We hope you and your family are doing well as we move into Spring! While we are still not out of the Covid woods yet, much of the focus has moved to vaccinations and economic recovery, and positivity is returning to the world. Despite some stubborn similarities, 2021 is shaping up to be much better than 2020. So, what does that mean for your investments? 

In this edition:

  • March 2020 versus March 2021 – Similar but Different

  • Canadian Equity – Starting the Year Strong

  • U.S. Equity – Growing Dividends Fast

  • Global Equity – Great Businesses, Attractive Valuations

  • Fixed Income – Well Positioned

  • Interest Rates – Should I Be Interested?

  • Update Videos – Short and Sweet 

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In many ways, March 2021 looked painfully like March 2020. Covid was still ever-present, various jurisdictions moved in and out of lockdown stages, and uncertainty was and is still a constant. However, March 2021 was also very different in that we now have a path forward thanks to vaccines. 

Throughout the first three months of 2021, a growing base of real-world evidence showed (and continues to show) that multiple Covid vaccines are both safe and effective. Pharmaceutical giants are working together to manufacture doses in the tens of millions, and the vaccines are being distributed throughout the world. The result is a slow march towards reopening, and the effect on the global economy is already visible. 

Despite the challenges posed by 2020, not a single business we own or purchased was permanently impaired by the pandemic. Investors that stayed the course have seen their accounts recover to levels above where they were in January 2020, and those that added to their portfolios in March are up as high as 65%. 
In March 2021, unemployment rates in Canada and the U.S. kept falling as various businesses could re-open and people returned to work. Global GDP is steadily recovering to pre-2020 levels and positioned to grow further. 
This is a good news story! The key takeaway is that the global economy is on a path to recovery. However, it’s important to understand that the path to recovery won’t be smooth, and there are still risks ahead that need to be managed. 
It has been a strong start to the year for our Canadian Investments. Despite a difficult 2020, the Canadian Banks have already recovered to pre-pandemic profit levels. While this is exciting, we believe they have a long way to go. The combination of record-high deposits and a rising interest rate environment is the perfect formula for growing profits. It means the Canadian banks have more money to lend out, and they can charge more to do it. 
It’s important to remember that the Canadian Banks are still operating under some pandemic rules that do not allow them to grow dividends. This rule is temporary, and we expect to see dividend growth when the rules are eased.  
Another Canadian business, Magna International, has also had a stellar start to the year – showing more profits in 2020 than in 2019 and growing their dividend in turn. 
The U.S. remains a great place to invest. One of the biggest things we are looking for when investing in the U.S. is dividend growth. Our objective is to buy high-quality companies that grow their dividends the fastest, and we accomplished that objective again in 2020 with annual dividend growth of 14%, compared to 5.8% for the S&P 500.  
The importance of this shouldn’t be understated – in one of the most difficult operating years ever, the businesses we own not only survived, but thrived, and increased their payments to investors as a result. As the U.S. economy reopens, we expect to see even higher dividend growth in 2021 than we saw in 2020. So far in 2021, we have already seen 5 of our U.S. companies announce dividend increases. When companies grow their dividends, their share prices eventually follow.  
Investing outside of North America is something we are still excited about. Beyond widening our net to make sure we own some of the best businesses in the world, valuations in global equities are very attractive. 
Some of the best businesses in the world are outside of North America, and some of them are great deals today. For example, Komatsu is a heavy equipment manufacturer and one of Caterpillar’s biggest competitors. Komatsu stands to benefit from a massive boost in global infrastructure spending. They have been growing both profits and dividends faster than their competitors, and trade at a substantial discount relative to their peers. Komatsu is an excellent example of the type of global business that gets our team excited. 
While interest rates have been climbing, they are still very low. Low-interest rates mean Government bonds pay almost nothing, and the safest corporate debt pays barely more than that.

The only way to get paid owning bonds in a low-interest environment is to buy high-yield bonds, and that’s exactly what we own. High-yield bonds pay more because the risk of the borrowing company failing to pay back the loan is higher. We are extremely selective when buying these bonds, and we will only buy high-yield bonds from companies we are confident can pay us back, and that are backed by collateral or other protective covenants.

As the economy recovers, so do the companies we have lent money to. That means we are collecting the same high yield, while the risk of default decreases. Your high-yield bonds are well-positioned because the yield is far more attractive than government bonds and the default risk is dropping as the economy recovers. 
One eventual result of a strengthening economy is rising interest rates. While rates are still at historic lows, we have seen an increase throughout the first quarter of 2021.  
Some businesses benefit from higher interest rates. For example, when rates rise banks can charge more for all types of loans, ultimately generating higher profits. 
Other investments can be harmed by rising rates. If a stock substantially benefitted from falling rates, it’s logical to assume that rising rates will have the opposite effect. Many of the best-performing stocks and sectors in 2020 were exactly these. We have already seen a reaction in markets, specifically in the tech-heavy Nasdaq index, one of the best performers of 2020. 
Rising rates don’t mean we are headed for a market crash, and it may still take years for rates to return to normal levels. The impact of rising rates is more likely to impact individual companies than the market as a whole. Rising rates provide both risks and opportunities, and the key to managing this balance is paying reasonable prices for companies that are highly profitable today with excellent long-term growth prospects. 
Gregg Filmon, MBA, CIM,
(204) 949-1723

Gregg Filmon, MBA, CIM | President
t: (204) 949-1723