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The Growth Portfolio finished August up 16.3% over the past year, the American Growth Portfolio gained 22.6%, and the Income Portfolio returned 1.7%.

August was a month where the major market averages appeared calm, but several important developments beneath the surface continued to evolve.

Earlier this summer, the artificial intelligence (AI) trade experienced a sharp setback, triggering the largest hedge fund deleveraging event in more than a decade. Since then, an unusual pattern has emerged. Many of the stocks that led the market higher over the past year, particularly semiconductors, have stopped reacting to earnings announcements with the large price swings investors had grown accustomed to.

Part of the reason may be the cooling in speculative activity we noted last month. Over the past year, heavy call-option buying often amplified moves in popular AI stocks, helping drive sharp rallies following positive news. More recently, that activity has subsided. As a result, many of these companies have traded in unusually tight ranges despite reporting strong operating results, allowing short-term momentum to gradually normalize. This has helped suppress overall market volatility, even as economic uncertainty remains elevated.

That consolidation may also be creating a tactical opportunity. If current conditions persist, there is potential for investors to rebuild those positions and re-establish stock-specific trading and dispersion strategies. While this does not change our broader caution toward market risk at this time, it could provide a favourable backdrop for select semiconductor stocks in the short-term. Whether this period of calm continues or gives way to a more volatile environment will be an important question heading into the fall.

Credit markets are also sending mixed signals. High-yield credit spreads remain near levels last seen before the 2007 market peak, suggesting investors remain highly optimistic about economic and corporate fundamentals. Yet at the same time, government bond yields have risen sharply around the world. Those two messages are not entirely consistent with one another.

Where we differ from consensus is in our interpretation of rising bond yields. The popular narrative is that yields are moving higher because of stronger growth, persistent inflation, and concerns surrounding government debt. We are not convinced.

Yields have risen across the United States, Europe, and Japan at the same time, while the U.S. dollar has remained relatively stable. To us, that looks less like an inflation repricing and more like a global re-positioning event by hedge funds and other institutional traders. As Japanese rates rise and the yen strengthens, investors who previously borrowed in Japan to buy higher-yielding assets elsewhere may be unwinding those trades, placing pressure on bonds and equities simultaneously.

If correct, this would suggest that rising yields are being driven more by capital flows than by improving economic fundamentals. In that case, today’s weakness in high-quality long-term bonds could ultimately prove to be an opportunity rather than a warning.

Recent economic data supports that view. While markets remain focused on inflation, labour market conditions have continued to soften. Employment growth has slowed, prior job gains are being revised lower, and several broader indicators suggest the economy is cooling rather than overheating. Increasingly, we believe investors may be fighting yesterday’s inflation battle while overlooking a more important shift toward slower growth.

One area where this disconnect between perception and reality may be creating opportunity is healthcare.

Despite accounting for nearly one-fifth of U.S. economic activity, healthcare today represents only about 9% of the S&P 500. Relative to the broader market, the sector recently reached one of its cheapest valuations in more than two decades.

Yet the long-term investment case is remarkably straightforward. Unlike many popular themes that depend on forecasts, healthcare is supported by demographics. The Baby Boomer generation is entering a stage of life where demand for pharmaceuticals, medical devices, diagnostics, healthcare services, and long-term care naturally increases. Aging is one of the few economic trends that can be forecast with a high degree of confidence.

After years of investor capital flowing toward technology and artificial intelligence, healthcare increasingly appears to be one of the market’s most overlooked opportunities.

We continue to see a market characterized by narrow leadership, elevated optimism, and growing sensitivity to liquidity conditions. While tactical opportunities remain in select equities, we believe some of the most compelling longer-term opportunities are emerging in healthcare and high-quality long-duration bonds, where investor expectations remain unusually low relative to potential outcomes. As always, our focus remains on protecting capital, thinking independently, and positioning portfolios where we believe the balance between risk and reward is most favourable.

Further Reading

Many of the themes discussed in this month’s letter, particularly the recent rise in global bond yields and the role of international capital flows, were recently featured in a Wall Street Journal cover story on sovereign debt markets.

I was honoured to be quoted in the article discussing the relationship between Japanese yields, global capital flows, and the ongoing repricing occurring across government bond markets.

WSJ: Bond Rout Deepens Around Globe

Model Portfolio Highlights
Growth Portfolio: We made no changes during August. In the early days of September, however, we made several adjustments to portfolio positioning. We initiated new positions in Novo Nordisk, Micron Technology, and Intel, where we believe the potential return opportunity has become attractive. Novo Nordisk remains one of the world’s leading pharmaceutical companies, yet recent share price weakness has left the stock trading at a valuation that we believe understates its long-term earnings power and the durable demographic tailwinds supporting healthcare demand. We also added Micron and Intel to gain exposure to what we believe could be an emerging short-term opportunity within semiconductors as discussed above.

To fund these purchases, we took partial profits in Cenovus Energy following a period of strong performance and modestly reduced our bond holdings. Our long-term view on high-quality government bonds remains unchanged. However, recent market movements have created compelling equity opportunities in our opinion, allowing us to reallocate a small portion of capital while maintaining meaningful bond exposure.

American Growth Portfolio: Positioning is aligned with the Growth Portfolio.

Income Portfolio:We made no changes during August. In the early days of September, however, we made several adjustments to portfolio positioning. We exited our position in U.S. Treasury Inflation-Protected Securities (TIPS), trimmed our exposure to long-term bonds, and increased our allocation to equities through large-cap U.S. and Canadian companies, with an emphasis on Canadian banks. We continue to maintain a significant allocation to government bonds.

While we remain constructive on high-quality bonds over the longer term, the recent rise in yields and weakness in areas of the equity market created an opportunity to increase equity exposure. We believe this adjustment improves the portfolio’s balance between income generation, capital appreciation potential, and diversification.

Our approach targets opportunities with a significant margin of safety with minimal risk of permanent loss. Patience remains essential in realizing long-term gains.

We advise families and individuals with $1 million or more in investable assets who value prudent stewardship, independent thinking, and a long-term approach to preserving and growing capital. If this approach aligns with your own, we would welcome a conversation.

Thank you for your continued trust.

Yours,

Ben

Ben W. Kizemchuk
Portfolio Manager & Investment Advisor
Wellington-Altus Private Wealth

Office: 416.369.3024
Email: bwk@wellington-altus.ca
Book time with Ben W. Kizemchuk: Portfolio and Plan Review

Ben Kizemchuk offers full-service wealth management for high-net-worth Canadians including families, business owners, and successful professionals. Ben and his team provide investment advice, financial planning, tax minimization strategies, and retirement planning.

Performance reporting disclaimer: Performance results reflect the returns of each representative model portfolio. Returns are calculated using each model portfolio’s monthly performance, including changes in securities values, and accrued income (i.e., dividend and interest), against its market value at the closing of the last business day of the previous month. Performance results are expressed in the stated strategy’s base currency and are calculated on a net of fees basis. Individual account performance may materially differ from the representative performance history set out in this document, due to factors such as an account’s size, the length of time the strategy has been held, the timing and amount of deposits and withdrawals, the timing and amount of dividends and other income, and fees and other costs. Investors should seek professional financial advice regarding the appropriateness of investing in any investment strategy or security and no financial decisions should be made solely on the basis of the information provided in this document. This is not an official statement from WAPW. Please refer to your official WAPW statement for your specific performance numbers.