January 17, 2023

The Reporter — Fourth Quarter 2022

WAS 2022 REALLY THE YEAR OF UNPLEASANT SURPRISES?

In the 1990s, there was a hit TV show in Quebec called Surprise sur prise , hosted by comedian Marcel Béliveau. Quebec personalities would be filmed with hidden cameras while a prank was being played on them, with one of their acquaintances in on the joke. The idea was to see how these celebrities reacted to fake but very believable scenarios. It was interesting to watch how differently they reacted to surprising situations. No two people reacted the same way.

Michael Roussel, psychologist and author of The Power of Surprise, writes that surprise is the only emotion that requires personal interpretation. Indeed, a surprise is neither negative nor positive in itself; only our interpretation will determine its nature. For example, for many investors, 2022 was a year filled with unpleasant surprises. These included events such as the biggest jump in inflation in 40 years, a second consecutive year of negative returns for the bond market, and the dramatic collapse of cryptocurrencies and a variety of shares popular with the financial community (Amazon, Shopify, Tesla, etc.).

For us, 2022 was more about "course correction," as we witnessed a return to normal in several areas already mentioned in the past. Here are 3 examples:

• At our January annual online conference, we reiterated our belief that cryptocurrencies are financial vehicles to avoid.
• Portfolio manager Daniel Ouellet sounded the alarm on tech stocks in a La Presse article titled "Bulle techno 2.0."^{note de bas de page 1}
• When it comes to fixed-income securities, in recent years we've opted for bonds with short- and medium-term maturities, a logical and worthwhile strategy in a rising interest rate environment. This allowed us to do some damage control in a context of interest rate hikes aimed at offsetting inflation.

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"Control your destiny or someone else will."

– Former General Electric CEO Jack Welch

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Of course, some events did catch us off-guard, like the war in Ukraine. Fortunately, sound diversification and favourable positioning kept us on the right track. For instance, portfolio holdings like Nutrien and Suncor took full advantage of the supply shock caused by the military conflict. There's also the policy interest rate above 4% in Canada and the United States, which increased the volatility of the different asset classes. As a result, we chose a more tactical stance based on the extreme thresholds for both the equity and bond markets, an approach that has proven successful. Concretely, this means making transactions whose objective was solely to take advantage of a reversal that would benefit us in the short term. Here are a couple of examples that will help make this clearer:

1 — iShares NASDAQ 100 Index ETF (CAD-Hedged) trades

As detailed in the third quarter 2022 Reporter, since June, the major North American benchmark indexes have remained within a broad, well-defined corridor. For example, the S&P 500 moved roughly between 3,600 and 4,300 points. Last September, we were able to take advantage of the fact that the S&P 500 traded briefly below 3,600 points to buy the iShares NASDAQ 100 Index ETF (CAD-Hedged) for $86.10, thanks to the portfolio’s available liquidity (4%). This US exchange-traded fund replicated the performance of the 100 largest non-financial corporates traded on the NASDAQ, while eliminating the US dollar's impact on performance. On this last point, it should be noted that the greenback had just appreciated considerably in relation to the Canadian dollar, rising from 1.30 to 1.38 in the previous two weeks, making it vulnerable in the short term. When the S&P 500 resumed its uptrend toward the top end of the target range over the last few months, we sold off our position at a price of $92.70 for a gain of approximately 8%.

2 — Trades to extend and shorten bond portfolio duration

As we mentioned above, when a bond portfolio manager anticipates interest rate hikes, they'll look to shorten portfolio duration, whereas they'll do the opposite if they expect interest rate cuts.

At the end of July, the Canadian 30-year interest rate was 2.80% and the duration of the bond portfolio was 7.8 years. With a possible upswing of this long-term interest rate looming, we reduced the duration to 6.3 years. When our forecast came to pass in early September, we extended the term to 8.40 years as the Canadian 30-year interest rate was 3.20%, an extreme level for the past few years. Finally, in late November, we further shortened the duration to 6.40 years after the long-term interest rate fell 24 basis points (0.24%) to 2.96%. As you can imagine, we expected a bullish recovery for this benchmark interest rate.

Closing remarks

In light of the above, despite this tumultuous period, we're very pleased that we've remained true to our investment beliefs, while being flexible enough to make the most of the investment opportunities that have cropped up. No doubt, our good relative performance in 2022 is a reflection of this observation. In the Appendix, you'll find a summary of the transactions carried out in the Growth Portfolio during the most recent quarter.

With respect to preferred shares, we believe that they continue to represent a significant investment opportunity. In this regard, you'll soon receive a video in which manager Daniel Ouellet will share his vision on this preferred asset class in 2023.

That sums up the situation for the past few months. As for our outlook for 2023, we prefer to save the "surprise" for the January 25 online conference!

2022 PERFORMANCE SUMMARY

Q4 2022 PERFORMANCE REVIEW

2022 PERFORMANCE REVIEW

APPENDIX

At the end of each year, we make a series of transactions to obtain capital losses. The goal is to reduce tax payable by applying the amount of such losses against capital gains from the current year. With our personalized discretionary management, we can maximize your after-tax return.

Most of the time, we want to bring back a security sold for tax purposes to the portfolio. In order to benefit from the capital loss deduction, the share must be redeemed after 30 days, otherwise the capital loss will be considered a superficial loss and therefore not eligible. If so, we replace the stock sold with the purchase of a correlated asset, that is, one that performs in substantially the same way. As a result, the portfolio strategy remains unchanged.

This position will, of course, be sold upon the redemption of said share, if we so desire. Otherwise, we keep the correlated asset, which was the case for almost all tax transactions completed in the last quarter. Only the purchase transaction for the SPDR S&P 500 ETF NYSE was liquidated, and the proceeds were invested in the US money market. Taking into account the liquidity generated by the closing of the iShares NASDAQ 100 Index ETF (CAD-Hedged) transaction described above, the cash level is approximately 9% for the Growth Portfolio. Below is a summary based on trade matching.

Source :

Dufour, R. (2020). "Bulle techno 2.0." Marchés financiers. La Presse, 8 octobre.