SFG Newsletter - June

4
Market Update Many of the same themes within the market over the past year have connued in the most recent quarter. Healthcare and Technology connue to lead while Energy and Ulies connue to lag. Due to the composions of the Canadian and American equity markets, significantly beer performance has been achievable in the United States. As a result of this, and more parcularly the factors leading to the connued divergence in equity market performance, the USD$ connues to trend favorably relave to the CDN$. Our Can-Am porolio is allocated accordingly. Energy Prices The big news, parcularly here at home, is a connuaon of low energy prices. This has had a negave effect on the Canadian economy, shown by major firms beginning to lay off staff in an aempt to cut costs. For the U.S., where energy producon is a significantly smaller component of the country's gross domesc product, low energy prices are boosng their economy as consumers have more discreonary income with lower gasoline prices. With the recent elecon of an NDP government in Alberta, low oil prices are not the only thing curtailing capital investment in our province. Businesses and investors alike are in the “wait and see” mode as a result of the uncertain outlook for the Alberta economy. Our contacts tell us that much of the capital investment, once desned for Alberta, is now going to Saskatchewan and Brish Columbia. The outlook for oil prices remains weak as meaningful improvement to the supply / demand equilibrium seems to be a long way off. On the demand side, Asian economic growth connues to decelerate, now that the physical build-out appears to be complete. Economic growth in the developed countries is anemic—at best. On the supply side, oil producon connues to grow. OPEC has stated they will be ramping up producon to maintain market share—generally viewed as in retaliaon to the “American Shale Revoluon”. Addionally, oil in storage has hit mul decade highs, liming any significant upside to crude oil prices. The full effect of lower energy prices on the Canadian economy is yet to be determined, but it appears to be extending well beyond the Alberta border and into many different industry groups. The days of $100 per barrel oil appear to be over. Can-Am Porolio Response We have connued to favor the U.S. market over the Canadian market as the domesc economy appears to be unraveling. Our highly refined stock selecon process has kept us out of the energy and ulity sectors and directed us into beer performing sectors which are very underrepresented in the Canadian market—Healthcare and Technology. (Connued on page 2) Inside the Issue Page 1 Market Update Page 2 Global Tensions Page 3 Oil Price Outlook Diversified American Growth Summary Page 4 Summer Survey Our Team Mike Seed First Vice–President and Porolio Manager (780) 970-5359 [email protected] Jack Seed First Vice-President and Investment Advisor (780) 970-5360 [email protected] Ken Gordon Investment Advisor (780) 970-5362 [email protected] Holly Chung Client Associate (780) 970-5363 [email protected] Keanan Boomer Financial Associate (780) 498-5048 [email protected] Relave Index Weight Good Sectors Strength TSX SPX Health Care 100% 2% 11% Technology 89% 3% 16% Consumer 78% 15% 23% Total - Good Sectors 19% 49% Relave Index Weight Bad Sectors Strength TSX SPX Ulies 0% 6% 5% Energy 11% 24% 8% Telecom 22% 2% 1% Total - Bad Sectors 32% 14% Manulife Place Suite 1780, 10180 101 St. Edmonton, AB T5J 3S4 seedfi[email protected]

Transcript of SFG Newsletter - June

Market Update

Many of the same themes within the market over the past year have continued in the most recent quarter. Healthcare and Technology continue to lead while Energy and Utilities continue to lag. Due to the compositions of the Canadian and American equity markets, significantly better performance has been achievable in the United States. As a result of this, and more particularly the factors leading to the continued divergence in equity market performance, the USD$ continues to trend favorably relative to the CDN$. Our Can-Am portfolio is allocated accordingly.

Energy Prices The big news, particularly here at home, is a continuation of low energy prices. This has had a negative effect on the Canadian economy, shown by major firms beginning to lay off staff in an attempt to cut costs. For the U.S., where energy production is a significantly smaller component of the country's gross domestic product, low energy prices are boosting their economy as consumers have more discretionary income with lower gasoline prices.

With the recent election of an NDP government in Alberta, low oil prices are not the only thing curtailing capital investment in our province. Businesses and investors alike are in the “wait and see” mode as a result of the uncertain outlook for the Alberta economy. Our contacts tell us that much of the capital investment, once destined for Alberta, is now going to Saskatchewan and British Columbia.

The outlook for oil prices remains weak as meaningful improvement to the supply / demand equilibrium seems to be a long way off. On the demand side, Asian economic growth continues to decelerate, now that the physical build-out appears to be complete. Economic growth in the developed countries is anemic—at best. On the supply side, oil production continues to grow. OPEC has stated they will be ramping up production to maintain market share—generally viewed as in retaliation to the “American Shale Revolution”. Additionally, oil in storage has hit multi decade highs, limiting any significant upside to crude oil prices. The full effect of lower energy prices on the Canadian economy is yet to be determined, but it appears to be extending well beyond the Alberta border and into many different industry groups. The days of $100 per barrel oil appear to be over.

Can-Am Portfolio Response We have continued to favor the U.S. market over the Canadian market as the domestic economy appears to be unraveling. Our highly refined stock selection process has kept us out of the energy and utility sectors and directed us into better performing sectors which are very underrepresented in the Canadian market—Healthcare and Technology.

(Continued on page 2)

Inside the Issue

Page 1

Market Update

Page 2

Global Tensions

Page 3

Oil Price Outlook

Diversified American

Growth

Summary

Page 4

Summer Survey

Our Team

Mike Seed First Vice–President and Portfolio Manager (780) 970-5359 [email protected]

Jack Seed First Vice-President and Investment Advisor (780) 970-5360 [email protected]

Ken Gordon Investment Advisor (780) 970-5362 [email protected]

Holly Chung Client Associate (780) 970-5363 [email protected]

Keanan Boomer Financial Associate (780) 498-5048 [email protected]

Relative Index Weight

Good Sectors Strength TSX SPX

Health Care 100% 2% 11%

Technology 89% 3% 16%

Consumer 78% 15% 23%

Total - Good Sectors 19% 49%

Relative Index Weight

Bad Sectors Strength TSX SPX

Utilities 0% 6% 5%

Energy 11% 24% 8%

Telecom 22% 2% 1%

Total - Bad Sectors 32% 14%

Manulife Place

Suite 1780, 10180 101 St.

Edmonton, AB T5J 3S4

[email protected]

Page 2

Canada—TSX Index

United States—S&P500 Index

Health Care Sector

Technology Sector

Energy Sector

Global Tensions

There are a number of global factors currently affecting various asset classes and economic sectors. We continue to see unrest in parts of Europe as well as the Middle East. Tensions continue to run high in the Euro-zone, as Greece fights to meet the terms of its bailout, which it needs in order to avoid a debt default. Sanctions applied to Russia after their invasion of the Ukraine have caused a rapid deterioration in the Russian economy. This has been compounded by low oil prices and an unwillingness from President Putin to have meaningful negotiations with his western counterparts. Also, ISIS continues to make threatening statements towards the United States and Canada, putting these governments on high alert. In addition to these issues, the markets have been adjusting for an interest increase by the U.S. Federal Reserve. Consensus seems to be forming around a 0.25% increase at the Fed’s September meeting.

Can-Am Portfolio Response Despite local and global disruptions, we continue to achieve strong portfolio performance through strict adherence to our continually evolving, highly disciplined portfolio management methodologies. We have implemented a number of very significant upgrades to our Can-Am management strategy over the past 6 months:

Style Diversification—through the implementation of four non-correlated equity

sub-strategies. Each strategy is well defined within its unique quantitative model and employs an embedded sell discipline to maintain continuous exposure to top-ranked companies across four diversified equity mandates.

Relative Strength—measures the trajectory angle of market-traded, investable

assets. We are currently tracking 1300 items in our Relative Strength (RS) Matrix universe, including stocks, preferred shares and various other asset classes such as bonds and commodities through the use of exchange traded funds. The universe is ranked daily, with the strongest trending item receiving a RS ranking of 100% and the weakest item receiving a ranking of 0%. The implementation of our RS scoring system is to ensure we continually maintain an overall portfolio ranking of 80%+. The theory behind employing RS is derived from Sir Isaac Newton’s First Law of Physics—”An object in motion remains in motion unless acted upon by an unbalanced force.” An investment performing better than the majority of options will likely to continue to do so—until it does not.

Dynamic Currency Allocation (NEW!)—While we have been very pleased with

the performance of our Can-Am equity mandate over the past several years, we knew we were leaving a lot of performance on the table as a result of the fixed allocation of only 15 American stocks within the 40 stock Can-Am mandate. Given that our Diversified American Growth mandate has compounded at 32+% annually for the past 3 years, elimination of the fixed Canadian / American allocation shackles has occurred. This required a complete rebuild of our tracking systems and block trading platform, but we are pleased to announce we have broken free from the restraints.

Currency Adjusted Relative Strength Matrix (NEW!)—With the

implementation of a dynamic currency allocation model, we needed to have a means to truly asses the slope trend of our RS universe in a common currency—the Loonie. Where historically, the RS Matrix compared the slope trend of all 1300 constituents in our universe daily, it did not take into account the +/- impact of the USD$/CDN$ slope trend in addition to that of the U.S. holdings themselves. By embedding the currency impact within all American items in the RS Matrix, we now have a well-defined methodology to guide us to an optimal allocation between American and Canadian holdings.

Dynamic Fixed Income Allocation (NEW!) - Our recently implemented Dynamic

Fixed Income Allocation methodology, as described in our last newsletter, allows us to

(Continued from page 1)

(Continued on page 3)

Utility Sector

continuously measure the health of the equity market in relation to bonds and cash. When bonds achieve a RS score of 70%+, we lower our equity allocation and get defensive. When this last occurred, in October 2014, we liquidated 30% of all client equity allocations and moved into bonds, temporarily, to weather the storms. For a traditional balanced portfolio with 60% equity and 40% fixed income, we quickly transitioned to 40% equity and 60% fixed income. If required, we would have continued to get more defensive.

RSQ Ranking (NEW!) - Our newly implemented RSQ ranking was designed to identify turning points. It combines Relative Strength,

as described above, with 3 additional shorter term measures designed to identify an unbalanced force, signaling the requirement for reallocation of portfolio holdings. The RSQ Ranking was specifically designed to get us into new strong trends and out of new weak trends quicker. “Trends” can be inferred to relate to individual stocks, stock sectors, stocks vs. bonds and currency allocation decisions.

Preemptive Inversion Defense (NEW!) - About 80% of the time, stocks with the

highest RS scores are the best daily performers. About 20% of the time, stocks with the worst RS are the best performers. Periodically, there are periods lasting 1-2 weeks where the best performing stocks are sold down and the worst performing stocks are bought up. We call this a Relative Strength Inversion. During a period of inversion, the worst performing stocks are not actually being bought. In a traditional sense, traders are typically covering short positions where the have profited on the stocks decline. But the effect is the same. During an inversion, money is coming out of stocks temporarily. Periods of inversion occur 2-4 time per year. Inversions typically occur after extended stretches of very strong performance by the top Relative Strength stocks. To preemptively defend our equity allocation from these periods of performance inversion, we have developed a methodology whereby we “flatten out” our typically concentrated sector allocations after periods of statistically significant out-performance relative to the overall market (benchmark). When we breach the upper threshold of relative performance, on a trailing 30 day basis, we take some profits from our big winners and diversify out into quantitatively “buy” ranked stocks within sectors the portfolio is underrepresented in.

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Oil Price Outlook & Economic Impact

Energy - Outlook We see the break points for the price of oil as $50 and $60. It is critical to note that the energy sector makes up a large portion of the TSX, so what hap-pens in the Alberta economy has far reaching affects on the rest of the country.

While these scenarios may have very different im-pacts on our local economy, our Can-Am model has the ability to adapt to all market circumstances as they unfold, and invest in assets that thrive in each particular market condition.

Price of Oil 2-4 Year

Probability Impact Commentary

Below $50 25%

Canadian Very Negative

Oil prices slide further and cause a number of potential problems in Alberta. Capital expenditures in this province will likely slow down or stop completely, combined with a sharp downturn in the real estate and job market.

American & World Positive

Between $50 and $60

50%

Canadian Slightly Negative

Continued uncertainty in the energy market, companies likely remain in a holding pattern. This would cause expenditures to slow but not stop all together, with more gradual downturns in real estate and employment.

American & World Slightly positive

Above $60 25%

Canadian Positive

A market showing resilience through this coming period would be constructive for the province as a whole. A rebound in prices could lead to fewer job cuts and stabilization of the Alberta economy.

American & World Neutral

Normal Day 80% Inversion Day 20%

Relative Daily Relative Daily

Strength Group Strength Group

Quintile Performance Quintile Performance

100% - 80% 0.51% 100% - 80% -0.21%

80% - 60% 0.33% 80% - 60% -0.03%

60% - 40% 0.15% 60% - 40% 0.15%

40% - 20% -0.03% 40% - 20% 0.33%

20% - 0% -0.21% 20% - 0% 0.51%

Summary

Investing is measured in very simple terms—what was the return achieved and what was the volatility incurred to achieve that return. Our investment methodology turns the idea of “safe investing” on its ear. The traditional Canadian favorite sectors (Banks, Energy, Utilities) have significantly lagged the overall market for many, many months. We have a number of new people coming in to learn about what we do that feel that their portfolio is “defensive” because of their current investment professionals “words of wisdom.” This is often a cover up for poor performance and a lack of investment management process. In our opinion, a stock itself cannot be described as “conservative”, only an investment strategy as a whole. Portfolio management methodology (or lack thereof) is what determines risk. The traditional methodology of “buying good companies and holding them for the long-term” results in large volatility and a coin toss as to what the long-term outcome will be.

We strongly believe that the employment of active, advanced methodologies to limit risk, preserve capital and foster predictable short and long-term portfolio returns is paramount to achieve the objectives we have placed upon ourselves. We are continually refining our wealth management disciplines as each day is a learning opportunity wasted if we do not. As each year passes and technology advances, traditional inactive methods of portfolio “management” are becoming obsolete—if they are not already.

1 Month 6 Month 1 Year 2 Year 3 Year

Seed Financial Group Diversified American Growth

5.53% 18.14% 38.76% 36.38% 32.49%

S&P500 Benchmark 4.38% 11.27% 28.56% 27.55% 27.36%

TSX Composite Index -1.22% 3.33% 5.80% 12.20% 12.58%

All performance shown in C$, net of management fees

Seed Financial Group—Diversified American Growth Our Diversified American Growth portfolio mandate has an exceptional track record of providing strong returns with limited volatility. It employs all of the strategies as our Can-Am mandate, except for dynamic currency allocation. While our outlook for American equities remains very favorable, there will come a time where Canadian equities become more attractive. Our strategy is to convert the Diversified American Growth portfolios to Can-Am portfolios at that time, providing a single equity solution for all environments.

Your Wealth Management Team

Mike Seed, First Vice-President and Portfolio Manager

With over 20 years experience in the investment and wealth management industry, Mike acts as the Seed Financial Group's portfolio strategist. Mike is responsible for the continual development of our proprietary portfolio methodologies and working with clients to develop an asset mix that meets their investment needs. Mike is responsible for the day-to-day management of our discretionary portfolios and making investment decisions with respect to the portfolios' holdings. Mike's independent research forms the foundation for the Seed Financial Group’s proven wealth management mandates. Mike is a registered portfolio manager.

Jack Seed, First Vice-President and Investment Advisor

As an Investment Advisor with over 50 years of experience in the Canadian investment industry, Jack specializes in offering comprehensive wealth management solutions to affluent individuals and business owners. Jack was a Branch Manager with another bank-owned firm for over 20 years, and has been leading Seed Financial Group since its creation in 1995. Jack holds the Fellowship of the Canadian Securities Institute (FCSI) designation, the highest honor awarded to professionals in the investment industry. The FCSI designation is exclusively limited to those who have demonstrated superior knowledge, education, experience and the highest degree of ethical standards.

Ken Gordon, Investment Advisor

Ken Gordon has over 25 years of quantitative investment experience having designed end-to-end systems from alpha generation to risk and performance attribution. He has been employed as a Director of Research, a Vice President of Quantitative Research, a Sector Analyst & Portfolio Manager, and most recently as a Capital Markets Project Manager.

Holly Chung, Client Associate

Holly brings 7 years of industry experience to Seed Financial Group. She provides professional and efficient administration for the team with exceptional attention to detail. She ensures that client requests are processed in a timely

manner. Throughout her career, she has honored her commitment to professional development with continuing education. She is currently pursuing her Certified Financial Planner (CFP) designation.

Keanan Boomer, Financial Associate

Keanan is the newest member of our team, bringing 5 years of industry experience. He brings with him a wide breadth of industry knowledge, and works predominantly on the facilitation of Seed Financial Group block trading, individual account restructuring, and provides assistance with the quantitative stock selection process. Keanan is currently working towards attaining the highly respected Chartered Financial Analyst (CFA) designation.

This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2014. CIBC Wood Gundy is a division of CIBC World Markets Inc., a subsidiary of CIBC and a Member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada. If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.

Client Survey - We value your opinion!

Ensuring that your are satisfied will all aspects of Seed Financial Group is our primary

objective. We will conduct a Client Audit to help identify ways to find out what you’re most

happy with, but more importantly, identify areas we need to focus more energy on. We will

review and analyze the results in complete confidence.

The process should take no more than 5 or 10 minutes and your responses will be

invaluable to our development. We’ll use this information to shape the service that we

offer and, where there is an interest or need, to provide you with more information on our

products and services. If you prefer to remain anonymous, indicate that in the final

question and your name will be removed.

Thank you in advance for your input and please feel free to call if you have any questions.