the tinnerman wealth brief
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BMO Nesbitt Burns
The Tinnerman Wealth Brief Winter 2018
With 2017 safely behind us, now is a good time to take a look back at some of the highlights from the past year. One thing that we can say at the outset is that the keepers of the record books must have been very busy last year, as the financial markets saw innumerable new benchmarks established. Looking at the equity markets in the U.S. it seems that new records (good, bad and astounding) were set for seemingly everything of material interest to investors.
To the above, the S&P 500 is in the midst of its second longest ever bull market run, and it will shortly become the longest bull market on record if this trend continues. At the end of 2017, the S&P 500 had risen for a record 14 straight months, and it appears that January 31st will make it 15 months. Possibly even more remarkable is the fact that the market has risen with so little in the way of declines that it now owns the record for the longest streak without so much as even a 3% correction.
As we have noted in several of our past letters, the S&P 500 has been far from cheap for some time as on a price-to-earning basis it has only been more expensive once in its entire history. At the same time, the markets have been incredibly calm – even complacent – as the CBOE Volatility Index (i.e. the VIX) set new record lows in 2017, and has continued to hold at extremely low levels. Money borrowedto invest in markets (i.e. margin debt), as reported by the New York Stock Exchange, also set multiplerecords last year and now stands at nearly $600 billion, or more than 15% above 2016 levels. Andfinally, passive investment products exploded in popularity in 2017 such that a recent article in Barron’spredicted that index products could make up half of all retail U.S. equity flows in 2018.
“Everyone’s a winner, baby, that’s the truth” from the 1978 song “Every 1’s a Winner” by British soul band, Hot Chocolate
Let’s connect Mark Tinnerman Portfolio Manager, Senior Vice President
Jonathan Lin Wealth Advisor, Financial Planner
Tamara Uptigrove Investment Advisor, Portfolio Manager
Tina Dragneva Associate Investment Advisor
Tel: 416-359-4803 Toll Free: 1-866-210-5204 Fax: 416-359-6519 tinnermanwealthgroup.com
Given the foregoing, it is not a surprise that the U.S. equity markets performed extremely well during 2017 with the S&P 500, the Dow Jones Industrial Average and the Nasdaq posting total returns in Canadian Dollars of 13.83%, 19.69% and 19.82% respectively.
The Tinnerman Wealth Brief
Winter 2018
It is also not surprising that Canadian equities were not terribly far behind their U.S. counterparts with the S&P/TSX Composite Index posting a return of 9.10%. What is surprising is that, as shown in the table below, most markets in the world followed the U.S. lead. In local currency terms investors could pretty much not lose last year, regardless of which major global market it was that they had invested in, and what asset class it was that they had invested in – treasuries, fixed income, equities, gold, and (for what it is worth) Bitcoin. The fact that everyone was a winner in 2017 was especially surprising as interest rates began moving up in 2017 in what appears to be the start of a persistent trend.
2017: The Year In Numbers from BMO Performance Benchmarks Report
Asset 2017 Return
Canadian T- bills 0.55%
Canadian Bond Universe 2.52 %
S&P/TSX Composite Index 9.10%
S&P 500 (C$) 13.83%
DJIA (C$) 19.69%
NASDAQ (C$) 19.82%
MSCI World (C$) 14.99%
MSCI Emerging Markets (C$) 28.70%
MSCI Europe(C$) 17.94%
Gold (C$) 6.40%
Bitcoin (C$ 1,344.15%
For our part we are pleased to report that our client portfolios handily outperformed the benchmark of the Tinnerman Wealth Group (i.e. 50/50 weighting in each of the S&P 500 and TSX Composite Indices) which posted a return of 11.47% in 2017. As always, we note that summary performance results are not provided in our quarterly letters because the Tinnerman Wealth Group does not employ a “one size fits all” approach to the management of our client families’ portfolios. Our investment portfolios are tailored to meet the unique to the goals and objectives of each of our client families and as such we ask that you please review your account statements (or call us) for your individual portfolio information.
We are always pleased when our clients do well but, as we have repeated on numerous occasions, we do not put much stock in good (or bad) short term performance results. After a year like 2017, we think investors would be well-advised to remember that long term investment success does not come easy. Unfortunately, there are an awful lot of people (professional and retail investors alike) who have come to believe that the simple act of being in the markets is a recipe for success, and that doing the research to gather knowledge
about individual investments is a waste of time. Our expectation is that, in the not too distant future, such uninformed investors will learn that 2017 was an anomaly and that everyone is not a winner – and that’s the truth.
To the above we should add that we do not foresee some great market meltdown, such as the three that we have experienced during our tenure managing wealth; those being Black Monday in 1987, the bursting of the tech bubble in 2000-01, and the 2008-09 financial crisis. In fact, we are quite positive about the outlook for our investment portfolios, as corporate profits and the global economy appear strong, unemployment is low, wages and inflation finally seem to be rising, and governments are enacting tax policies which are more favourable for individuals and corporations (except in Canada).
We do, however, foresee something akin to a culling of the herd as the era of indiscriminate monetary interventionism appears to finally be coming to an end. With apologies to Warren Buffett, we expect that as
the monetary tide goes out, investors will learn who’s been swimming
naked. To be clear, this is an individual company problem – and not a market problem – for the reason that central bank policies have enabled poorly structured and/or managed businesses to continue their operations through cheap debt and access to the capital markets. The record levels of household debt and government debt may get the headlines, but the fact is that corporations have also accumulated unprecedented debt loads and it is unlikely that things will end well for all concerned.
Moving forward into 2018 and beyond, we expect that investors with the knowledge and expertise to distinguish good companies from the bad will be well-rewarded for doing their homework. To this point we would note that we in the Tinnerman Wealth Group have been doing our own research for more than 30 years now – to identify and invest in better businesses which have: (i) simple and easy to understand business models, (ii) strong balance sheets, (iii) predictable and sustainable revenues and dividends, (iv) the proven ability to generate above average returns over the long term, and (v) can be purchased at prices that provide a margin of safety. Our experience and commitment to this core philosophy is what has made the Tinnerman Wealth Group successful and it is why we now manage almost a billion dollars on behalf of our client families and institutions.
As we noted earlier passive index products have become immensely popular with retail investors because they are a cheap and easy way to invest across asset classes, markets and sectors. The millennial generation in particular like this approach as, for some odd reason, they seem to believe that they can be successful buying investments that by definition can never outperform the market. They also have no concerns about the fact that passive index products are unthinking entities which automatically buy every security in an index without giving any consideration to either the investment attributes of the index components or their valuations. What we find most odd is the apparent belief of millennials that wealth can be achieved without knowledge, interest or effort on their part.
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The Tinnerman Wealth Brief
Winter 2018
To be fair to millennials, they likely hold these views because they have never seen markets that are not being deliberately manipulated by interventionist central banks, as has been the case for the past 10 years. And also because so many of the industry players that have jumped on the passive investment bandwagon are promoting the fallacy that low fees are more important to one’s wealth than knowledge and expertise. We can forgive this misperception on the part of the millennials, but we cannot forgive the commentators and industry professionals who should know that everyone is not a winner, especially when markets are territory as today. Every time I see a television commercial or hear a market commentator infer wealth can be achieved without knowledge, interest or effort, I think of Nathan Mayer Rothschild (1777 – 1836) who said,
“It takes a great deal of boldness and a great deal of caution to make a great fortune: and when you have got it, it requires ten times as much wit to keep it”.
Advertisements for passive investment vehicles may not be aimed at the client families that we in the Tinnerman Wealth Group work with, but they do serve a useful purpose – as a kind of litmus test. The more inclined a member of our next generations is to believe the message of these ads (which is, that managing money is simply a “point and click” exercise), the less prepared they are to manage their own financial affairs. Or, heaven forbid, the wealth of their entire family. We have been managing family wealth for a long time and we can assure you that discovering that some members of our next generations are not strong on wealth matters is the norm. And it is
better recognized sooner than later because, notwithstanding a few exceptions, it takes a long time and a lot of effort to prepare our next generations to “take over the family – not take from the family”.
Instilling a strong financial acumen and developing a thoughtful wealth management strategy are critical elements in ensuring that your family wealth will span future generations – but they are only half of the equation. To be truly successful, future family wealth stewards also require emotional inheritance – the behind the scenes knowledge of the experiences, stories and thinking that were (and are) integral to the success of the family. As we have written on numerous occasions, the goal of the Tinnerman Wealth Group is to help our client families integrate these two elements into a cohesive plan that meets the needs of their next generations. It is neither straightforward nor easy, but we can assure you that the resources needed for success in this complex endeavour do exist. In my view, Heritage Planning provides the best path to such family wealth success, which is why I undertook earning the designation of
Heritage Design Professional.
We trust that you found this letter of interest and, as always, we close by asking that you do not hesitate to call us to explore any of the topics raised herein – we are always pleased to hear the thoughts and opinions of our clients. We also ask that you do not hesitate to give this letter to any friends, family members or acquaintances and invite them to also call us if they wish to discuss this letter and/or our perspectives on wealth management.
Sincerely,
Mark Tinnerman
Mark Tinnerman
Portfolio Manager
*Both Associate Portfolio Managers and Portfolio Managers can offer the BMO Nesbitt Burns Managed Portfolio Account to clients. For simplicity, we have used the term “Portfolio Manager”. Bank of Montreal or its affliates may act as a lender or provide other services to certain of the corporations mentioned herein and may receive remuneration for the same.
BMO Wealth Management is the brand name for a business group consisting of Bank of Montreal and certain of its affliates, including BMO Nesbitt Burns Inc., in providing wealth management products and services. ® “BMO (M-bar roundel symbol)” is a registered trade-mark of Bank of Montreal, used under licence. ® “Nesbitt Burns” is a registered trade-mark of BMO Nesbitt Burns Inc. BMO Nesbitt Burns Inc. is a wholly-owned subsidiary of Bank of Montreal. The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not refect those of BMO Nesbitt Burns Inc. (“BMO NBI”). Every effort has been made to ensure that the contents have been compiled or derived from sources believed to be reliable and contain information and opinions that are accurate and complete. Information may be available to BMO NBI or its affliates that is not refected herein. However, neither the author nor BMO NBI makes any representation or warranty, express or implied, in respect thereof, takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. This report is not to be construed as an offer to sell or a solicitation for or an offer to buy any securities. BMO NBI, its affliates and/or their respective offcers, directors or employees may from time to time acquire, hold or sell securities mentioned herein as principal or agent. BMO NBI will buy from or sell to customers securities of issuers mentioned herein on a principal basis. BMONBI, its affliates, offcers, directors or employees may have a long or short position in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. BMO NBI or its affliates may act as fnancial advisor and/or underwriter for the issuers mentioned herein and may receive remuneration for same. A signifcant lending relationship may exist between Bank of Montreal, or its affliates, and certain of the issuers mentioned herein. BMO NBI is a wholly owned subsidiary of Bank of Montreal. Any U.S. person wishing to effect transactions in any security discussed herein should do so through BMO Nesbitt Burns Corp. If you are already a client of BMO Nesbitt Burns, please contact your Investment Advisor for more information.
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