2022 was a tough year for both the stock and bond markets 鈥� and considering that most portfolios are made up of stocks and bonds, it was a tough year for most investors.
鈥淚n terms of bonds, 2022 was the worst year ever for U.S. bonds. For stocks, it was certainly among the roughest, if not the worst,鈥� says Kevin Kirkwood, Chief Compliance Officer and Chief Investment Officer of Vancouver Island鈥檚 .
The volatility in those markets is exactly why Alitis includes alternative investments in their clients鈥� portfolios 鈥� and that diversification allowed them to weather the storm of 2022 better than most.
鈥淭he Alitis , which is our largest and most diversified investment, didn鈥檛 get hammered the way most other funds did. Last year it made 1.86 per cent, which isn鈥檛 fantastic, but that鈥檚 in a year where the vast majority of funds lost money. In its Global Neutral Balanced category of over 3000 funds, the Alitis Income and Growth Pool is one of only 27 that made any money at all.鈥�
Inflation, war and other turbulence
With inflation ramping up throughout 2022 and interest rates bound to increase, Kirkwood and the Alitis Investment Committee knew to avoid bonds as much as possible.
鈥淲hen interest rates go up, short term bonds react the least, so we shifted the fixed income investments there. Long-term bonds lost 20-30 per cent or more, but short-term bonds lost less than five per cent.鈥�
Inflation also affects the stock market, as higher costs often cannot be passed through to the end consumer, resulting in a squeeze on profits.
鈥淲e didn鈥檛 like the look of many valuations, especially in the American technology sector. There was such a focus on big names like Tesla and Amazon in the public conversation, but we didn鈥檛 like the math. The technology sector in the US was worth more than the entire stock market of other countries, such as Japan. You could have purchased Tesla, or for the same price, purchase the five biggest banks in Canada plus the entire Energy sector on the TSX. This did not make sense,鈥� Kirkwood says.
Add in Putin鈥檚 invasion of Ukraine and supply chain issues related to the pandemic, and 2022 was a volatile year 鈥� which is why Alitis also invests in real estate and mortgages. The was up over eight per cent in 2022 and the Alitis was up 5.5 per cent.
鈥淓ven in stressful times people need a place to live, so investing in these alternative assets offers added protection from risk. You can never avoid every shortfall, but diversification offers greater protection.鈥�
Investing in 2023
2022 offered very little certainty, even in the usually stable bond market. Now with interest rates at a much higher level, there is a better chance that bonds could provide some protection in the next downturn, and Alitis is taking that into consideration when managing their portfolios. Investing in mortgages is still wise, Kirkwood says, but the stock market will likely continue to be volatile.
鈥淭here have been some strong days, but we have to look longer term and avoid the euphoria in the day-to-day market. We rely more on boring math than trending stocks.鈥�
The recent bank collapses in the USA along with banking stresses in Europe have caused continued tremors throughout global markets, so Alitis continues to invest cautiously.
鈥淚t appears that inflation of three to four per cent is likely to be the new normal. Our view is that we鈥檙e likely to see a recession towards the end of the year, but a recession isn鈥檛 necessarily something to be afraid of. The unemployment rate is so low, for example, that even after a small recession we鈥檒l still be miles ahead of past hard times,鈥� Kirkwood says. 鈥淭hose who spread their investments over stocks, bonds, mortgages and real estate should be exposed to less risk.鈥�
Find Alitis Investment Counsel in Campbell River at , in Victoria at , in the Comox Valley at 1, and online at . For more information, call 250-287-4933 or email info@alitis.ca.
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