E24: Second Quarter Letter 2023 - Driver's Training Edition

This podcast is brought to you by Gensler Wealth. The information discussed today is meant to be general in nature and not tailored to your specific investing circumstances. This means that you should talk to your regular Ginsler wealth advisor or your own advisor before acting on any information we discuss today. Nothing in this podcast is intended to be a solicitation and past performance does not guarantee future returns. Be forewarned. This podcast will delve into my deepest fears around my 16 year old daughter as she learns to drive. Apologies in advance. Today on the unlimited podcast, it's my reading of my 2023 second quarter client update. We call it the Driver's Training Edition. We review scary stuff going on in the markets, how we use facts and probabilities to make investment decisions for our clients, and provides examples of what we're investing in. Now let's go. Welcome everyone to the Gensler Wealth Unlimited Podcast. Today I will be reading my 2023 second quarter client update from June of 2023. We call this the Driver's Training Edition. And here we go to Ginser Wells clients. The first half of 2023 has been a scary one. Not because inflation continues to be more persistent than expected, but or because central governments have continued to raise rates and will likely do so again. Or because of the ongoing Russian war with Ukraine. Or that in the face of all of this, US technology stocks, especially the largest seven of them, seem to be in their own bubble. No, the first half of 2023 has been a scary one for me because my 16 year old daughter got her G1 driver's license permit at the beginning of the year. Because I am now in driver training mode, I've become more attuned to my own driving actions that have become second nature to me in order to help me teach my daughter how to become a good driver. It dawned on me that beyond the basic skill of controlling the vehicle, safe driving is all about math or more specifically, probability the actions you take to drive from A to B to maximize the probability of arriving safely at your destination. This is why I adjust my speed up or down to get out of another car's blind spot, making it a lower probability of that car turning into me. This is why I stick to major streets versus taking the highway if the travel time isn't materially different, and by doing so we avoid the higher probability of major injury if something goes wrong on the highway. And this is why I take an extra few seconds to start driving after the traffic light turns green. This minimizes the probability of getting hit by a driver running through their newly turned red light. With my newfound focus around probability as it relates to driving over the past quarter, I've been similarly attuned to how we use the same concept when managing your investment portfolios. Given some of the scary items listed above, we have been particularly active this quarter adjusting client portfolios and introducing new strategies. Actions we believe should increase the probability of a protecting capital, b minimizing volatility, and c generating attractive returns. In one of my early client letters, I stressed that uncertainty is the only thing I know with certainty. On the website you'll find a link back to the original letter when I wrote that we acknowledge this uncertainty and combine it with facts and and probabilities to arrive at what we believe are the best investment decisions for the balance of this letter, Please recall that all our clients have different investment goals, objectives and risk tolerances and therefore will have different portfolios which may not include some of the strategies detailed herein. Let's start with facts the most important fact to reiterate is that interest rates have increased dramatically and rapidly since early 2022. Again, I encourage you to go to the website. You'll see a chart depicting the interest rate increases. Increased interest rates make borrowing more expensive for companies and homeowners, among others. A few months ago I attended a lunch featuring Tiff Macklem, governor of the bank of Canada. He was extremely clear that unless and until inflation returns to 2%, he will not cut rates and may in fact continue to raise rates. His goal, like other central bankers around the world, is to inflict sufficient pain on companies and individuals until they dramatically reduce spending. That is a fact. However, it shouldn't be a surprise that these initial and swift interest rate increases have yet to achieve Mr. Macklem's goal. Companies and individuals with floating rate debt can handle increased interest costs for a period of time. Those with fixed rate debt maturing soon will face a harsh reality in the form of dramatically higher borrowing costs upon renewal. It is our view that interest rate cuts will not be coming soon. This means there is an increased probability of companies earnings being lower for some time, equity markets and lower probability. With the above facts stated clearly, the probability of strong equity returns should be lower. So what happened so far in 2023? The equity markets rallied, of course. More specifically, technology stocks rallied with the NASDAQ composite index up 32% and the S&P 500 up 16%, both dominated by the seven large tech giants. And a little footnote here, Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta comprise approximately 27% of the weight of the S&P 500 index and 45% of the weight of the NASDAQ Composite index as at June 30, 2023. Was this outcome a highly probable forecast on January 1st of this year? Definitely not and it may not last. If not for the current excitement around artificial intelligence, equity market performance would likely have been far more in line and in fact below the equal weighted S&P 500 return of 6% as opposed to the regular S&P 500. That gives more weight to its larger constituents and the S and P TSX here in Canada, which was up 4%. In the letter, you'll see a chart showing the Equity market index performance 2023 year to date comparing a variety of indices While investors in the media often focus on the latest exciting news, markets are up in 2023. Yay. It is important to remember that equity markets still have quite a way to go to make up for a dreadful 2022. And again, there's a chart in the letter that shows the performance of the equity markets since the beginning of 2022 and they all remain even today below that initial level. The last point is a great reminder of why it is so important to minimize losses and protect capital when investing. Climbing out of a hole is much harder than avoiding it. The Nasdaq requires a positive 50% return to recoup its 33% losses in 2022. Even its blistering 32% performance so far this year won't cut it. We believe the short to medium term outlook for equities remains rocky with a higher probability of weaker performance. Facts and Probabilities Actions we are taking Most of our clients are long term focused investors. When we look at the long term performance of equities and of the many equity managers we review on an ongoing basis, we find that good long term results tend to all coalesce around the very high single digit range. However, in the current environment where we believe equity returns may fall short of this long term average and do so with elevated volatility, we have been focused on and initiating or increasing allocations to strategies with many of the following 1. Lower volatility which equals a higher probability of generating the target return with smaller fluctuations. 2. Downside protection equals a higher probability of not losing capital or losing less capital. 3. Owning higher ranking securities that equals a higher probability of recouping capital and collecting all interest. 4. Asymmetric return profiles equals a lower probability of downside relative to the upside potential. 5. Tax effective that's focusing not just on pre tax returns but after tax returns as well and finally six Capitalizing on distress and this is more specific to the current higher interest rate environment. Interestingly, we continue to uncover opportunities that have many of the characteristics noted above and can also generate pre tax investment returns similar to or greater than equities and footnote on that represented by the longer term performance of equities, past performance of the strategies under review and Gensler Wells expected target returns for these strategies. Specific results are not guaranteed. Some examples you may see or may soon see in your portfolios Canadian Mortgage Strategy this strategy has generated a consistent 9% plus return each year since its inception and since we started adding a declined portfolio. It has zero negative months in its history. It issues shorter term generally less than one year mortgages at conservative loan to values. The principals who own and run this mortgage lending business have committed $15 million of their own money to absorb any losses that may occur and there have been no losses so far. This would have characteristics 1, 2, 3 and 4 that I mentioned earlier. Again, easier to review on the website and you'll see the letter and those references SPAC Arbitrage Strategy One of the best examples of an asymmetric return profile. Listen to our recent Unlimited podcast episode what is SPAC Arbitrage With Jamie Wise to truly understand this strategy. It exhibits downside protection characteristics with upside opportunity. It has characteristics 2, 4 and 5 mentioned before bank issued structured notes securities that pay a high contingent income generally between 9 to 11% as long as a reference portfolio, which is typically the performance of the big six banks doesn't fall more than 30%. It has characteristics 1, 2 and 3 mentioned previously preferred Equity issued by asset based Lender A unique find. This specialty finance company with an approximately $2 billion loan portfolio and over 6,000 business borrowers issues preferred equity to investors that pays 12% per year in the form of dividends which are taxed more favorably than regular interest income. This equity ranks as the most senior obligation of the company after its senior bank debt and it has characteristics 1, 2, 3 and 5 mentioned previously. Now a quick footnote on this the precise securities issued are common shares of the company's Canadian funding entity. 12% is the current dividend rate which we expect but is not guaranteed to continue. Stressed and distressed Focused Strategy this is perhaps the most tactical new addition to our roster based on our view of the coming stress for companies caused by higher interest rates and lower customer spending. This hundred billion dollar plus global fixed income manager has a smaller dedicated strategy aimed at capitalizing on stressed and distressed corporate bonds has characteristics 3, 5 and 6 mentioned before. What do all the above strategies have in common? In our view, they offer a higher probability of helping our clients arrive safely at their investment destinations with a lower probability of getting into an accident. Final footnote, all investments come with risk and uncertainties and nothing herein should be taken as a guarantee of future results or returns. Past performance is no guarantee of future results. Some or all of these strategies may not be appropriate for certain client portfolios and some of these strategies are only available in non registered accounts or at certain minimum investment amounts. Following on the driving theme of this letter, in our efforts to constantly bring you more value, our Gensler Wealth Partners program has been expanded to include an exclusive offer on a specialty high end card detailing service along with offers and discounts from a few other new partners. Your private web link was in our client only email communication. If you are a client, you can reach out to us directly if you need a link to that. Wishing you a wonderful summer and please wish me luck as the driver training continues. Thank you for your trust, support and confidence. We are available 247 should you need us. Sincerely me Brian Gensler President and CEO, Gensler wealth so that was our 2023 second quarter client update. We have a exciting podcast on the way with the President of Lavazza Canada talking about all things coffee, so stay tuned for that coming in the next few weeks and look forward to speaking to all of you then. The unlimited podcast is hosted and produced by Brian Ginsler and is edited and mixed by myself, David McMillan. This podcast is not to be taken as investment advice. If you like what you heard, don't forget to rate the podcast and follow us on social media. Inslerwealth thanks for listening and see you next time. Sam.