Amazingly enough, we were able to keep client portfolios nicely in the black for 2022. This was despite a bear market which began in 2021 with the destruction of money-losing tech stocks, Bitcoin, meme stocks and the so-called COVID winners. The bear then broadened-out in 2022 to encompass not only the quality names of the S&P500, but bonds and more recently, real estate. While certainly not the worst year on record, it was a fairly rough year for most investors given the following results: S&P500 (-18.1%), TSX60 (-6.2%) and the FTSE Russell Cda Universe Bond Index (-11.7%). Indeed, I may have just posted the strongest annual relative performance of my 30-year investment career.
Unfortunately, keeping portfolios in the black resulted in an unusually active year for me. My trading activities will no doubt cause clients with taxable accounts some measure of pain at tax time. Keep in mind that I did the best I could to capture capital losses where possible, and that paying 25% tax on a dollar of gains is always better than paying 50% tax on interest income. Finally, doing whatever it takes to avoid interrupting the compounding machine is important. Consider the difference between heading into the new year having earned +7% vs -8% in 2022: on a million-dollar portfolio that means starting the year with a larger $1,070K base rather than $920K, a huge $150K swing.
Because bonds performed as poorly as stocks this year, both balanced and growth-oriented investors should have expected similarly poor returns between -7.5% and -8.5%, based on their relevant benchmarks. Happily, this was not the case for us.
As indicated above, there really wasn’t any place to hide in 2022. Being overweight energy, the one winning sector of the year helped a lot. While taking everybody’s allocation from 3% to 15% was definitely the right call, in order to do so (i.e., raise the necessary cash) I had to let go of some long-held positions with big unrealized gains. The same was true for building an overweight position in utilities and materials. Unfortunately, I was also forced to repatriate our overseas oil money in BP, Shell and Exxon when governments decided that the way to solve the energy shortage was to hit big oil companies with a windfall profits tax: that ought to encourage them to spend more on risky exploration and development! I’m hoping this won’t be the case at home given that Canada is such a huge oil exporter.
As expected, squeezing the inflation genie back into her bottle is proving difficult, thus I am still leaning towards higher average inflation in the years ahead. Hence, I still want exposure to important commodities such as copper, oil, fertilizers, natural gas and uranium. However, rates have moved up enough in 2022 to encourage me to build a modest deflationary hedge using 1-5 year GICs: federally guaranteed product now yielding 4-5%. Gold bullion which worked well enough in 2022 (+7% in CAD), remains an important hedge for portfolios in case things truly go off-the-rails in what remains an incredibly fragile global financial system (think recent UK pension crisis).
Mark Stairs, CFA
Senior Portfolio Manager
