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With markets continuing last months upward drive, we thought this would be a good time to send an outline of our thoughts on the root causes of the circumstances we find ourselves in. At the same, time we wanted to provide guidance as to how we are monitoring and dealing with the situation in your portfolios.

Although an upward moving market is a much more pleasant situation than that we faced at the beginning of the pandemic, it is none the less stressful for us. As we are judged by our actions when markets fall, so too are we judged by our actions when markets rise. Our job, as we see it, is to maximize return for the risk that each of our client households wish to tolerate. Missing an opportunity to crystalize gains can hurt returns just as much as missing buys at the bottom of a market correction.

As usual, the important question becomes, what is coming next? If we know this, we can position the accounts to reflect the situation. There are two basic ideas out there as to where we are going. I will explain them in general terms, if you would like a more in-depth clarification please do not hesitate to call Terry, Navi or myself.

The first scenario basically says that the world is awash with cash just waiting to be lent out and spent. This cash comes from the Central Banks of the world that have “borrowed” money on our behalf and pushed it out of their “door”. This money is available to companies, consumers and other borrowers at record low interest rates. This means that once the crisis is over consumption will resume and large companies will be in good shape, consumers will consume and will even borrow to do so. The stock markets will participate in this rally because Central Bank buying of bonds has brought their yields down to a level well below the inflation rate, there is simply no alternative other than equities if you are looking for a return higher than inflation. As this is being written a 10 Year Government of Canada bond is yielding 0.794% well below the 2+% inflation rate that degrades the buying power of your dollars.

There is a growing list of proponents of the view mentioned above, all of them successful people that I respect. Paul Tudor Jones of Tudor Investment Corporation, Jeremy Segal the Russel E. Palmer Professor of Finance at Wharton Business School and many others.

As is typical of the economy and stock market in general, there is never one universally accepted hypothesis. Another group of equally intelligent people who’s view of the situation differs drastically from the one above. This group includes, Ray Dalio, founder of Bridgewater the largest Hedge fund in the world, Peter Schiff of Euro Pacific Capital and many others. They are concerned about the global debt and money printing situation previously mentioned. They see the massive borrowing that has occurred as being reminiscent of other times in history where we subsequently ran into trouble. Indeed, they point out that a similar situation in the 1920’s, “Roaring 20’s”, lead to the Great Depression in the “Dirty Thirties”. Massive amounts of money sloshing around the economic system can, under the right circumstances, cause massive inflation and lack of faith in the financial system.

What do Navi, Terry and David think? Simply put, we believe that there is a short and a long- term scenario at play. We believe that initially the first group will likely be right. That is, we will return to normal quickly and the excess funds waiting on the sidelines will find its way into the system. The question becomes how long will this last, weeks, months, years? At present the advisory team we rely on, Scotia Global Portfolio Advisory Group, feel that we are in a technical bull market. They feel we may see a little retracement from the November highs but feel chances are good that markets will be net positive for at least the first half of 2021. They too agree with letting profits ride to a higher level of equities than we were prior to this crisis. In the mid to long run, they are also concerned with the excess debt in the system. We shall see how the central banks and finance ministers deal with this and will remain vigilant. Where applicable, we are also suggesting some methods to mitigate this inflation/debt risk in your portfolios.

Our current plan is to allow the equity positions in the portfolios to expand with the markets during the so called “return to normal”. We will allow them to reach a higher level of equity than prior to COVID when we were tending to keep equities in a portfolio that is normally 50% equity in the 35-40% equity range. We manage your portfolios on a case by case basis but as a guide we will be allowing a portfolio that would have on average 50% equity to creep up to and, in some cases, slightly over the 50% level.

Please note, I have included our portfolio methodology below for those of you who are not familiar with it, would like a refresher or are new to our style of portfolio management.

We would like to thank you all for your patience and understanding during this time. We are trying as best we can to deliver the same service as we did pre pandemic but realize that a large part of that service relied on us being physically close to one another. Something that is now not possible.

Wishing you all the best this Christmas and Holiday Season.

David, Navi, Terry and Aurelie.

Portfolio Management Process.

With the above said, we try to follow a discipline that is well proven during these times of uncertainty.

First, decide whether we are going to be overweight, underweight or at the prescribed weighting that we have set for your household. This is the average holdings in equities and fixed income that we have agreed on to meet your goals. To do this, we look at the broad view of the economic situation to try and decipher where we are heading. If things look good, we bias the equity position higher and vice versa.

We then look at your portfolios to see if they reflect the allocation to the asset allocation we have prescribed to your account. You may remember that we were 15% under allocation in equities going into the current crisis due to our negative view. This meant that a household that would normally be 50% stocks and 50% bonds was being run at 35% Stocks and 65% Bonds.

Next we look at the markets to try to decide if equities are reflecting the situation in the economy. Has the market fully valued the equities to reflect the situation at hand. This can be more difficult than one thinks because markets are forward looking.

When the markets fell, we fell with them but at a lower rate than we would have done if we had been fully allocated or overweight stocks. This brought the percentage of equities in the portfolio below the minimum weighting that we ascribe to your portfolios. We then started to buy equities to keep above the minimum weighting, this was done by slowly nibbling away at “value stocks” to bring the asset allocation back toward a position around 5% above the minimum mandated to each household.

As an example, a typical account designed for 50% Bonds. 50% Stocks would experience the following.

Equity   Fixed Income                     Situation

35%        65%                                        Pre COVID most accounts were 15% below “normal” levels.

28%        72%                                        Market declines in March. Equity is now below the minimum of 30%

35%        65%                                        During downturn We used liquid fixed income to buy low priced equity.

45%        55%                                        Current position of a typical 50% Equity, 50% Bond portfolio.

The above is where most of our established accounts find themselves, not quite at their long-term average but not anywhere near their minimum. Again, we try to customize this approach to each client so your household may differ slightly.

Please advise us if you have any concerns or questions regarding your particular situation.

Regards,

David, Navi, Terry and Aurelie.

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