the times they are a-changin’
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THE TIMES THEY ARE A-CHANGIN’. David Picton, President, Picton Mahoney Asset Management. INTRODUCTION TO PICTON MAHONEY. Portfolio management boutique managing $7.0 billion in assets for investors through three lines of business Authentic hedge fund strategies Sub-advisory services - PowerPoint PPT PresentationTRANSCRIPT
Slide 1
THE TIMES THEY ARE A-CHANGIN
David Picton, President,
Picton Mahoney Asset Management
1
1
INTRODUCTION TO PICTON MAHONEY
Portfolio management boutique managing $7.0 billion in assets for investors through three lines of business
Authentic hedge fund strategies
Sub-advisory services
Institutional long-only mandates
We remain committed to our founding principles:
Authenticity
Transparency
Capacity
THERE IS A REASON THE MARKETS HAVE BEEN SO CHALLENGING OVER THE PAST FIVE YEARS
History shows that big bull markets are usually followed by big consolidation phases
These great reckoning phases are never pleasant and usually squeeze excesses from the system, setting the stage for the next bull market
PORTFOLIO CONSTRUCTION IS EXTREMELY DIFFICULT IN TODAYS ENVIRONMENT
Consider how lacking the traditional tools are for savers today
(Not to mention, the general aversion to risk many investors have post the 2008 collapse)
INCOME INVESTORS HAVE BENEFITTED DISPROPORTIONATELY FROM FALLING INTEREST RATES
We are very concerned that conservative investors are not prepared for potential volatility/losses that these types of investments could face once interest rates normalize
Source: Corporate Reports, National Bureau of Economic Research, Empirical Research Partners Analysis
A CAUTIONARY TALE FOR INCOME INVESTORS
Rate Risk 1994: The great bond massacre
Today if rates increase 1%, 5-year Government bonds should lose $5 and 10-year Government bonds should lose $9
Source: Bloomberg, Bank of America Merrill Lynch
WE BELIEVE THAT MOST INVESTOR PORTFOLIOS, (ESPECIALLY IN CANADA), ARE POORLY CONSTRUCTED
Too much cash that has no chance of upside or inflation protection
Concentrated in interest rate related vehicles that are trading at excessive valuations
Lack foreign content (especially U.S. growth stocks)
Disproportionately exposed to resource stocks and banks given that makeup of the Canadian benchmarks
Potential problems with portfolios
WHAT IF QUESTIONS INVESTORS NEED TO ASK THEMSELVES REGARDING THEIR PORTFOLIO
What if stock markets continue to rally?
What if interest rates continue to rise/normalize?
What if stock/sector leadership change continues?
If you dont like the answers you are getting to these questions then it is time to reconsider your positioning and/or the investment tools you are using to build your portfolio
The times they are a-changin
Investment outlook
THE CASE FOR ECONOMIC ACCELERATION IN 2014
Many former headwinds are becoming (or should soon become) tailwinds to the economy
STRENGTHSTABILITYWEAKNESSU.S.Wealth effectHousingCredit cycleCorporate CAPEX/ manufacturing renaissanceFiscal dragJAPANEUROPEBRICS??We are in both
U.S. OUTLOOK IS IMPROVING
Rise in home prices and stock have added almost $9 trillion of wealth
Source: J.P Morgan Chase
HOUSING IS STRONG AND AN INTEREST RATE SPIKE RISK IS OVERSTATED
Source: NAR, MBA, Zelman & Associates analysis
JOBS STILL TO COME FROM HOUSING
Each 250,000 Of U.S. Housing Starts adds one million new jobs and $4 to S&P 500 EPS
Source: Bloomberg
CAPEX STILL LANGUISHES THE $2 TRILLION CASH HOARD
A lack of faith in politicians and more specifically, the fiscal circus in the U.S., may be the only thing that stands between the deployment of cash and a CapEx Supercycle
Source: Credit Suisse, ISI Group
U.S. FISCAL DRAG IS PEAKING
Source: Goldman Sachs
EUROPE IS PULLING OUT OF RECESSION
Europe is coming out of the recession led by Germany and France. The fiscal drag from the austerity measures (-1.6% of GDP in 2012, -1% in 2013, and a projected 0.6% in 2014) are diminishing
Source: Eurostat, national statistics office, JP Morgan
JAPAN WHERE INFLATION IS WELCOMED!
Japan has finally decided to tackle its decade long deflationary recession problem
Japans new prime minister, Shinzo Abe, has embarked on a massive fiscal & monetary stimulus plan, dubbed Abenomics
The monetary aspect is aimed at reducing real interest rates and weakening the Yen
Japanese stocks tend to outperform when the Yen depreciates
Source: Bloomberg
JAPANESE EQUITIES: EARNINGS ARE IMPROVING AND VALUATIONS REMAIN ATTRACTIVE
The weaker Yen has translated into better earnings expectations for Japanese companies
Despite the rally, Japanese equity still has lots of room to run
CHINA IS A WILDCARD
Source: Bloomberg, PMAM Research
CHINAS GROWTH OVER NEXT DECADE(S) LIKELY TO BE LED BY CONSUMPTION
A 1% Increase in Chinas consumption to GDP is equivalent to $73 billion (USD) of incremental spending
Source: Bloomberg
CHINA: GROWTH COMPANIES WILL CONTINUE TO BE SOUGHT AFTER IN A LOW GROWTH ENVIRONMENT
Source: Bloomberg, MSCI
Despite the negatively regarding China/EM, Chinese small/mid cap stocks (as represented by ChiNext) has massively outperformed this year. Investors are buying the new growth companies focused on the consumer rather than the large cap growth companies of the past (predominately state owned materials/energy/financials/industrials)
STOCKS REMAIN ATTRACTIVE: EQUITY YIELDS ARE SUPERIOR TO BOND YIELD
Source: Bloomberg
SHORT-TERM STOCK MARKET WEAKNESS WOULD BE TYPICAL, AND SHOULD BE BOUGHT
Source: Bloomberg / PMAM Research
CORPORATE CASH SHOULD LEAD A BOOM IN M&A
Current M&A activity rests at more than half of 10 year averages. This suggests that the markets may be in the very early stages of a market rise with a good deal of potential going forward
Source: Bloomberg
INFLATION RISKS MAY BE OVERSTATED, WHICH COULD BE GOOD FOR DEVELOPING ECONOMIES AND P/E RATIOS
Lower inflation has paved the way for better economic data
Decoupling from China allows for the return of non-inflationary growth
SLEEPLESS NIGHTS
There are numerous questions that keep us up at night including:
Are we underestimating the tail risks on BOTH sides?
Has Fed policy so distorted the market pricing mechanism that it is fostering risk seeking behaviour reminiscent of the pre-crisis period?
Do investors understand that they take inordinate amount of risk in the bond market and not enough in the equity market?
Will politicians keep watching financing costs fall while doing nothing to get to the heart of the issues?
Will a healthy balance between monetary and fiscal/political policy be struck in time?
ARE YOUR PORTFOLIOS READY?
Source: Bloomberg
ARE YOUR PORTFOLIOS READY?
Source: Bloomberg
PMAMS PORTFOLIO STRUCTURE
SYNERGY CANADIAN CORPORATE CLASS SECTOR EXPOSURE: AS AT AUGUST 30, 2013
SYNERGY GLOBAL CORPORATE CLASS SECTOR EXPOSURE: AS AT AUGUST 30, 2013
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise indicated and except for returns for periods less than one year, the indicated rates of return are the historical annual compounded total returns including changes in security value. All performance data assume reinvestment of all distributions or dividends and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
CI Investments, the CI Investments design, Synergy Mutual Funds, are registered trademarks of CI Investments Inc.
Thank YouFOR ADVISOR USE ONLY
2202002000
U.S. Stock Market
CAR=14.9%CAR=12.3%CAR=23.0%20 Years20 Years25 Years30 Years???
0.2 0.4 0.6 0.8 1.0 1.2 1.4 195519601965197019751980198519901995200020052010
Large-Cap Stocks: Highest Quintile of Dividend YieldRelative Trailing-P/E Ratios
Average
(30.0%)(25.0%)(20.0%)(15.0%)(10.0%)(5.0%)0.0%5.0%10.0%5.00%5.50%6.00%6.50%7.00%7.50%8.00%8.50%9.00%
Jan-94Feb-94Mar-94Apr-94May-94Jun-94Jul-94Aug-94Sep-94Oct-94Nov-94Dec-94
Indicative % Loss on 10 Yr% Yield
10 Yr Long Bond YieldIndicative % Loss on 10 Yr
39%46%43%35%36%32%27%27%27%27%26%25%24%22%24%23%22%22%21%21%23%22%22%22%23%25%26%24%20%16%16%15%14%14%17%22%23%
00.050.10.150.20.250.30.350.40.450.5
Monthly Principal & Interest on a 30-Year FRM as % of Income
4006008001000120014001600180020002200240001020304050607080
Homebuilders' Sentiment Points To Much Higher Starts
NAHB Housing Market Survey (6m lead, ls)Housing Starts (rs)
Long-termaverage = 1,470Correlation = 96%
1.12.91.9-1.0-0.4
-5-4-3-2-1012341Q122Q123Q124Q121Q132Q13
GDP Growth (% q/q)
Level of Euro area real GDP (% q/q saar)
GermanyFranceEuroSpainItaly
0.30.350.40.450.50.550.60.650.70.750.865758595105115125135
20002001200220032004200520062007200820092010201120122013
Relative Performance of Japan to World vs. USDJPY
USDJPYMSCI Japan / MSCI World
30%35%40%45%50%55%60%65%70%75%80%
19951996199719981999200020012002200320042005200620072008200920102011
Consumption, Share of GDP
ChinaUnited States
5606607608609601060116018002000220024002600280030003200340036003800
ChiNext Comp Index Price LevelShanghai SE Comp Index Price Level
ChiNext Comp vs Shanghai SE Comp -2013 YTD
Shanghai SE CompIndexChiNext Comp Index
+53%-7%
234567891011
Corporate Bond and Equity Yield
S&P 500 Current Earnings YieldIG Corporate Bond Yield
7580859095100105110
-12-11-10-9-8-7-6-5-4-3-2-10123456789101112
S&P500 PerformanceMonths Before/After Peak in S&P 500S&P 500 Around Year/Year Declines in Long-Term Bonds of at Least 15%Current (Zero = 8/2/2013)
50060070080090010001100
1966-1982
DJIA performance over 1966-1982
50007000900011000130001500050060070080090010001100
1998-Present1966-1982
Dow Jones Industrial Average Index
1966-19821998-Present
GICS sectorSynergy GlobalMSCI World $CDifference
Financials28.5%34.4%-5.9%
Energy16.8%24.9%-8.1%
Materials7.8%13.8%-6.0%
Industrials9.5%6.9%2.6%
Consumer Discretionary11.2%5.5%5.8%
Telecom Services2.7%5.0%-2.2%
Consumer Staples4.6%3.2%1.5%
Health Care6.0%3.0%3.0%
Utilities1.3%1.8%-0.5%
Information Technology7.9%1.6%6.3%
Cash & other3.6%0.0%3.6%
Total100.0%100.0%
GICS sectorSynergy GlobalMSCI World $CDifference
Financials23.6%20.8%2.9%
Information Technology13.2%11.8%1.4%
Consumer Discretionary13.1%12.1%1.0%
Industrials11.9%11.1%0.8%
Health Care9.9%11.3%-1.4%
Energy8.4%9.8%-1.5%
Consumer Staples6.5%10.3%-3.8%
Materials4.9%5.8%-0.9%
Telecom Services3.2%3.7%-0.5%
Utilities2.7%3.3%-0.6%
Cash & other2.7%0.0%2.7%
Total100.0%100.0%