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A Case Study On: Cannabis and Bitcoin Mania

A new investment mania is always just around the corner. All you need are the right ingredients of hope, unquantifiable potential and greed. Cannabis stocks and Bitcoin qualify for this distinction as we observe them both dominating the headlines. So, we thought we would take this quarter’s Case Study to discuss why a speculative craze does not fit with Avenue’s strategy of investing in consistent and profitable businesses.

Q4 2017 Letter

2017 was a challenging year for bond investors as interest rates rose in Canada. That challenge contrasted with what was a decent year for Avenue’s equity portfolio where the return was roughly in line with our expectations. However, within the portfolio there were certainly plenty of variables which we will discuss in this quarter’s letter. Also, we would like to reaffirm how Avenue’s portfolio strategy is always looking to lower risk given our view that there are now parts of the stock market that we would describe as overvalued.

A Case Study On: Compounding with Bond Investments

Compounding investment savings using bonds requires a grasp of a few simple concepts. However, it is amazing how complicated the financial industry makes it sound. What tends to get lost in the noise of interest rates going up and bond prices going down is the far more important result that bond interest and maturities can be reinvested at a higher rate.

Q3 2017 Letter

Avenue’s fixed income and equity portfolios historically have little turnover of the individual securities from year to year and 2017 has been no exception. However, this year has been notable in terms of big moves in interest rates, the Canadian dollar and many stock market sectors and individual stocks. In this quarter’s letter we would like to discuss where our portfolios stand in relation to these many moves.

The Internet Bubble 2.0, The Disruption of Everything

The stock market of 2017 is starting to feel a lot like 1997. It is now a full 20 years after the first stock market internet bubble. The peak of that market phenomena was in 2000, but it was two and half years earlier when the market started to differentiate between those businesses who used this new phenomenon called the internet which could attract millions of ‘eyeballs’ and those businesses who did not. The world was never going to be the same. Owning your Mum and Dad’s stocks was as sexy as wearing a one-piece wool bathing suit.

Q2 2017 Letter

The Avenue Bond portfolio is up 1.3% for the first half of 2017 as the expectation of higher inflation and a sell-off in the bond market has not materialized. The Avenue Equity portfolio is up 1.0% for the first half of 2017. While we have not had a market pull back this year, after a good performance in 2016, the type of income producing stocks that Avenue invests in seem stalled as investors’ attention remains on technology and more specifically disruptive technology companies.

Q1 2017 Letter

In this quarter’s letter, we would like to review Avenue’s bond portfolio strategy and performance. We will then give an update on why Avenue’s equity strategy is well suited to approaching today’s investment uncertainties. We will conclude with our view on current stock market valuation, given this has been the focus of many client questions over the last few weeks.

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A Case Study On: Avenue’s Equity Strategy vs. An Index

Why should one invest with Avenue as opposed to an index and why does Avenue not use index funds to gain exposure to some harder to invest in sectors?

Q4 2016 Letter

Politics and subsequent government policy normally affect the level of interest rates, the economy and the stock market gradually, over time. However, the election of Donald Trump as president of the United Sates is a rare exception where market perceptions dramatically changed overnight. In this quarter’s letter, we will discuss what are the most likely US government policy changes and the potential positive impacts on our Avenue Fixed Income and Equity portfolios going into 2017.

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A Case Study On: Politics & Investments

Usually politics grabs the news headlines but does not have much effect on investments. Profit margin cycles and the direction of interest rates evolve gradually over decades and are the real long term drivers of investment returns, unless you experience a dramatic and sustained political interference. So while US politics dominates our news cycle and we would argue that the current US election would have some negative consequences from either candidate, it is important to look beyond this noise and fully grasp how intrusive and stifling domestic politics has become.

Q3 2016 Letter

The last three months have seen the continuing trend of gradually rising interest rates in both Canada and the US. In this quarter’s letter we will elaborate on Avenue’s bond portfolio strategy where the majority of our investments are in shorter maturity Canadian corporate bonds.

A Case Study On: Bryden’s trip to Omaha

The annual proxy season can be a tedious time for money managers as public companies send out their annual reports and proxy materials. Tedious as it is, proxy season is an important time of year, when shareholders are given the opportunity to vote for board members, management compensation, as well as other corporate matters. However, aside from the occasional contentious vote, usually the general consensus towards proxy season amongst investment managers is a collective yawn.

Q2 2016 Letter

We are experiencing a continuous stream of crises, with the latest being Brexit. The results from all these events (the Greek debt, the slowing Chinese economy and Brazilian corruption) are causing ongoing pressures to lower inflation and subdue growth, which hold down interest rates to very low yields. The world is awash in surplus money that needs to go somewhere and any income generating business, asset or higher yielding bond should become increasingly valuable. However, as investors we will always have to live with short term volatility.

A Case Study On: Higher Taxes

Tax rates are going up in Canada for the wealthy and the moderately wealthy. This has a significant impact on after-tax investment return when Avenue does retirement projections for many of our clients. It is an obvious statement but one we haven’t had to formally address because for the most part the previous federal conservative government had spent the last ten years lowering various tax rates. This is important because we need to make sure we use realistic expectations for planning retirement income.

Q1 2016 Letter

In the first three months of 2016 we experienced a dramatic stock market sell-off followed by a rapid recovery. At Avenue, we have argued that along with low interest rates, and higher stock market valuations, comes increased volatility. Just a small change in investor perception of the future can trigger a pronounced stock market move in either direction. An important part of Avenue’s investment strategy is to be ready for the unexpected and to take advantage of it.

A Case Study On: A Liquidity Crisis

A very real challenge we face is a lack of liquidity in both the bond and stock market for smaller investments. We see three reasons for this liquidity crisis; two are global issues and one is unique to Canada.

Q4 2015 Letter

2015 was a hard and stressful year. At times it felt like mini-crisis after mini-crisis. By year-end, Avenue’s bond portfolio was up a bit and Avenue’s equity portfolio was down slightly. Low interest rates continue to be a challenge for returns in the Bond portfolio. However, the equity portfolio is faced with multiple challenges from currency, from commodities, and from investors’ perceptions of the future direction of interest rates. On the positive side, the high yielding stock investments that we favour are now at decent valuations and we believe they should offer better returns this coming year.

Case Study On Why Preferred Shares are not Bond Substitutes

This month’s topic, in light of a market sell-off, is about sticking to our strategy when faced with adversity. Again we feel Mr. Bruce Lee is spot on in his Zen approach to conflict, which can also be applied to the mental challenge of stock market investing.

Q3 2015 Letter

We have spent the last three quarterly letters saying that not much has changed. Now, almost every corporate bond, stock and asset is being repriced and the rate of change or volatility is up significantly. We believe this environment to be another symptom of low interest rate policies. However, this current sell-off improves our opportunities to invest in quality income-producing securities, which is Avenue’s core investment strategy.

A Case Study On: Bond ETF Illiquidity

That we are even talking about this kind of truly esoteric ‘systemic risk’ shows how far markets have progressed since the 2008 financial crisis. We will do our best to explain what this risk is and why it is a hot topic. But first we will start with a few definitions.

Q2 2015 Letter

The main financial event in the second quarter was the rise of short term interest rates. As a result, the price of bonds fell but this did not result in a stock market selloff. Therefore, not much has changed since we last wrote three months ago and the equity portfolio has been unusually stable. There are two popular concerns that we would like to address in this quarter’s letter: the risk to corporate profit margins and the danger of illiquidity in some markets.

A Case Study On: The Stability of Stock Market Returns

Warren Buffett has been one of the most successful investors of our time. He is equally good at distilling complicated investment concepts and explaining them in a way that is accessible to everyone. In this year’s Berkshire Hathaway annual report, he presents a clear and simple argument for long term stock investments being more stable and less risky than long term bond investments.

Q1 2015 Letter

There is no dramatic difference between the strength of the US economy and that of a core European economy like Germany. However, ultra-low interest rates are magnifying the subtle differences and we are now seeing a large flow of money from Euros to the US dollar as well as the continued rise of asset prices. Avenue has started to incrementally move investments back to Canada.

Q4 2014 Letter

We continue to believe that there are few better substitutes for our investable savings than owning quality stocks for growth and certain selective bonds for income and safety. Again, we witnessed two rapid recoveries in the stock market following volatility in October and December. Moreover, corporate share buybacks and acquisitions reinforced the dynamics of the equity bull market. However, potential big risks to North American equity investors are a potential rise in wage inflation and increased geopolitical unrest.

A Case Study On: Oil Pricing

Avenue believes that with time, the price of oil should recover to the $75 to $80 price level. However, lower prices might be needed in the short term to reduce the excess supply from the global oil market.

Q4 2013 Letter

Avenue Investment Management has now been looking after client money for 10 years. In this quarter’s letter we will revisit our original purpose and discuss our present challenges. This will be followed by our usual discussion of the current investment climate and how we are positioning our investments for 2014.

A Case Study On: Equity Portfolio Volatility

We have written about Avenue’s theory regarding equity portfolio volatility, or risk, over the last 10 years in several case studies. Now that we have completed our first decade, we are happy to share with you that the results were much better than what we had hoped for.

A Case Study On: Avenue vs. The Index

Avenue’s Equity Portfolio is designed to accomplish consistent compounding in a diversified mix of assets and not simply to replicate or beat an index. The fundamental reason for creating a portfolio this way is to drive down the overall risk or volatility as it is called in the financial industry. We address this issue occasionally in this part of the letter because there are times that our portfolio does not reflect what is happening in the broad market indexes and we get questions as to why this is the case.

Q3 2013 Letter

Avenue Investment Management has now been looking after client money for 10 years. In this quarter’s letter we will revisit our original purpose and discuss our present challenges. This will be followed by our usual discussion of the current investment climate and how we are positioning our investments for 2014.

A Case Study On: Profitability vs. Growth

We are at a unique point in time that clearly demonstrates a universal investment fallacy where growth in Gross Domestic Product (GDP) will somehow translate to positive stock market returns. The performance of the Chinese stock market clearly exposes how simplistic this assumption is in reality.

Q2 2013 Letter

It is our belief that the American stimulative monetary policy will be coming to an end. We are witnessing an active realignment of bond and stock prices. We will do our best to describe how this impacts the various parts of our portfolio and how this creates an opportunity for additional investments.

A Case Study On: Safety (Owning Good Assets In Good Places)

We would like to share a couple of recent developments which confirm our belief that investing Safely in today’s world is best served by owning a hard asset or business in a sound legal jurisdiction.

Q1 2013 Letter

In this letter, we discuss various topics regarding the Fed, the Canadian economy, and our thoughts on gold.