Portfolio Update/Weather Matters Again

Brandon Snow's picture

Portfolio update: The markets entered the year with high expectations for equities which have recently come back down to earth. The trigger for the “risk-off” trade was the pressure on emerging market (EM) currencies (and bonds by proxy) which rippled through consensus longs in Japan and U.S. equities, and shorts in treasuries and gold. We have also seen some less-than-stellar economic data points out of the U.S., which has exacerbated the sell-off. As many of you know, we always worry about what can go wrong. We have been highlighting EM as a risk for a few years now, but at this point we are not seeing any signs of contagion.

As the market sell-off occurs, the question is what is happening to fundamentals? This may not matter in the short-term but it does in the long-term. While valuations are becoming more attractive in EM, and sentiment is WAY DOWN, we believe the recent volatility and actions by central banks will hurt fundamentals. At this point, it is too early to know the ramifications of these changes. We are not stepping into these regions in a big way, however, you can expect us to start digging around to find the best businesses in select geographies so we can move quickly when the time is right. Recent U.S. data has been below expectations (but is fine on an absolute level), from ISM to retail sales to jobs, data points suggested a slowdown through December into January. However, we think it is too early to call an end to the recovery and much of this slowdown could be related to the weather. We are in the midst of one of the worst winters (in terms of the amount of snow and freezing temperatures) in history, and it is impacting activity across a number of industries (watch for a blog on the impact to the natural gas market). So far, earnings results have been fine, but not great, and management teams have been very cautious on their outlooks for the year. Some key industries, including the transports, have been given positive outlooks for the year. The next few months will be very important, from a data perspective, to see whether or not the U.S. economy is stalling out.

We were fortunate to enter the year with a significant cash level as it was tough to find highly attractive ideas, as referenced in a few of our previous blogs. We have seen solid opportunities in North American retailers where some high-quality names have been sold with broken business models and also in select industrials, and the energy and financials sectors. Overall, our cash positions are down by about half, from 15-20% entering the year across equity funds to the 5-10% range now. We have a LONG list of potential names to buy but remain very patient for appropriate prices.

The bottom line: We are feeling a lot better about the current opportunities in the market than we were a few months ago. Sentiment is coming back and we believe, at least for the U.S., a lot of the concerns can be explained away by adverse weather, affording us the opportunity to put some of our cash to work. This correction may not be over, and we still have a decent amount of cash we will put to work if the opportunities arise. The instability in EM looks contained today. But as everyone must appreciate by now, our focus remains on the downside risks to the outlook and we will continue to monitor the situation for signs of a bigger problem. As always, we reserve our right to change our mind and are cognizant of maintaining enough liquidity in our funds to raise significant cash, if necessary.

Comments

Submitted by Ryan on

Hi Brandon,

What percent of the portfolio can go to cash in the various mandates and does it differ between CI and National?

Thanks

Brandon Snow's picture
Submitted by Brandon Snow on

The ability to invest in cash depends on the individual fund style. All of our funds must be at least 50% invested at all times. This means for an equity fund, the technical limit would be 49% cash, while for the asset allocation and income products we could be 50% cash and 50% bonds, including government bonds. From a practical perspective, the lower risk equity funds wouldn't go over 30-35% in cash and the income funds would likely remain close to fully invested. Our Asset Allocation fund and small/mid-cap focused mandates (e.g. Growth Companies and Pure Canadian) may get closer to the maximum cash limit.

Submitted by Darren Shellbor... on

It is comforting to know how seriously you take downside protection and that you don't just slough it off for the sake of a quick grab. Thank you. I am proud to have Cambridge as a core component of my business.

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