September 2016

Cidel Asset Management Inc. manages the Toron AMI Balanced Strategy.

Toron AMI’s Balanced Portfolio fund is designed for a broad range of investors as a complete
portfolio solution. Investors benefit from access to the firm’s multiple investment strategies in one
balanced investment. Read the Fact Sheet for a full overview of this strategy.

For information about performance, view this summary from the eVestment Database.


Note: Toron AMI and Benchmark performance is gross of applicable management fees.

August 2016

Over the course of July, equities shrugged off their Brexit inspired swoon, with the MSCI World Index gaining just over 4%, largely upon the perception that central banks would act to offset any economic impact of the UK decision. The Canadian dollar fell modestly against its US counterpart, and the yield on the US 30-year treasury fell 10 basis points.

While it is generally accepted that the various programs of Quantitative Easing (QE) – injecting cash into the economy by buying bonds – carried out by Central Banks have been successful in terms of supporting the economy, it’s also apparent that they haven’t delivered the boost to growth and inflation some of their more enthusiastic advocates hoped for. Likewise, the move to impose negative interest rates seems to some extent to have been counterproductive thus far, due to the negative impact on commercial bank profitability. Obviously believers in the maxim “if at first you don’t succeed”, many opinion leaders are now advocating even more out-of-the-box policies- particularly the concept of ‘helicopter money’.

While it creates a fantastic mental image, helicopter money is actually a metaphor put forward by economist Milton Friedman and popularised in a 2002 speech by Ben Bernanke when he was a Fed Governor. The basic concept is that if the central bank created money and gave it to the government, which in turn used it to invest in infrastructure, say, or cut taxes, the resulting boost to aggregate demand in the economy would stimulate growth. While this sounds in effect the same as QE, there is a crucial difference. In a QE program, the central bank is exchanging one asset (cash) for another (bonds issued by the government). The government still has to repay those bonds, albeit now to the central bank rather than the previous private sector holder. While the mechanics could take several forms, a program of helicopter money would effectively supply fresh cash to the economy but with no corresponding government liability. From the perspective of the private sector, QE leaves their net assets the same but alters the mix; helicopter money on the other hand serves to increase their net assets.

On paper this sounds like a good idea- public spending and a boost to people’s incomes should have a stronger direct economic impact than relying on some spill over from higher asset prices arising from QE. Likewise the absence of incremental government borrowing reduces the risk of upward pressure on interest rates. However as is always the case there are a number of significant potential pitfalls (setting aside questions of the legality of such action). The credibility of central banks lies to a large degree on their independence from the government, and a perception that they are in reality subject to political influence could therefore threaten the effectiveness of future actions. Short term success in stimulating the economy could also take government focus off attempts to enact more difficult longer term reforms. Finally, the achievable boost to demand is debatable if any increase in household income is perceived to be one-off in nature- for this reason spending on infrastructure and so forth is preferable to a one off transfer payment to members of the public.

Overall it is likely that the risks to central bank credibility will prevent a wholehearted adoption of helicopter money. Certainly the Bank of Japan, considered by some the most likely candidate to put it into practice, recently disappointed markets with their failure to do so. That said the temptation is there and will intensify should the current underwhelming growth trends persist. Overall we return to the sentiment expressed in last month’s note- the importance of selectively investing in companies with underlying business characteristics that give them control over their own destinies.

Click here to read a Wealth Professional article on the global appeal of Canadian telecoms, featuring our portfolio manager Rob Spafford.

Click here to watch Karl Berger on BNN’s ‘The Close.’

Click here to read this Canadian Business magazine about investing in a low interest rate environment, featuring our Chief Investment Officer Arthur Heinmaa.

July 2016

For the quarter ended June 30th, equity markets returns were up slightly from the previous quarter and are now positive for the year. Year to date, the S&P returned 3.28%, the MSCI 0.12%, the TSX 9.8% and bonds 4%.  Of course the big news was the result of the Brexit vote and the stunning decision by the citizens of the UK to leave the European Union. This result continues to reverberate across financial markets with equity markets almost recovering their losses following the vote. In contrast however, the global bond markets have not returned to their pre-Brexit levels. This month we will look at what this decline in yields might mean for the economy and investors.

Thirty years ago interest rates stood at over 15% and many people were losing their homes because they were unable to afford the higher mortgage payments due to increasing mortgage rates. Never in their wildest dreams did anyone expect to see today’s 10-year Canadian bond rates at 1% and 30 year bond rates at 1.60%. In the week after the Brexit vote long term (30 year) yields dropped by 0.45%, an amazing move in the bond market, and they remain at those low levels. What is implied by these interest rates?

The first implication of these low rates is that global growth will remain muted. The economy will stumble along, but it is unlikely that we will return to the 3% growth rates of the past. Low interest rates over the past 8 years have encouraged companies and individuals to spend/consume today, essentially bringing forward consumption from the future to today. The direct consequence of that policy is to dampen demand in the future. Anyone who really had an intention to spend or expand has already done so, and hence lower demand lies ahead. Lower demand will translate into anemic growth.

The second implication is that inflation is expected to remain low. Many market observers forecast increasing inflation rates as both the Fed and European Central Bank embarked on quantitative easing and central bank balance sheets expanded. This has not proven to be the case, and indeed the market is now forecasting that the first interest rate increase will now take place no earlier than 2019.  Without sufficient demand the economy will fall chronically short of potential, resulting in little or no inflation. Therefore, we shouldn’t expect inflation to push interest rates higher.

The third implication, which is actually more of a question, is why the government is not spending on needed infrastructure projects. Adjusting for inflation, long-term Canadian and US interest rates, i.e. the borrowing cost for the government, are at or below zero. In many other countries interest rates are below zero even before inflation adjustments. It would be reasonable to assume that there should be some infrastructure investments that would produce a benefit that is greater than zero. As most of us would agree, public transportation would be high on the list, as would road repairs. Unfortunately however, there seems to be little will for governments to spend money – even at these low interest rates.   Until that changes don’t expect the growth picture to change.

In this low growth environment it is more important than ever to be selective about the securities you purchase because tepid economic growth will not bail out a struggling company, and indeed it will serve to exacerbate the financial implications of corporate mistakes.

Arthur Heinmaa, CFA
CEO, Cidel Asset Management
Chief Investment Officer


Click here to see Karl Berger on Bloomberg TV, discussing investing in global markets.

CEO Craig Rimer is featured in this Wealth Professional article. Click here to read about what sets Cidel apart from the ‘Big Five’ Canadian banks.

June 2016

In a huge surprise, the UK voted to leave the European Union.  This decision immediately reverberated through global financial markets with Sterling dropping over 10% versus the US dollar, dropping to a 31 year low, equity markets declining over 5% and the 30 year bond rising 4%.   To put things in perspective, the Dow Jones Industrials were up 500 points in the previous 5 days and are expected to lose 500 points at today’s opening.  Where financial markets will settle is still unknown but we wanted to share some of our initial thoughts on this historic day.

1. Is this the beginning of another financial crisis?

This is not another Lehman.  The voting results surprised yesterday’s consensus, resulting in dramatic short term moves in the market but this decision in no way undermines the financial system.   The banking system today is better capitalized and less leveraged than at any time in recent memory.   This vote is not the same as the financial crisis of 2008.  Investors should not liquidate their portfolios thinking that we are on the brink of a financial collapse.   What we have experienced is a global repricing of financial assets based on the prospects for lower growth in the future.

2. What are the key things to consider?

In our view there are three important features of this vote to consider.  First, the vote is clearly a vote against the establishment.  Almost universally economists, business leaders and academics supported and campaigned for the remain side.  Despite the reasoned, logical arguments put forth by the remain side, voters rejected those arguments and instead sided with the populist anti-immigration anti-Europe leave campaign.  Indeed those cheering the results are none other than Donald Trump, Marie  Le Pen and Frauke Pettry (Alternative for Germany) all of whom are campaigning as the anti-establishment candidates in their countries.

Second, there was a dramatic split between the young (under 35) and the old (over 60) with the young voting almost 75% in favour of remaining in the EU and an equally large portion of the older population voting to leave.  In the abstract this result is disheartening because the younger population will have to live with a decision that they clearly did not want.   Only time will tell if this decision lingers in the minds of younger voters when it comes time to make decisions on pensions and healthcare for retirees.

Third, there was a large split in the vote between the large urban areas and the rural areas.   London, Edinburgh, Liverpool and  Manchester all voted to stay with the bulk of the smaller regions voting to leave.  The polarization of voting was remarkable and we think it is an indication of how the smaller regions believe that they have been bypassed in this new era of globalization.

This pattern of voting is not unique to the UK.   It is likely that we will see a similar pattern in Spain on June 26th and in the US this fall.  This polarization between the young and old, urban and rural and the establishment and populists will only increase political uncertainty in any future election.   All of which will make it riskier for corporations to make longer term capital commitments.

3. What are the consequences for the economy?

Overall we should expect lower growth in the future.   In times of market turbulence we regularly look at what is happening in the fixed income markets to validate or refute what is happening in equity markets.   The US long bond dropped from a yield of 2.56% to 2.39% in the space of a few hours.   It might seem like a minor move but in fixed income markets this move is nothing short of remarkable.  It is a clear indication that the expectation will be for lower growth and lower rates for a longer period of time.

The reasons for lower growth are straightforward and both are rooted in the uncertainty surrounding the timing, terms and conditions of the UK exiting the euro.  Corporations in Europe or doing business in Europe will be more cautious and will delay or slow investment in that region until the terms of business are clear.   Given the size of the European economy this will have an impact on the prospects for global growth.

For the individual, particularly in Europe, our suspicion is that they will be more risk averse and accumulate savings rather than spending or investing.  This situation will act as a brake on growth and might drive interest rates even lower throughout the European area and the rest of the developed world.

4. Should I adjust my portfolio?

The answer is no.  The instinct to run to cash is always powerful in times of uncertainty and it is important to fight that sentiment and stick to a disciplined plan.   Rarely do short term emotional decisions work out well.   One can’t trade on yesterday’s prices so the decisions must be based on what the prices are today and more importantly what they might be in the future.  Hence, the important activity will be to incorporate this new reality into our valuation models and make appropriate changes to holdings and asset allocations if required.

The past 24 hours have been unlike anything we have seen since the UK withdrew from the European Exchange Rate Mechanism (ERM).    We will continue to monitor markets and will make changes to your portfolios only if it is warranted by valuation concerns and not emotion.

Please feel free to contact your Cidel Consultant if you have any other questions.

Arthur Heinmaa
Chief Investment Officer, Asset Management

Click here to watch Karl Berger on BNN’s “The Street.”

Charles Lannon was interviewed by the Financial Post. Click here to read about our view on the current bull market, and some of the holdings in our Global Equity mandate.

Portfolio manager Stephen Caldwell gives The Globe and Mail some of his favourite stocks in the healthcare sector. Click here to read.

May saw a rebounding US dollar adding to returns on US assets for Canadian investors. Other international markets made some headway too. The strong US dollar pressured several commodities, although oil worked its way higher. Despite experiencing some volatility, US long bonds ended the month largely unchanged.

US companies are required to file audited financial statements prepared according to Generally Accepted Accounting Practices (GAAP), determined by the Financial Accounting Standard Board (similar requirements exist in other countries). However, companies may also report earnings on a pro forma basis, incorporating adjustments to GAAP earnings to reflect what they would like investors to see as the company’s underlying earnings power. While it is true that investors should be looking forward to a company’s future earnings potential and not focus on short term, ‘one-off’ developments, it would not be cynical to think managements use pro forma earnings to paint the most flattering picture possible, a task made easier by the relative freedom to decide which adjustments to make. Currently the spread between GAAP and pro forma earnings for the S&P 500 is running at 30%, a difference last seen in the third quarter of 2009 when companies were still cleaning up their books after the financial crisis. Combined with the current anaemic level of earnings growth, commentators are increasingly concerned that companies are becoming more aggressive in papering-over deteriorating fundamentals. Likewise the Securities and Exchange Commission (SEC) has made it clear that they intend to question more companies about how they arrive at their pro forma figures, indicating that they will be placing this issue under increased scrutiny. Should investors be concerned?

While a degree of caution makes sense, a review of historical trends and a closer look at the current situation would argue against overreacting. Firstly, 20 companies alone account for in excess of 50% of the pro forma/GAAP spread; secondly, oil and gas impairment charges are, as would be expected, running at high levels. Finally, the spread between pro forma and GAAP estimates hasn’t been a great predictor of future market performance; indeed, the divergence is often greatest around a market bottom, when companies are writing down all sorts of assets in the middle of a recession. However, conclusions drawn from the aggregate picture don’t necessarily hold when looking at individual stocks. It’s always important to be aware of accounting issues, whether or not the market is paying as much attention as it should.

At Toron AMI, our investment process explicitly includes a review of earnings quality and the appropriateness of adjustments included in pro forma numbers. We accept the case that genuine one-off events, such as restructurings, should be considered (although a surprising number of companies exist in a world of rolling restructurings), but we take a highly skeptical view of certain common non-cash adjustments. First, adding back the cost of management stock options as a non-cash expense is debatable because ultimately these options result in dilution to existing shareholders or a cash outflow to buy back shares and offset the dilution. Second, we are cautious about adding back the amortisation of acquired intangible assets because the intangible itself was purchased with shareholder funds; it’s almost like adding back depreciation of fixed assets.

While some degree of pragmatism is ultimately required, we take care to consider any material adjustments in pro forma earnings in our valuation work. By incorporating this discipline into every investment decision we make, together with consideration of management track records and other key factors, we focus our attention only those investments offering a favourable balance of risk and reward.

May 2016

A rebounding Canadian dollar saw gains on international equities translate into modest losses for the month of April. Commodity prices and related shares did well, although the sustainability of their outperformance is an open question. US 10-year Government bond yields moved modestly higher.

On June 23, British citizens will take to the polls in a referendum over ‘Brexit’ – whether the UK will remain a member of the European Union – a decision with important ramifications for both sides.

Among those favouring Brexit, there is undoubtedly some nostalgia for a bygone age of ‘warm beer and cricket’. However, advocates also point to the costs (both direct and indirect) of EU membership, which have been estimated as high as 11% of GDP. Obviously estimating indirect costs (e.g. those due to ‘excessive’ regulation, etc.) is highly subjective. Particularly concerning for London, a financial hub (financial services are 12% of UK GDP), are EU proposals to introduce a financial transaction tax, among other regulations. Another concern is the impact of immigration from EU states. Although the UK’s ability to attract young, well-educated EU immigrants was a significant factor in the OECD’s reappraisal of the UK’s trend growth rate from 1% to 2%, this favourable view is far from universal – the last general election saw significant defection of traditional blue-collar support from the Labour Party to the Eurosceptic UKIP. Finally, there is a sense that the EU will inexorably move toward ‘ever closer union’, leaving the UK increasingly marginalised; therefore leaving now is perceived as the lesser of two evils.

In the other corner, supporters of the status quo point to Britain’s trade privileges as a member of the sizeable EU market and to the ability of financial firms based in London to operate in EU markets with a ‘single passport’. Proponents also emphasise the benefits of immigration, pointing to studies that EU migrants are net contributors to public finances. Brexit would have an immediate negative impact on the economy, and subsequent growth, they claim, would not offset it. Finally, it might not be as easy for the UK to preserve the current trade benefits with the EU as Brexit advocates assume. The potential for a yes vote is causing concern in Brussels, not least because of its potential to spread to other members.

The demographics of support for the two camps are interesting. ‘Remain’ is most popular with the younger 18-29 year old cohort, whereas ‘Leave’ is the choice among those 50+. Given that different age groups have different propensities to vote this could lead to an outcome quite different from that suggested by polls. Similarly, support for staying in the EU is strongest in the highest socio-economic group, and strongest for leaving in the lowest – a reminder that individual circumstances can cause the day-to-day impact (real or perceived) of events to vary significantly.

Polls currently read neck-and-neck, with marginal gains in favour of exit. Online betting markets, however, are pointing to a decisive vote in favour of remaining in the EU. Should the vote favour Brexit, the UK would have 2 years to negotiate a new relationship with the EU, during which the status quo would continue to apply. If two years pass without agreement, membership will cease unless an extension is agreed upon. Although a leave vote will not result in immediate changes to the UK’s status, the subsequent period of uncertainty could well have a negative impact on the economy and Sterling. While Toron AMI’s global portfolios are currently underweight in the UK market, we have an open mind and are watching closely, ready to take advantage of any opportunities arising over the coming months.

Click here to watch Pierre Bouchard on BNN’s ‘The Close.’

Click here to watch Stephen Caldwell on BNN’s ‘The Business News.’

Click here to watch Pierre Bouchard on BNN’s ‘The Close.’

Click here to watch Karl Berger on BNN’s ‘The Close.’

Click here to watch Rob Spafford on BNN’s ‘The Close.’

Click here to watch Karl Berger on BNN’s ‘The Street.’

April 2016

Looking solely at the returns for the quarter ended March 31st, equity markets hardly changed from the beginning of the year: the S&P returned 0.60%, the MSCI -0.90% , the TSX +4.5% while bonds returned about 1.5%. However the quarter was in fact quite volatile. Equity markets declined over 10% at one point, oil hit a new low at $26.05 and corporate bond yields spiked to levels not seen since 2009. It would have been easy to lose money trying to time the ups and downs of this market. The best results were achieved by resisting the urge to trade.

Media reports and investors focused on the movement in equity markets, but the prevalence of negative interest rates across the globe is an even bigger story. Not long ago, negative interest rates seemed related to concerns over the possibility of a Greek default. However, their persistence, and in some cases their adoption as an explicit monetary policy tool, has real implications. Currently, there is about $7 trillion in bonds which trade at negative yields – not an inconsequential sum. An investor in Switzerland could purchase a 5-year bond for CHF103.50, earn no interest and receive CHF100 in 5 years’ time – in effect locking in an annual interest rate of -0.70%. In other words, investors pay CHF3.50 to guarantee CHF100 in 5 years. This situation is entirely foreign to Canadian and US investors.

In Canada, we view current interest rates as extraordinarily low at 0.70% for a 5-year government bond. However, we are a high-yielding country! Most investors would be surprised to discover that among developed countries, only the US, Greece, Portugal and Iceland offer higher yields; even Spain now yields less than Canada. As a result, Canadians should not be so quick to assume that our interest rates will move higher soon and any further economic weakness and Canada may find itself joining the negative interest rate club. But in the global search for yield, Canada currently offers a compelling investment opportunity – positive yields, especially for European institutional investors, for whom negative interest rates are a fact of life. Rather than charge small depositors a negative interest rate, European banks have partially absorbed the interest cost and raised service fees.

So, what does this situation mean for most investors?  First, negative interest turns conventional financial wisdom on its head. For example, although deferring taxes on investments has generally been advisable, in the world of negative rates this is no longer the wisest course of action. In fact, you may want to accelerate your tax payments – a dollar today is worth more than it will be in the future. Shrewd Swiss citizens have attempted to prepay taxes, but the government has now forbidden paying anything but current taxes. This is but a small window into the world of negative interest rates.

Second, and most importantly, investors must consider how this kind of interest rate environment impacts retirement plans. Many simple retirement calculators blithely assume that fixed income returns will work out to their long term averages of about 6% per annum. Given the current interest rate levels (0.70% 5 yr. – 1.40% 10 yr.), those returns are simply unrealistic. Even at today’s interest rates, many investors are losing money after taxes and inflation are taken into account. To achieve higher rates, investors must consider corporate bonds, preferred shares and alternative investments as part of their overall bond allocation. Our team is focussed on finding companies with the ability to increase dividends at rates well above inflation and on constructing preferred portfolios that avoid common mistakes with this asset class, thus reducing potential future problems for our clients.

Negative interest rates, once considered a historic anomaly, have become a common fixture in today’s fixed income markets. We can no longer assume that Canada will follow its own path to higher rates. To be successful, investors have to consider the implications of negative rates to understand how to alter their current portfolio or what action to take if Canadian rates fall, gulp, below zero.

March 2016

Listen here to an internal interview with Charles Lannon, the head of Toron AMI’s Global Equity strategy. He has just returned from a research trip to Japan and Singapore and in the interview he discusses his trip, including the general mood among business executives, the economy, and the companies he met with.

If you have any questions, do follow up with your relationship manager or contact for more information about the Conversation Series.

Disclaimer: Past performance is not an indication of future results. The content contained in this document is for information purposes only. It is not intended as an offer or solicitation for purchase or sale of any security or financial instrument, nor is it advice or a recommendation to enter into any transaction. All individuals should obtain specific professional advice.

With the Republican and Democrat nomination processes drawing to a close, campaigning for the November US election will soon begin in earnest. Given the current frontrunners, it certainly promises to be an interesting few months, to say the least. Should investors care? A theory which was once in vogue described the Presidential Cycle, where pre-election promises and fiscal initiatives designed to bolster voter sentiment led to a stronger market in the election year and the preceding one, while the reversal of those initiatives in the following two years led to weaker returns. Certainly there is some intuitive appeal to the theory. It did seem to hold true  for a while, which of course led to its gaining popularity, but as is often the case over a longer period its effectiveness has become less compelling- 2008 was an election year, for example. Whether this is a case of mistaking correlation for causation or a reflection of changes over time in the structure of the US economy is an interesting topic for thought.

Considering the election year specifically, research by Deutsche Bank shows that since 1960, the fourth year of the presidential election cycle has seen the S&P 500 produce a capital return of 6.5%, versus a rise of 7.9% for all years; excluding 2008 the respective figures become 9.1% and 8.8%- a negligible difference. Looking within the year, work by Ned Davis Research shows that stocks tend to struggle during the first half of election years, bottoming on average in May. The timing of a more constructive market environment tends to coincide with emerging clarity as to who the eventual winner will be, regardless of who it is.

Overall, while we do not advocate making investment decisions on any short term or seasonal theme, we think it’s reasonable to expect some pick up in volatility in the run up to the election, especially given the likelihood of some controversial policies being floated. Our base case though is that as in the past once a better picture emerges of who the eventual winner will be, it will be discounted as the outcome and the election will fade as a source of investor uncertainty (no doubt to be replaced by something else!) Of the two most likely candidates, Clinton is generally felt to represent the status quo and as a result be the most ‘market friendly’; Trump on the other hand is a bit more of a loose cannon but the fact of the matter is that any presidential legislation has to make it through Congress; an extended period of gridlock would be the likely result, leaving investors to focus on the broader fundamental picture.

February 2016

Global equity markets started the New Year on a glum note as December’s optimism turned to disappointment as stocks around the globe sold off in January. By some accounts this was the worst start to the year since the 1930s, although a rebound mid-month pared losses. Government bonds posted gains, due in part to “safe haven” buying. The Canadian dollar hit a low against its US counterpart, dipping below 0.69 before rebounding to just short of 0.72 at the end the month.

Overall, sentiment has turned more negative on the outlook for global growth, but it is always difficult to determine in the short term whether this caused markets to fall or vice versa. Policymakers have been active, with the Bank of Japan adopting negative rates on new deposits and the Fed starting to sound a bit doubtful about their outlook and, by implication, the timing of further rate increases. The VIX index, a closely watched measure of market expectations of near-term volatility embedded in S&P 500 stock index option prices, rose sharply before settling back to the 20 level (about its average level since inception in 1990 – the low to mid-teens level that persisted for much of last year being very much an anomaly).

So what, in reality has changed? The decline in oil prices accelerated back in October of last year, and Chinese shares have been in more or less constant free-fall for the last 6 months. While earnings growth for US companies has ground to a halt, this was expected and doesn’t appear to be worsening.

What appears to be at work is that investors are increasingly considering the broader implications of what until now have commonly been viewed as discrete events. In particular, the ability of companies exposed to commodity prices to service their often considerable debt loads has led to concerns over a looming pick up in defaults, and the exposure of the banking system to losses. More broadly, persistently low inflation and a subdued growth outlook has investors pondering the build-up of corporate debt over the past few years.

While we do expect corporate debt levels to be an issue for 2016, we certainly do not anticipate a debacle like 2008 since there is currently no problem with the enormity of the US mortgage market and the magnifying effect of difficult (or impossible) to value financial instruments. That’s not to say that the market won’t be prone to fits of uncertainty however, and an uptick in loan losses could reasonably be expected to pressure bank lending at the margin. A stabilisation in commodity (particularly oil) prices is, in our view, an obvious catalyst for a more constructive market environment as it will help in assessing the magnitude of whatever credit issues there are; it’s probably not a coincidence that stocks and oil both bottomed on the same day in January.

In conclusion, there probably will be some credit issues and other surprises in store for 2016. However given the strength of bank balance sheets (in the US at least), any problems should be manageable and contained to companies that have painted themselves into a corner through bad financial planning. Toron AMI’s portfolios have limited direct commodity exposure, and those companies with exposure have a solid financial profile. Likewise our emphasis on balance sheet strength and durability of cash flows leads us to invest in companies that are well positioned to take advantage of any opportunities 2016 might bring.

January 2016

Listen here to last week’s open conference call, where we discussed the Canadian preferred share market. Preferred share returns were down significantly in 2015, listen here to learn about the opportunity this presents.

We welcome your questions and suggestions for next month’s call. Send them in to

Disclaimer: Past performance is not an indication of future results. The content contained in this document is for information purposes only. It is not intended as an offer or solicitation for purchase or sale of any security or financial instrument, nor is it advice or a recommendation to enter into any transaction. All individuals should obtain specific professional advice.

Click here to watch Rob Spafford on BNN’s Market Call!

Sound and Fury, Signifying Nothing

The end of the year is a good time for a moment of reflection to consider your successes and failures as an investor. An objective review of investment decisions, performance and risk is a cornerstone of a good portfolio management process. Let’s look at some lessons of the past year and talk about a couple of key risks for 2016.

2015 can be summed up with a quote from Macbeth; “…full of sound and fury, signifying nothing”. The S&P was up only 1.5% and 10 year US bond yields were up only 0.06% to 2.26%. The Canadian market performed poorly with the TSX down just over 8% and the 10 year yield dropping 0.30% to finish the year at 1.45%. The route to these results was tumultuous as both equity and bond markets experienced some of their largest intraday moves in history.

During 2015, three unforeseeable events had huge portfolio implications for unprepared investors. The first was the almost 17% drop in the Canadian dollar – the second largest drop ever. Toron AMI always advocates that investors maintain consistent exposure to assets outside of the Canadian market. In 2015, this discipline helped your portfolio generate good returns in a difficult environment. The lesson? You need to access the deepest, broadest set of investment opportunities to take advantage of the risk reduction that portfolio diversification provides.

The second event was when the Swiss central bank abandoned its pledge to limit the appreciation of the Swiss Franc vs. the Euro. While this had a limited impact on your portfolios, it speaks to the issue of central bank credibility. If investors start questioning a central bank’s commitment to a policy, it makes a central bank’s ability to shape investor expectations even more difficult. The lesson? You can’t always count on central banks to keep their word and should incorporate that uncertainty into your portfolio construction and asset allocation.

The third surprise was the further 20% drop in oil prices – along with the overall commodity index. Early in 2015 there was so much optimism that oil prices would rebound, that many investors plowed large percentages of their portfolios into energy, only to see dramatic losses. It was not being wrong that torpedoed these investors; it was the size of the position relative to their overall portfolios. The Toron AMI exposure to energy had only a small impact on your portfolio, more than offset by other investments. The lesson? A properly diversified portfolio limits the damage from a single large economic event: “risk not thy whole wad”.

Looking forward to 2016, it seems there is more uncertainty than we have seen in years. Any number of unanticipated factors could easily alter the economic outlook materially and invalidate even the most thoughtful forecasts. In no particular order, some things we are thinking about:
• What would a Trump/Cruz presidency do to markets?
• Is OPEC going to change its oil price policy?
• Will the US consumer continue to spend?
• What if we have more terrorist events in the US and Europe?
• Can the Chinese government continue to orchestrate growth?
• Can commodities rise without an increasing Chinese growth rate?
• What if the Federal Reserve raises interest rates too quickly?
• Why is productivity not recovering?

You can drive yourself crazy thinking about all of the potential risks. The key is to ensure that no single event dominates the return on your portfolio. It is this risk management ethos that continues to be central to our portfolio management approach: we spend as much time thinking about risk as we do thinking about returns. If you get the risk management process right, the returns will look after themselves.

I wish all of you a happy and prosperous 2016.

Arthur Heinmaa, CFA
Managing Partner

Chief Investment Officer Arthur Heinmaa offers commentary on recent market volatility: Read Here

December 2015

Listen here to last week’s open conference call, where we discussed AirBnB and its competitive threat to the travel industry. You may be surprised at what you hear!

We welcome your questions and suggestions for next month’s call. Send them in to

Disclaimer: Past performance is not an indication of future results. The content contained in this document is for information purposes only. It is not intended as an offer or solicitation for purchase or sale of any security or financial instrument, nor is it advice or a recommendation to enter into any transaction. All individuals should obtain specific professional advice.

Watch here to see Stephen Caldwell on BNN!

Global markets and interest rates broadly finished November close to where they started, masking some volatility over the course of the month. The Canadian dollar weakened against its U.S. counterpart in sympathy with commodity prices.

It has been almost 30 years since Francis Fukuyama’s essay ‘The End of History?’ put forward the thesis that the end of the Cold War and the victory of Western liberal democracy heralded a much less eventful era for geopolitics. While that seemed like a reasonable expectation as the Berlin Wall was dismantled in 1989, anyone who has been paying the remotest attention in recent years would conclude that it has turned out to be a rosy tinted forecast indeed.

Recent months have seen events happen around the world that underline how fortunate so many of us are to live our lives in relative peace and harmony. Nobody knows what the future will bring, but how should we as investors consider the impact of what we will term ‘crisis events’ on our portfolios? While the human impact is all too real, and it is reasonable to expect an economic impact to shaken consumer confidence, what does this mean for markets?

The evidence strongly suggests the financial market impact of ‘crisis events’ is fleeting and largely a short-term reaction to headlines rolling across the screen. A study by Ned Davis Research looked at a sample of 50 crisis events dating back to 1907 and stemming from both financial and geopolitical developments in order to measure the immediate and subsequent impact on the Dow Jones Industrial Average Index. The study found a mean loss of 6.8% in the immediate aftermath of the event, but what about the long term?

The study showed that despite immediate losses, the markets showed mean gains of 3.7%, 5.2%, 9.0% and 14% over the subsequent 22, 63, 126 and 253 days respectively. The three events with the biggest market impacts (the 1907 collapse of Knickerbocker Trust, the 1929 Crash and Black Monday in 1987) were all financial in nature and by definition therefore associated with substantial market losses. However even in these cases, the index produced positive returns in all of the subsequent periods measured and recouped a substantial portion of those immediate losses. The biggest loss after 253 days (38.1%) occurred following the collapse of Bear Stearns in 2008; a period where events in the financial sector were unfolding at rapid speed and with cumulative impact.

So in the face of crisis events what should we do as investors? We are all human and understandably experience human emotions upon reading the headlines after major world events. Tempting as it might be, the evidence strongly suggests that reacting to any immediate market movements is not the right course of action – a welcome reminder to maintain a long-term view as we start to look ahead to what 2016 might have to offer.

Watch Rob Spafford discuss investing in railroads on Market Call on November 25, 2015

November 2015

A look at some of the month’s most interesting articles, presentations, and commentary.

*Click Here: 

Six years ago we brought on a valuable partner in Cidel. At that time Cidel acquired a majority interest in our firm and immediately became an integral part of Toron AMI, helping us grow and deliver on our promise to our clients.

We are very proud to announce that as of the end of October, the partners of Toron AMI have exchanged their shares in Toron AMI for shares in Cidel. Some of our partners also took the opportunity to increase their level of shareholdings – a strong vote of confidence in our future.

For our firm, this event marks an important step in our plan to become a leading international investment manager and private bank. For our clients, it means we will continue to offer top tier investment solutions and superior counselling by our highly qualified team. In days coming, the portfolio management team from Cidel will be integrated with the existing Toron AMI team under my leadership, deepening our investment management capabilities for all our clients. In time, our extended partnership will provide the added benefit of Cidel’s global private banking services.

Nothing will change in our clients’ interactions with portfolio managers and in the way we manage portfolios. Clients can expect the same level of personal service experienced over the years with Toron AMI.

For me, and for all of us at Toron AMI, this is an exciting development as our firm evolves in the spirit of partnership. We are dedicated to providing exceptional professional talent to serve our clients for many years to come.

Arthur Heinmaa
Chief Executive Officer & Chief Investment Officer
Toron Asset Management International | Cidel Financial Group

Listen here to our open conference call, where we discuss the biggest themes looking ahead in capital markets and answer questions sent in by clients.

We welcome your questions for next month’s call! Send them in to

In October, stock markets rebounded substantially from losses experienced in the proceeding months. Bond markets experienced some weakness.

October 21, 2015 was immortalised in the 1980’s movie ‘Back to the Future Part 2’ as the date the two principal characters time travel to in a silver DeLorean sports car. The tranquil market environment that persisted for most of 2015 came to an end over the last couple of months with a marked pick up in volatility attributed to a variety of factors, from Chinese growth to U.S. interest rate policy. So far there have been 61 days with a move in the S&P 500 in excess of 1%, ahead of the long term average of 54. While the end of the year typically sees volatility abate, the potential for a Fed tightening cycle to commence in December has the potential to negate this trend. What lessons can we take from the past to interpret future volatile investment environments?

In a 1981 paper the renowned economist Robert Shiller noted that movements in stock prices were excessive relative to subsequent changes in the dividend stream those prices represent. Shiller has returned to this topic several times, considering the role of investor psychology versus rational reactions to changes in fundamentals as a catalyst for episodes of market volatility. In the aftermath of the global market crash in October 1987, he surveyed individual and institutional investors over their behaviour during that period. While the passage of time has developed a narrative for the factors causing the crash, the responses paint a different picture. The survey did not come up with any particular news event that was a catalyst for the sell-off, although there were concerns expressed about valuation and interest rates. Rather, there was a strong belief that investor psychology rather than any change in fundamentals what the main factor at play, with a “contagion of fear” experienced by 40% of institutional investors. Interestingly many were influenced by a historical analog with the events on October 1929.

While 1987 was a long time ago, it’s not hard to believe that advances in communication have only facilitated the transmission of changes in market psychology since then. Human nature being what it is, such changes will invariably occur, leading to volatility episodes. It’s probably a good idea to treat any fundamental explanations with a degree of skepticism. In his 1996 Chairman’s Letter Warren Buffett said he “would much rather earn a lumpy 15% over time that a smooth 12%”. At Toron AMI our principal focus is to look at the underlying fundamentals of the companies we invest in to avoid investments likely to experience undue volatility in the underlying businesses, and we view periods of volatility unrelated to changes in the broad environment as opportunities rather than threats.


October 2015

Read our quarterly recap and comments on the economy here: Q3 2015 Website Commentary

After almost 4 years of steady increases, investors were reminded this quarter that markets can also go down. Third quarter market returns were down no matter where you invested. The MSCI was down about 9% for the quarter pushing its year to date return to -7.5%. Lead by oil, commodities were down 14.7% for the quarter and 16% YTD. Even the fixed income market was down in all but government bonds, which were barely breakeven. The newspapers kept up a steady drumbeat of worries about Chinese growth. This month, we wanted to look at the size of the China impact and where there is an opportunity for investors.

The declining growth rate in China was cited as the proximate cause for the fall in markets. But how big is China’s impact on the global economy? The world economy, excluding China, is about $60 trillion. China’s imports of goods and services amount to $2 trillion, or about 3.3% of the world economy. But even if China reduces its imports by 20% (a large number), that would translate into a drop of 0.60% in the world’s growth rate. However, the world’s growth rate would still be positive at about 2.5% per year; lower but not catastrophic. The concerns about China’s impact on the global economy seem to be overdone and more about fear than fact.

With any decline in the markets, there are pockets of opportunity. First, the equity market is now selling at 14.2 times next year’s earnings compared to a long-term average of 15.1 times. Recall that the long-term earnings include many decades where long-term interest rates were significantly higher than they are today. So equity valuations look inexpensive not only from a long term perspective but also relative to the 2% return that investors would earn in government bonds. Indeed the dividend yield on both Canadian and US indexes is higher than the 10 year bond yield. Essentially, investors have an income advantage for taking on equity risk. Investing judiciously in this market should still reward the investor with a 2 – 5 year investment horizon.

Corporate bonds have also suffered during the past 6 months. The high-yield bond market is now set to have its first losing year since 2008. The interest rate difference between corporate bonds and government bonds is at level that we have not seen in over 5 years. Overall, investors have become more concerned about a weaker economy and the ability of corporations to pay their bond obligations. However, corporations are generally in better financial condition now than they were 5 years ago, and unless global growth tumbles to zero, it is unlikely that we are going to see a rash of corporate defaults. Though all corporate bonds are not created equal, by scrutinizing the balance sheets, investors can identify good risk-return opportunities in corporate bonds. Currently, investors are earning well above historic averages to invest in corporate bonds.

The fixation on weakened Chinese growth has blinded investors to so many good things in the economy: corporations have stronger balance sheets, cheaper commodity prices are good for consumers, a growing global economy, and stronger wage growth, just to name a few. In turbulent times like these, a steady focus on valuation and risk control will allow investors to take advantage of any market decline.

Arthur Heinmaa, CFA
Managing Partner

September 2015

During the past 6 years we have become accustomed to opening our account statements and seeing values continue to go up. This month, we will see a decline in market values with equity markets off about 4% and bond markets down 1% during August. With the dramatic movement in markets, it is useful to talk about why investors achieve higher rates of return over time by investing in equities.

Most investors think about volatility as market movement on a particular day. Portfolio managers think about volatility as measured by standard deviation – not just in a day but over whole periods of time. Standard deviation is the measure of the “spread” of data: the higher the spread, the higher the standard deviation, the higher the volatility and the risk. The standard deviation defines the risk that we can expect during a given time. For instance, a treasury bill has a known return and maturity date so the price moves very little and correspondingly has very little volatility (or risk). On the opposite end of the spectrum, a small cap equity has no certainty of any return and could have high volatility. In general, we can expect that the greater the uncertainty of the investment, the higher the volatility.

Now here is the key insight: if all we wanted was low volatility, our only option would be to invest in treasury bills, achieving a return of close to zero. If we want a return greater than treasury bills, however, we have to be prepared to assume a greater degree of volatility. Essentially, higher volatility is the price you pay for potentially higher returns.

To understand volatility in returns, consider the case where you have two investments: Investment A has a return of 1% and risk of 1 and Investment B has a return of 10% and a volatility of 5. How to invest becomes a function of how much risk are you willing to tolerate. Over time the second investment would generate a higher rate of return but the price would vary greatly from day to day. By being willing to assume the higher price volatility you can achieve a higher rate of return which illustrates why equity markets have outperformed treasury bills over time.

At Toron AMI we spend as much time on risk as we do on expected returns. We try to make sure that any one event does not unduly impact the portfolio and that the companies in which we invest have the financial strength to thrive in a weak economic environment. By employing a disciplined portfolio construction process, we have been able to reduce the volatility of our portfolios without sacrificing performance.

In today’s volatile markets, some companies on our watch list have dropped to levels where they offer compelling value. We will use this market volatility to purchase those companies and add to any underweight positions. Volatility can be your ally if you take advantage of it.

Arthur Heinmaa, CFA
Managing Partner

Oil prices have dropped drastically over the past year yet oil production globally continues to grow. Why? At Toron AMI, we see two main sources of this growth: OPEC’s increase in production, and improved technological efficiencies in the U.S.

Read all about it in Crude Market Thoughts

August 2015

What are the global relationships that define the price, the availability and the security of oil supply worldwide? Since oil prices began falling almost a year ago, so many questions have arisen. How did we get here?

Read this insightful piece by Tim Hague and the Toron AMI Team to understand the Geopolitics of Oil.

Watch here for Karl Berger’s discussion on the Canadian Dollar : the worst is yet to come.

July 2015

Read our quarterly recap and comments on the economy here: Q2 2015 Website Commentary



Our roads are clogged, public transit in major Canadian cities pales in comparison to other world class cities and high speed trains simply do not exist.  While estimates on the size of Canada’s infrastructure deficit vary, the conclusion is the same: we have underinvested for years and the amount needed to fix our infrastructure is massive.  It could be as much as $350-$400 billion.  Our quality of life and ability to compete on the global stage depend on the performance and quality of our public infrastructure.

Governments are beginning the address the problem, but commitments are short of what most experts believe will be necessary to meet our future needs. In the recent federal budget, the Government set up an innovative Public Transit Fund, funded at $750 million over the next two years and $1 billion per year after that.  They also promised $5.35 billion per year for municipal, provincial and territorial infrastructure under the New Building Plan.

However with 30-year Government of Canada bond yields at just over 2 percent, it begs the question of whether there will ever be a better time to invest in infrastructure. Government deficits are always a hot topic, but increasingly the public is beginning to understand that there is a big difference between deficits tied to investing in infrastructure and those related to program spending. In personal terms, it’s like a home mortgage debt versus a loan to fund regular monthly expenses. It may be that our governments are missing the opportunity of a lifetime to borrow at the lowest interest rates in over 100 years to invest in an economy that has grown at over 5% annually (well below current rates) over the last 50 years.

We will always need infrastructure to improve the productivity of Canadians so that we can remain competitive. We also need to ‘think outside the box’ and explore many ways to finance improved infrastructure, such as enhancing the productivity of infrastructure services, managing demand through pricing mechanisms and many others identified by the Conference Board of Canada in its influential 2011 report and recent discussions. We can all agree that there is a critical need for investment — how we finance it is an important choice for our future.

May 2015

Attending Berkshire Hathaway’s 50th Annual General Meeting – James Porter, Partner & Managing Director

The world came to Omaha on the weekend and I had the privilege of being there to see Warren Buffett and his partner Charlie Munger hold court at Berkshire Hathaway’s (BH) Annual General Meeting. The meeting itself was unlike any shareholders’ get together that I have witnessed. The venue and the surrounding city were overwhelmed by the devoted who traveled from China to Sweden to help celebrate the company’s 50th anniversary. Just getting a seat was a real adventure. Visiting the BH displays and shopping made the holiday season at the malls comparatively leisurely. As for the shopping (some of it exclusive to the BH AGM), one could visit a model home, buy candy or pick up some underwear (Berky boxers and Berky bras certainly seemed to be big sellers).

The kick-off was a surprisingly slick video comprised of commercials for Berkshire Hathaway companies peddling everything from snacks to banking services, along with humorous skits featuring Warren and Charlie. There was also a medley of Beatles tunes with revised lyrics celebrating 50 years. The famous Q & A lasted for six hours with both men, an octogenarian and a nonagenarian, fielding questions with wry humor.

My favourite anecdotes were Buffett admitting to a quarter of his calories coming from Coca-Cola products, and saying (to paraphrase), “I see a lot of happy people consuming Coke and Dairy Queen treats, I don’t see a lot of smiles on people leaving Whole Foods!”

Some highlights from this Toron AMI partner’s perspective:

  • A company’s culture matters above all. What people do is more important than what they say.
  • Without a doubt, BH has invested well. When asked for five key criteria, they answered they simply don’t work that way. Every business they buy is evaluated, but not with a pre-determined framework.
  • On job cuts that have occurred in companies they invest in and on wages both men were very direct:  They don’t buy companies to make cuts, but they expect efficiently run enterprises. While they each had slightly differing views they both agreed that simply raising the minimum wage is not the best solution; the focus should be on skill development and improvement to socio-economic mobility in the U.S.
  • They are highly optimistic about the future of the U.S. and believe the next generation will be far better off.
  • Charlie Munger spoke at some length about his views on China. He believes that China is finally finding a pathway to release the potential of its people and that U.S. – China trust will be critical to both nations’ futures.  In particular, he cited the work to end corruption as a necessary step for the Chinese people and system.

It was abundantly clear that Buffett and Munger don’t just buy stocks;  they invest in businesses with great long-term potential and superb operators. That certainly strikes a chord with me and my partners at Toron AMI as it is the key to building long-term wealth.

All in all, it was a great experience to be there!

We are pleased to announce that Barry Da Silva has joined the Toron AMI team on May 1st as a Portfolio Manager with investment research responsibility for the Energy sector.

Barry Da Silva’s Background

Barry has extensive analytical and portfolio management experience. He comes to us from one of the country’s larger investment managers, where he was a Canadian equity portfolio manager. Prior to that he spent a decade as an investment analyst and portfolio manager at OMERS, one of the leading Canadian public sector pension plans. There Barry had research responsibilities for a wide variety of industries and developed detailed expertise that he has leveraged as a Portfolio Manager in both the Canadian and U.S. markets. Barry has a B.A. in Commerce and Economics from the University of Toronto, and holds a CFA charter.

 Toron AMI & Our Canadian Equity Team

Barry will be a significant contributor to the team, our process, and our ability to continue providing our clients with excellent Canadian equity investment returns. The Canadian equity team follows a disciplined bottom-up approach to stock picking and portfolio construction. Each portfolio manager within the equity team, led by Bob W. Gibson, is responsible for research on specific industry sectors, and participates in the stock selection and portfolio construction process.

Please contact us should you have any questions or require more information. All of us at Toron AMI are excited about this great addition to our team, and look forward to working with Barry.


This weekend, Toron AMI’s James Porter is heading on a road trip to Omaha to attend the Berkshire Hathaway Annual General Meeting and hear from Warren Buffett!

Watch this space next week for Toron AMI’s take on this fascinating event.

April 2015

“The capitalist system is under siege. In recent years business has increasingly been viewed as a major cause of social, environmental, and economic problems… Companies are widely perceived to be prospering at the expense of the broader community. ” This statement appeared in a 2011 Harvard Business Review article by Harvard business professor Michael Porter and management consultant Mark Kramer. Just look at the Occupy movement and how it has spread around the globe to see this observation in action.

The way to combat massive social problems, they propose, is to make business the solution – they call it ‘creating shared value’(CSV). CSV “is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success.” It is addressing a social issue with a business model. At its heart, CSV means “businesses must reconnect company success with social progress.”

The CSV idea has injected new energy into the CSR and sustainability movements by rightly advocating a better alignment between a company’s core strategy and the social problems on which it can have an impact. The role of business is so crucial because only it has the capital and knowledge resources to make a difference – both alone and as a partner to NGOs. Watch Michael Porter explain the case for letting business solve massive societal problems like climate change and access to water.

Can these ideas really work? Some degree of rethink is certainly necessary. Companies that embrace these ideas are guided by leaders who value the importance of long-termism – understanding that real value and real wealth are created by adopting a long-term perspective, including the full impacts of their activities and the needs of future generations.

As investors, we need to be aware – but also tolerant – of the short term impacts of long-term thinking, and watch for the new business and investment opportunities as they arise and influence existing industries and ways of doing business.

March 2015

Our very own Pierre Bouchard, partner and portfolio manager was featured in this past Saturday’s La Presse.  To read the full translated text, click here.

For the original text as it appears in La Presse (in French) click here.