Here is a brief update on recent changes to our Canadian equity and the Canadian asset allocation funds:
First, I have to say we are feeling better about the outlook for equities today than we were six months ago, but of course everyone else is too! A number of indicators (breadth, momentum, sentiment) are once again flashing yellow. At the same time, a number of our holdings have had very good runs and currently look extended, so we have reduced our weights in these names. For these reasons, our cash levels have increased to 15-20% across the funds. (As you can see, the cash level is a result of our investment decisions and process rather than a macro-driven target.)
While 20% cash may seem high, it also means we are 80% invested. And what makes up the other 80% of the funds? If it were low-beta, non-cyclical stocks, then you would know we were bearish. In fact, we are holding a mixture of companies that we believe offer a solid total return and some cyclical, momentum and thematic plays that are higher volatility. Our cash levels do not mean that we are bearish on the outlook, just that we understand that the gyrations in the market can be violent. We have chosen to wait for a better risk-reward trade-off before becoming fully invested again. Additionally, as you may know, we have the flexibility and willingness to take our cash to much higher levels, if we feel it’s necessary.
Areas we are long and are looking to invest more include energy (gas, not oil), transportation (primarily in North America), media content (it is king, again) and consumer products (a lot of self-help situations and those with lowered expectations). We continue to avoid oil, materials (gold, and bulk and base metals) and Canadian banks.