Trust, transparency and financial expertise are just a few important qualities an investor should look for when searching for the right individual to manage their wealth. In today’s marketplace, there is a significant difference among financial professionals that many investors are not aware of. There are those who have a fiduciary responsibility and those who do not.

In Canada, there are over 121,000 registered financial professionals. 97% of these professionals are referred to as “Financial Advisors.” However, only approximately 3% of those individuals are registered with a fiduciary duty to act in the best interests of the client. The remaining number of these financial professionals are registered as “dealing representatives,” which is simply a salesperson licensed to sell financial products.

So, what is a fiduciary responsibility?

A fiduciary responsibility is a legal obligation that entails trust, confidence, and requires an individual to strictly advise in the best interest of their clients. In the financial services industry, being a legal fiduciary holds the registered financial professional or team of professionals to a higher standard of accountability. Their job is to make money for the client, whereas “dealing representatives” are incentivized for the firm and for themselves.

Let’s clarify some industry job titles

There are a number of job titles among members in the financial services industry, and it’s not always clear to investors what these individuals are qualified to do.

  • 97% of registered financial professionals are Financial Advisors = BAD
  • 3% of registered professionals are Financial Advisers = GOOD

The term “Financial Advisor ” is an unregulated job title and frequently seen in large Canadian banks. This means anyone in a bank can have it, without requiring specialized qualifications. As a Financial Advisor, there’s no obligation to sell an investor a product that best suits their financial goals. In fact, there could be instances where a Financial Advisor sells some of the least beneficial products simply because it’s in their best interest, they produce a higher commission or they’re pressured to hit revenue targets.

As an investor, you may also see the job title Financial Adviser (notice the “e”). While sounding very similar, this position and the responsibilities involved are drastically different. A Financial Adviser refers to a registered financial professional who has a fiduciary duty to the end investor. As defined by the Ontario Securities Commission (OSC), the title of “Adviser” is a legal term under securities law that describes a person or company that is registered to give advice about securities, whereas an “Advisor” is not. One letter makes all the difference.

Another thing to keep in mind is that the term “Adviser” can be used interchangeably with the following job titles: Portfolio Manager, Investment Counsellor, Asset Manager, Investment Adviser, Investment Manager and Wealth Manager. All of these job titles have a legal duty to act with care, honesty and in the best interests of their clients. Before entering the investment industry, these individuals require the highest level of education and professional qualifications to ensure that they are best fit to advise clients on their financial investments.

The Benefits of Investing with an “Adviser”

There are a number of long-term benefits that come with investing with a legal fiduciary or “Adviser.” When you begin working with an Adviser, they will develop a written agreement – known as an Investment Policy Statement – to outline your specific investment goals. This foundational document is a reference point for the Adviser to select investments and make discretionary changes to your portfolio over time. Some additional benefits of working with an Advisor include:

  • Advisers are registered and regulated by provincial securities commissions. In Ontario, this governing body is referred to as the OSC
  • Advisers must meet specific financial reporting, capital and insurance requirements to protect a client’s investments and ensure full transparency
  • Advisers are not paid by commission or based on volume of buying or selling investments
  • Advisers have lower management fees compared to typical mutual fund management fees
  • When you invest with an Adviser, your money must reside within a custodian financial institution as an extra measure of protection and safety

Given the large number of registered financial professionals in Canada, it’s essential for investors to understand exactly who they are entrusting their life savings and investments with. In doing so, investors can be assured that they are receiving unbiased advice, honest guidance and the financial expertise required to meet their unique goals.

At Avenue Investments, we are an independent private wealth manager, trusted fiduciary and partner-owned firm that focuses on helping clients achieve financial stability over the long-term. We build trust and confidence by owning 100% of what our clients own. Being a legal fiduciary, our investment team is held to a higher standard of accountability and we deliver on this promise by cutting our management fees in half for our equity portfolios during down markets.

We’re fans of old-fashioned print newspapers in this office.

Each day rolls of them – usually plainly bound by an elastic band or carefully preserved in a pink plastic bag – are carried in from outside our building steps. Like clockwork, the coffee is poured, and screens are switched on as we settle down to begin reading the events of recent past, present, and foreshadows of the future. Similar to a framed photograph that evokes particular emotions or memories, we collect certain newspaper issues if there is something special to be remembered that day.

In reviewing our collection of the past year, we wanted to share a few front-page headlines that have stood out to us. These pages illustrate a story of the global stock market in 2020: beginning, middle, and end.


Feel free to click on the images for the original articles.

January 20, 2020

Last year started out with an optimistic tone with the January 2020 Barron’s Newsletter cover calling for Dow 30,000 later in the year.

March 13, 2020

By March 2020 the global spread of COVID-19 was wreaking havoc on the healthcare systems and financial markets.

March 19, 2020

By the end of March, the financial panic was reaching its nadir. Market participants were starting to lose hope and the outlook for the global economy was dark.

November 25, 2020

By the end of November, the stock market had fully recovered all of its earlier losses and the Dow finally crossed 30,000.

As if nothing ever happened.

Given what last year brought to investors, we thought it would be worthwhile to highlight the note that we sent out to clients at the depths of the financial panic last March. Although it did not feel good at the time, we knew that the market environment in March was presenting us a great opportunity.


Subject: Avenue Portfolio Update – March 12th 2020

Date: Thursday, March 12, 2020

Avenue Portfolio Update:

We are again in one of those handful of days, over the course of a career investing in the stock market, where it is appropriate to ask the question, “why do we do this to ourselves?”

In the simplest of terms, this is what we know about investing:

  • To compound our savings at a higher rate of return than with bonds, we must own stocks.
  • Two thirds of our long-term return come from the reinvesting of dividends.
  • We will have bad markets, and we know it is hard to guess in advance when these days will happen.

Avenue’s strategy is built to deal with these realities.  Avenue’s stock market strategy is built on doing our best to own high quality businesses that generate income streams, which either are paid out as dividends or are re-invested in the businesses we own. We focus our research on the quality of the income that the company generates so that we can live through stressful times in the market.  It is essential to not pay too much for these investments.

In a hot bull market, like this January, we position the portfolio defensively.  When presented with extreme negativity, we can add money to our favourite investments. Buying in a bad market, like today, is the hardest part of the strategy. We must override our natural human instinct to protect ourselves and take advantage of times like this.

The alternative strategy is to buy on the way up and sell before the market crashes. There is always a temptation to over-trade, and you must be right with your decisions all the time.  The problem is we know this is not a successful long-term investing strategy because it requires guessing, not investing.

There is a paradox in our style of long-term patient investing. We are required to constantly reinvest our dividends back into the same type of investments. The fact these businesses are even cheaper in today’s stock market correction is absolutely better for our long-term returns, but it feels terrible at the time we are doing it.

So how did we get here and what is Avenue doing about it?

What is so unprecedented is the speed and severity of this stock market decline. We have had two, what we now call ‘Black Swan’ events in a matter of weeks.  The coronavirus is shutting down business and travel events globally, and Saudi Arabia decided to abandon OPEC after 47 years and begin an oil price war with Russia.

This is the first real bear market test of how regular retail investors using index funds would react in the age of social media.  What we experienced today was that every single stock in the stock market went down across the board and there was no place to hide. Canada, Europe, the United States, and Emerging Markets have all faced the largest stock market declines in decades.

Avenue has always stressed that we go out of our way to try and find stability and consistency in the underlying cash flow and earnings of our investments. 

What we are focusing on today is continuing to increase the quality of our investments so that we come out of this bear market with a greater portfolio of businesses. We have been trading more than normal over the past few weeks as we work relentlessly on the risk-management of our investments, while also high-grading our investments where we find opportunities.

Our view is that we believe the stock market has diverged from representing the underlying long-term value of our investments. In today’s market, quality investments and assets are being disregarded and punished just as severely as the broader markets.

Although the weeks and months ahead will continue to be volatile times, we continue to focus on patiently investing in businesses that come to a price level where we are comfortable owning them for the long term.

When the dust settles, we still face an economic landscape of exceptionally low interest rates and we also expect large central bank and fiscal stimulus over the coming months.  Our conclusion remains, where we have a longer time horizon, stocks still present the best long-term investing opportunities.

For Avenue clients that are retired and drawing income from their portfolios, periods such as this are why we have always stressed the importance of balancing stock market investments with owning high quality government and corporate bonds to draw from in our bond portfolio.

Please reach out to the Avenue team at any time with your questions and concerns as we continue to work hard through these volatile times.

Sincerely,

Your Avenue Team

The economy is doing so poorly, so why are financial markets going up?

Over the course of 2020, the global economy has been forced to move through the throes of the COVID-19 pandemic. Combined with fears of a contested U.S. presidential election, social justice unrest worldwide and a new work-from-home environment, investor behaviour and the economy at large has been impacted in more ways than one.

Right now, there’s a bit of a disconnect in the current environment. Unemployment rates are depressionary, small businesses are closing and the underlying economy is performing poorly, yet the stock market continues to rise. In order to properly navigate this environment, it’s essential to understand what is actually taking place.

So, why do markets continue to rise? There’s a handful of reasons for this:

1. The transfer of wealth from small businesses to big corporations

Throughout the pandemic, there has been a real transfer of wealth from small business owners and sole proprietors to big corporations. Lockdown restrictions were felt most by the mom and pop shops, pizzerias and cafes, while the big guys like Wal-Mart, Loblaws and Amazon were able to stay open and continue selling goods and services – making them the net beneficiaries of this pandemic. As such, big corporations in many sectors of the economy have gained more than they’ve lost during this time.

2. Interest rates have been suppressed, forcing people into the stock market. 

Interest rates have hit historic lows, making it nearly impossible to get a rational rate of return in the bond market. If you’re a bond investor, you’re likely losing money in this environment because real rates are negative (real rates = the nominal interest rate minus inflation and taxes). Therefore, bond investors have been forced to enter the stock market to seek a rate of return.

3. Increased government monetary and fiscal stimulus.

In an effort to protect the economy against a depression, governments globally have poured trillions of dollars into the financial system through various monetary and fiscal stimulus programs and relief packages. For example, in Canada, the government is providing basic income to keep people afloat through Canada Emergency Response Benefit (CERB).

As well, central banks in North America are purchasing bonds and mortgage liabilities from institutions so they can inject liquidity into the system. This has resulted in significant interest rate drops throughout the year, while driving asset prices up.

4. Retail investor stock mania.

Lockdown restrictions have forced many people to remain at home, unable to travel and with extra money in their pocket. With market noise and headlines going awry, people are chasing the U.S. equity bull market driven by excess liquidity and momentum in the technology sector. The digital direct investing options of today have made it extremely easy for new investors to enter the stock market with fractional share ownership – a new phenomenon that allows retail investors to purchase small pieces of big companies online.

Taken as a whole, the liquidity and momentum in the stock market has made retail investors want to jump without realizing what they’re actually buying and the price they’re paying for their assets. The price you pay for assets is relevant, it’s just not relevant right now due to a lack of education among investors. 

The technology and renewables sector are hot and extremely expensive in the current environment. The stock price movement we are currently seeing is based on short-term market noise and impatience among investors, rather than fundamental changes within a company’s earnings results. At the end of the day, although markets continue to rise, double-digit returns will always draw back to the mean over time.

We have been getting lots of questions about how our investments are faring in the face of this historic market decline. We have attempted to lay out our comments in a question and answer format. And please continue to reach out to our Avenue team at anytime with your questions and concerns.  

Q:  What exactly is happening in financial markets?

This has been the largest flight-to-cash in economic history given the unprecedented nature of the global economic shutdown we are witnessing to confront the spread of the virus. 

There has been a particularly strong demand for U.S. cash because of the trillions of global debts denominated in US dollars. Individuals, companies, and governments need cash now to cover expenses while the economy remains shut down. These entities will be starved of revenue as long as the economy remains shut down and this will create issues servicing their debts.

80% of global payments are conducted in US dollars even though the US economy reflects less than 20% of the global economy. 

The virus continues to be highly contagious, and we are only beginning to grasp the scale of transmission in Western populations in the last week.  To state the obvious, the capitalistic system isn’t designed to be shut down like this, in an abrupt manner.

In the past two weeks we witnessed significant deleveraging from the unwinding of certain leveraged financial products. This action hurt the sectors that are more often held by retail investors including financials, real estate investment trusts, and utilities.

We view this selling pressure as the unwinding of leveraged market players which is a temporary action and we are comfortable with the stocks we currently own in the real estate and utilities sectors. Avenue continues to be very underweight in our exposure to Canadian and U.S. financials which we expect to remain under significant pressure.

Q:  What has Avenue done leading up to today?

We entered this period of market uncertainty with a very defensive portfolio.  We felt we needed to protect ourselves from stretched valuations and from a U.S. equity bubble being created by an accommodative Federal Reserve. 

Keeping track of the proportionality of the numbers is straight forward when you look at the Dow Jones Industrial Average, because it started at a round number.  The Dow Jones has fallen from just shy of 30,0000 in February to a low on Monday of 18,500, losing over a 1/3rd of its value.  The Dow has rebounded over the last three days to just under 22,000. The TSX fell by roughly a 1/3rd as well during this month.  

Since the end of 2019 we have repositioned Avenue’s portfolio having sold and bought over 40% of the current holdings since January 2020.

  • 16% of holdings were repositioned from January 6th to February 4th to protect the portfolio from overvaluation and to lock-in profits on certain investments.
  • 14% of holdings were repositioned from February 24th to March 11th, given the evolving market backdrop and uncertainty around the virus.
  • 11% of holding were transitioned between March 12th to March 19th using risk management, selling positions that we viewed as non-core and adding to more favourable investments. 

The transactions are a function of our active risk management as we reposition the portfolio and upgrade our assets while everything in the market is on sale.

We expect that in time our portfolio turnover will decrease significantly.

Q: What do we expect the market to do going forward?

The low in a stock market panic usually coincides with maximum uncertainty and a period of forced liquidation of market participants. If in three weeks the economy is terrible, but we can understand where we will be in September, then we likely have seen the low in the market. 

But, if in three weeks the economy continues to deteriorate and there is no clarity on the outlook, we could have further weakness in stock markets around the world.

Importantly, we are now getting further policy action on a few key issues:

The US Federal Reserve has described its monetary policy stance as willing to provide an ‘infinite’ amount of cash. The US treasury market, which is one of the most important and liquid markets in the world was acting dysfunctionally last week. It has since improved given the policy intervention from the Federal Reserve. 

The Federal Reserve increased their balance sheet by over $1 trillion dollars over the past 3 weeks. A staggering sum.

Additionally, a US fiscal spending bill worth $2 trillion is in the final stages of voting in the Congress. This will put money into the hands of individuals to keep them solvent during this economic shutdown. 

This is what we once described as “Helicopter Money” only a few months ago.

Yesterday morning the US unemployment benefits added 3.3 million people in one week, which is a record. Our view is that the numbers in future weeks will be significantly higher.

Canada has taken similar action on monetary and fiscal policy and government unemployment protection. We also believe there will be relief from rent and bank loans for the next few months. 

Historically, the markets have recovered in an average time period of 6 months to 2 years and previous crisis situations have represented great long-term buying opportunities for quality assets.

Q: What is Avenue’s equity strategy going forward?

As of today, we have approximately 55% of the portfolio in cash, gold, high quality mortgage corporations, real estate and utilities. Over half the portfolio is generating significant income to be reinvested into the portfolio during this volatile period.

We will continue to be patiently buying as we go through this steep market correction.  We are focused on the highest quality large businesses, with a tendency for owning hard assets where we can find them. 

Earlier this week we bought back Bell Canada, added to Enbridge and Brookfield Asset Management, and made an initial investment in Kirkland Lake Gold and Inter Rent Apartment REIT.

Our plan is to maintain a minimum cash buffer as insurance given that the length of the economic shutdown is still unknown. 

Q: Are any of our portfolio investments at risk of insolvency?

This is by far the most important question and why we have been working around the clock for the last few weeks. We believe all the businesses we have invested in have a defensive and or essential nature to them.  As we regularly discuss, we prefer hard tangible assets that produce consistent income streams. 

We continue to ask ourselves, are our dividends likely to get cut and do any companies have too much debt.  Given our repositioning, we think we are in good shape to weather this storm and emerge stronger.

Avenue focuses our research on the profitability and consistency of a business.  It just so happens that many of these types of businesses pay a dividend.  So far, we do believe almost all our dividends will be maintained. Historically, it has been very rare for the Avenue portfolio’s underlying companies to experience dividend cuts.

There will be weakness in Canadian banks and for this reason we have a much smaller exposure to the banks than usual.  We believe the government will provide a backstop for bank loans, but it could still get messy.  We are hoping we might get a chance to add to our holdings at a much lower price.

Q: What has been happening with the bond portfolio? 

Avenue’s bond portfolio has investments in corporate bonds and a few publicly traded mortgage corporations and real estate companies. 

In extreme market declines we know there is always a potential that the bond market will freeze up because of illiquidity and the lack of bond trading desks willing to take on bond inventory. 

Whenever we make these corporate bond investments, we know the company will be solvent and we will mature the bond and collect our coupon income. Our bond portfolio is not a trading strategy. 

The bond portfolio was very defensively positioned for the last 6 months waiting for an opportunity to buy corporate bonds. But as of today, we have not seen anything that offers compelling value.    

Liquidity in the bond market is in the process of being restored by central banks and the majority of the portfolio is of very high credit quality with much shorter maturities than the broader bond index.

Q: Are financial markets telling us anything about the timeline of the virus? 

This really is the only question that matters, and we don’t believe anyone knows the answer at this point.  South Korea and Italy are quite geographically contained spaces when compared to the size of the United States and Canada.  

Our best estimate is that the economy is back up and running in May or by the latest the summer months, but we expect travel restrictions will continue for some time.

Q: Where will we be in six months to a year?

We truly hope we will know how our healthcare system can handle a new highly infectious seasonal virus over the coming weeks. As in 2008, today’s rush to US cash is being solved by printing money. The policy makers have been much quicker to respond this time around. There is a staggering amount of money being printed. 

We started the year with an outlook that for the next decade we need to make sure we own hard assets and essential businesses that can generate consistent income.  After the markets are settled down this will be more important than ever. 

It is understandable that businesses that need cash now must raise it where they can. However, all those people who feel safer with cash under their mattress are at real risk of a significant devaluation in the purchasing power of paper money because of the actions of central banks.

Q:  Why would I ever own a Canadian oil stock? 

We believe Saudi Arabia’s decision to abandon supply restrictions after 47 years had a lot to do with trying to hurt the U.S. shale oil producers. This will have a significant knock-on effect on the high-yield corporate bond market.  About 20% of the US corporate bond market is energy related.

We believe the Saudis are taking advantage of the extreme demand destruction to use market forces to get the US to stop drilling oil on such a large scale.  We have seen estimates this week that there might be 8-10 million barrels a day less demand when global supply is still running at 100 million barrels. 

In this situation we will only own one stock which is Canadian Natural Resources.  Their oil production is very low-cost, the oil sands can operate for fifty years without declining and their debt is manageable.

Q: Are gold stocks no longer a hedge?

We believe in investing in gold stocks as opposed to just owning the metal.  If we own a good mining business, we will have more gold in the future than we do today. We are very selective with the gold companies we own.

However, in the short term where investors value cash above everything else, gold stocks become just another stock on the stock market.  We are now writing this note on the other side of last week’s panic and gold share prices have already rebounded dramatically.  Gold fits into our overall theme of wanting to own hard assets.