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    Protecting your portfolio against currency changes

    In our conversations with clients, one question keeps coming up these days:

    “The Canadian dollar has dropped a lot. How is this impacting my investments?”

    You may have wondered this yourself so we thought to address it here. To clarify, when the Canadian dollar falls, as it has by 7% against the U.S. dollar in 2015, the value of U.S. holdings in a portfolio rises. The reverse is also true. For example, from 2002 to 2007, when the Canadian dollar climbed from about $0.63 to over $1.02, the S&P 500 returned over 6% annually in U.S. dollars, but lost about 2% a year in Canadian-dollar terms. Many investors have seen otherwise solid returns wiped out by currency fluctuations.

    Predicting currency patterns is one of the most challenging tasks in the field of investing. Today, more than ever. And while we are the first to remind clients that we are not currency traders, you can’t ignore exchange rates when investing internationally. There are two ways to look at the issue:  first as owners of U.S. assets and second as potential buyers.

    Those who have been following our strategy know that since 2010 we’ve been putting a lot of money to work in the U.S., predominantly in the stock market and private real estate (e.g. apartment buildings). For much of this time, the Canadian dollar was close to par and the beat-up U.S. market was giving us an opportunity to buy quality assets at reduced prices. This strategy played out nicely given both the loonie’s decline and the uptick in the U.S. economy over the past four years.

    The challenge before us now is to protect these gains should the Canadian dollar recover. Because while it may fall further in the short-term, it is unlikely to stay at current levels over the medium to long term.

    The second issue is with respect to potential new investments in the U.S. In front of our investment committee currently are several U.S.-based real estate investments that look attractive. Yet, if we are buying U.S. assets with 80 cent dollars and the dollar rebounds to, say, 90 cents, we need to be comfortable that our target return is still attractive. This is a regular point of analysis and discussion at our investment committee meetings.

    There are a number of factors that impact exchange rates and we believe it is best for us to avoid predictions. From our perspective, the answer is to put a hedge on a portion of our U.S. dollar-denominated holdings. (To hedge is to enter into a financial contract to protect against unexpected, expected or anticipated changes in exchange rates.) We recently hedged one third of our U.S. exposure and will continue to manage this risk going forward to protect client returns and capital.

    Currency hedging is not a panacea – there is a cost, it is imprecise and it only protects the value within a certain range and for a certain period of time under the contract. And there’s the possibility the Canadian dollar could go lower still. (The pundits’ forecasts range from 70 to 90 cents over the next year.) However, in this volatile, low-interest rate investment climate, where every percentage of return is hard won, we think it makes sense to lock in some of our gains. It’s all part of our approach to protecting capital first — especially when we can buy that protection at a cost that is reasonable – and above all, to be prudently diversified.

    Manage RRIF rules carefully – or you could run out of money

    Planning for retirement can be challenging. Attempting to balance your need for current income against the risk of outliving your savings is hard enough and, as it turns out, the federal government is not making things any easier.

    Back in 1992, the federal government was running a significant deficit and needed cash. To help rectify this problem, the Income Tax Act mandated that at age 71, Canadians must convert their registered retirement savings accounts into Registered Retirement Income Funds (RRIFs). Seniors had to begin drawing a minimum amount out of their RRIF every year, which was taxed upon receipt. This measure was implemented to help the federal government manage their cash levels and remove the deficit.
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    How to protect your investments from a market downturn

    At our investment meeting this week, one of my colleagues shared the news that he had received a call late the night before from a prospective client confirming his decision to hire us to manage his portfolio. While that itself is not news we’re thankful to say, what was interesting was the voice mail message the investor left, saying, “The market seems a bit high so I’m moving my money over to you guys to put to work in your more diversified platform.”

    Although we may be biased, we think there is merit in what he says — and we applaud his foresight. Too many investors (even professional ones!) have a tendency to extrapolate current investment trends well into the future. That is, they buy in after markets have been performing well only to sell out of fear when they turn bearish. In other words, they buy high and sell low. Frequently-cited research by DALBAR shows that over the past decade, investors have cost themselves potentially 4% per year in returns by doing the wrong thing at the wrong time.  In this business, one must be vigilant about not letting emotion drive decision making.
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    Why the deep freeze is good for your portfolio

    car in the snow21 150x150 Why the deep freeze is good for your portfolioApart from the Olympics, the most popular shared experience these days is talk about the weather. To be specific, the bitter cold that has hit most of Canada – and given rise to the new and now popular term, ‘polar vortex.’ However, there is a silver lining to these snow-filled clouds – and not just for those who enjoy winter sports.

    Demand for natural gas has risen appreciably with the decline in temperatures. And that’s good for investors like ourselves who took a contrary view back in 2011 when the commodity was deeply out of favour. At the time, in North America, natural gas was trading at approximately $1.80 per one million British Thermal Units (BTUs) and producers’ stock prices were depressed.

    But for investors who took a longer-term view, a different picture was emerging. One that held the potential for significant profit.

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    Is the U.S. market due for a correction?

    Is the U.S. stock market poised for a correction? Is January’s decline of 4% the start of a bigger correction?

    These are perfectly understandable questions. In fact, we hear them repeatedly when meeting with our clients here at Newport Private Wealth. And they are being heavily debated within our Investment Committee and by investment experts whose opinions we value. After all, the S&P 500 has increased by almost 50% in the last two years including 30% in 2013.

    The pessimists are arguing that:

    • the S&P 500 has increased for five consecutive years and a six-year streak has only happened once before (1982-89); and
    • market returns after two consecutive years of double digit returns have typically been modest; and
    • the stock market is expensive at 16x earnings.

    (Source: BMO Nesbitt)

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    Risk management is a hard sell!

    Equity mutual funds are getting a late Christmas gift this month: they are finally able to drop return data from 2008  from the calculation of their five-year performance numbers. Why is that important?

    In 2008, global equity markets fell between 30-54% (as if we need reminding!). Given that mutual funds generally report one, three, five and ten year historical performance, dropping 2008 from their critical five-year returns will optically improve the numbers, no question. But what does it tell us about risk? Those better five-year numbers might attract some investors to a level of risk they don’t want — and perhaps don’t understand. Let’s look back for a moment.

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    Future looks bright for Vision Critical

    vc blog 150x150 Future looks bright for Vision Critical Rarely do we write about specific investments in this blog, however, a recent post by Wellington Financial about one of our private investments caught our attention and we thought to share it with our readers.

    Vision Critical’s $10.5M secondary clears the deck for potential IPO.

    Vision Critical is a fast-growing Canadian tech company that has become a major player in global market research solutions. The company was founded in 2000 by noted entrepreneur, Dr. Angus Reid (former founder of Angus Reid Group, Canada’s largest research and polling group) and his son, Andrew Reid.

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