In the last couple of weeks, we have seen the markets correct, causing considerable angst among many investors. It now seems as though markets have become more stable. This is not to say that the capitals markets are not down in October, but we do feel that this correction has run its course. As we mentioned several times over the past few months, we remain focused on the longer term goals as outlined within our clients investment policy statement, and have used this weakness to strategically add value and yield for our clients.
Jason Donville of Donville Kent Asset Management, who many of our readers own via his capital ideas Fund, wrote about risk and how that gets managed during challenging periods such as September and October. “We continue to deal with short and long-term risk through a variety of mechanisms. We deal with short-term, or what I would call ‘identifiable’ risk primarily through security selection. The second type of risk we face is called ‘exogenous’ risk. This is the risk presented by events or factors that hit suddenly and cannot be predicted.” This second risk was also a consistent theme that was discussed by many of the Portfolio Managers we met with recently at the Fidelity conference we attended on behalf of our clients.
In managing for these two types of risk, Jason Donville came back to his underpinning philosophy of investing in companies that are capable of generating a return on equity that exceeds 20%. Throughout the year a company’s stock price might bounce around (a lot) but as long as earnings remain on track, we should be happy to continue to hold our investment. According to Jason that is how he sleeps at night. We quite agree with how Donville Kent has managed these risks for our clients and took advantage of the October volatility to increase our investment allocation with them.
In a commentary from our friends at Vertex, a very well respected local Asset management firm, they noted, “In our culture of instant gratification, most don't have the patience for the interval between undertaking an investment and reaping its benefits. For example, the average mutual fund holding period for a stock today is about four months. I contend, rarely will an investment pay off in less than four years - not to say some don't as we've had some instant gratification too - but generally, it's an accident when success occurs without patience.” An example of this that many of our clients can relate to is Manulife Financial, we began owning this global insurance company for many clients in 2010 and 2011 only to watch it languish in the low to mid-teens for a couple years, but our patience is now being rewarded as the market price now exceeds $21, thus providing a very nice long term return for those not concerned with the day to day or week to week price moves.
Our view is similar; accordingly we have remained focused on the longer term and are looking to exploit the recent market fluctuations in share price for your longer term advantage. The markets have corrected, but we do not think we are on the cusp of something bigger. Most economic cycles come to an end because central banks raise interest rates to stave off inflation, the yield curve begins to invert and corporate earnings decline. Currently inflation remains muted, the yield curve is not inverted and corporate earnings continue to grow as evidenced by nearly 80% of S&P 500 companies reporting their third quarter 2014 earnings have exhibited growth exceeding expectations. Thus we remain very confident about the future and achieving the longer term goals you have entrusted us to do, even though the past two months have been challenging.
Tonight is Halloween, so enjoy the fun and revelry with friends and family, but please remember to watch out for the ghosts, goblins, pirates, etc… as they run around the streets.
But perhaps the best news, especially for adults, this weekend is that beloved extra hour of sleep. Don’t forget to set back your clocks one hour Saturday night, as it is Daylight Savings Time.
Thank you for your trust.
As always, we welcome your feedback. Have a great weekend.
The Dekker Hewett Group