April 2018 SWM Letter — When Markets are Flat

We touch three main areas today.  (We'll limit any comments on freezing weather or strange events in Washington.)   (1) While investment markets have been especially volatile you might hear the Bee Gees in “staying alive.”  Or Carol King with “the best is yet to come”.   (2) We have some funny news about annuities and a word about why this could matter to you and your family.  (3) In closing we’ll ponder what Artificial Intelligence can mean for investing and how it impacts the future of work.

WHEN MARKETS GO FLAT  …

Our strength over the past year has been International and Emerging Markets.  Canada has been flat since last summer.  Bonds have offered little and often slide to the negative.  Gratefully our Global Dividends and International Equity have risen in double-digits, with Emerging Markets above 20%.

Canada’s banner year in 2016 gave 18% rewards, followed by 5% in 2017.  (Year-to-date is now down 6%, with the Toronto index exactly where it was last summer.

America’s S&P500 rode the rocket in 2017 with 18% growth but then dropped 11% in Feb/March.  Many sub-indices are negative since last summer because growth has been monopolized by certain tech-related “market darlings” while banks, real estate, and other blue chip enterprises have mostly remained stuck in a rut.

For more downcast news, banks are down over the past 3, 6, and 12 months despite their rising dividends, historic earnings, and sparky earnings ratios.  The entire Real Estate sector is down 2% in the past year.  Renewable Energy companies are down 5% to 25% in the same period.  Engineering and infrastructure firms are also seriously negative.

Will you believe me in saying, the future is brighter because the past has been difficult.   Investing is a process that rewards when we invest for patient results regardless of volatile or flat markets.  Every cycle has times like these.  Nothing is new.

If we own enterprises whose value is growing 10% a year, with dividends at 4%, earnings ratio below 15, and representing prime sectors of the economy in Canada and globally, then we are in the right position today.   So March 31st statements may say accounts dropped 2% – in a market that was down 5%.  This means we’re significantly safer than the stock markets.  And if you recall the Pendulum it will be swinging in our favour.  (If you don’t know about the pendulum, ask me.)

  • For young and pre-retirement investors, downswings are “on-sale”.
  • Retired persons drawing from an “income reservoir” remain safely on track.

Brief addition for deeper readers:  we invest not just for stable growth but especially to capture an attractive yield from established businesses through a variety of sectors.  We can see this for example in our mandate for Global Infrastructure Income.  Here we see the following and more (also see Infrastructure Income):

  • Airports including Flughafen Zuerich (Zurich), Aeroports de Paris (three airports in Paris), and the Sydney Airport Group (Australia).
  • Trent Severn (water and waste treatment in the U.K.)
  • Koninklijke Vopak (Dutch leader in energy/chemical storage)
  • National Grid (UK/US, distributing electricity & natural gas)
  • Crown Castle (broadcasting and telecommunications)
  • Orsted of Denmark (energy) and Kinder Morgan (pipelines)
  • Ferrovial of Spain (urban transport infrastructure)
  • Vinci SA (engineering & construction, France & worldwide)
  • NextEra Energy (US & Canada, electric, gas & renewables)
  • CN and CP railroads:  transport through Canada and U.S.

FUN WITH LIFE ANNUITIES.

We had fun with Annuities under the title Cinderella or Goldilocks.  New to me is a story that annuities helped bring down Napoleon’s empire.  Needing cash for various wars, France had the idea of selling annuities which plumped up the treasury (war chest) and only required smaller repayments over time.  Point is, people are supposed to die someday and then the annuity would stop paying.  Savvy Swiss bankers saw an opportunity, and bought life annuities on 5 year old girls so the French treasury had to pay Swiss banks a steady income for the next 50-to-90 years.

Today’s annuities are age-related, and more lucrative for our cash-flow if we're over the age of 70 or 75 when we buy them.   If bought with non-registered money (ie. not RRIF or Pension money) an annuity also offers significant tax advantage.  I’m thinking of someone who pays 2 cents tax for each dollar of annuity income.  Registered or not, Life Annuities offer stable and guaranteed income for life.

Could this ease worries for older Canadians and their families?  Three out of five Canadians (62%) say they worry about outliving their retirement savings.  Yet only one out of nine (12%) are aware how life annuities can help secure the life they want.  And if 10% to 20% of family wealth were in Life Annuities, it also logically supports seeking stronger dividend yield in an equity-income portfolio (see LIM).

ARTIFICIAL INTELLIGENCE,  AND FUTURE OF WORK.

While this note can barely scratch the surface, AI is not to be ignored:  not in view of our investments, nor how our families will negotiate the changing workplace.

Artificial or robotic intelligence is already at work in countless facets of our lives.  If you receive a package by mail or courier, search for something on-line, watch Netflix, enjoy Facebook, or take a web-based course, you’ll find AI is at the centre of it.

Some assume this makes AI a brilliant place to invest.  Not so easy!  There could be tremendous returns (and losses) like the high-tech frenzy of 1996-1999.  Whether those company names will last the next ten years is unknown today.

AI however is increasingly vital to nearly every type of business today.   Imagine the impact of electricity over steam in an industrialized society.  Imagine the impact of oil and gas for heating homes instead of coal and wood.  Imagine how revolutionary was the assembly line for car manufacturers.  Imagine again what the internet has done for shopping, banking, learning, driving, and communicating with each other.  Artificial intelligence has a dramatic impact on every type of business – worldwide!

While these changes amaze us, the benefits will continue through lower costs, accelerating access to new markets, increasing earnings of all types of blue-chip business, and enhancing dividend yields.   The brave new world of AI will pay many rewards to those with work or wealth and the capacity to invest.

Seen through a different lens, “The Future Of Work” gives us a moment to pause.  If we’re 35 today, we and our children have never known a time without the internet.  If we’re 55 today our children are either winning in the “gig-economy” with two or three jobs or they’ve been fortunate to land well in their studies and career.  If we’re 75 today our children have witnessed fifteen years of incredible change, and our grandchildren’s workplace would seem like science-fiction.  The currencies of this new work will not be dollars or hours, but knowledge, and that’s changing at the speed of light.

For careers, politics, democracy, environment, community-health, and (the possibility of) world peace, AI will be central.   AI is a new platform on which we are generating solutions to disease, hunger, climate, healthcare, and even human isolation.  As we invest in companies where AI is wisely implemented we can reap enormous benefits.  This will be a major thrust to accelerate investment returns over the next ten and twenty years.  But it assumes people continue to find productive careers and can save a nest egg after paying for food, shelter, and other family needs.  Anyone of working age who feels their learning is done, or who lacks skills in trades, services, or the information economy, will find an uncertain future.

  • Ponder: I receive reports on leading SME employers (small and medium business).  Over the years I’ve known quite a few such businesses.  Many recently-named leaders didn’t exist 5 years ago.  We are only starting to grasp the tremendous impact for work and careers, for family life and retirement, as well as corporate earnings and personal wealth.

IN CLOSING.

Last weekend was the coldest-ever weather in Ontario for April 15th.  I suggest that doesn’t delay planting gardens on the long weekend in May.  A metaphor?  Markets have been volatile, but economic expansion seems to continue in our favour.  The World bank sees 4% growth worldwide for 2019 and 2020.  We shall see ...yet meanwhile we are positioned to enjoy the rewards of growth while muting the downswings that also come along the way.

**  Our May letter will again arrive mid-month as Virginia and I prepare for cruising the the Rhine and then enjoy our youngest daughter’s graduation in Kingston.  We may skip a June letter -- or perhaps we'll have Ben or Whitney write it.   As always, we love hearing from you – any questions;  any needs – and when I’m away you can still reach Ben Takacs ...Benjamin@SovereignWealth.ca or ext. 222.

Yours in Financial Security for LIFE!

Brian Weatherdon, MA, CFP, CLU, CPCA. 905-637-3500

627 Guelph Line, Burlington, Ont. L7R 3M7.  1-877-937-3500

Brian@SovereignWealth.ca

Author:  A Lifetime Of Wealth — And How Not To Lose It  (2013). Protecting Life, Loved Ones, and Future Dreams  (2013). Your Business, Your Retirement: Halton Retirement Study (2015) .

** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. Returns are from publicly available sources and research from a variety of firms including but not limited to GLC, RBC, CIBC, Mackenzie, Franklin Templeton.  Opinions reflected in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to consult alongside your legal and accounting firms to advance your financial security and unique goals. We are grateful always to receive your comments and questions.

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