as Europe, Asia-Pacific, and India.

In an already active year for portfolio adjustments, the past five weeks have been the busiest in recent memory. As outlined below, we have continued to build equity exposure within our managed portfolio and are now overweight in the asset class. The increase in equities has been funded by dispositions in alternatives, preferred shares, fixed income, and cash.

With equity exposure nearing an upside limit, clients should expect future equity additions to be funded with the sale of existing equity positions that may have reached our valuation expectations.