Market Commentary

December 2021

The After Math

What do you get when you add rate hikes and central bank tapering to record equity inflows, stretched valuations and rampant inflation?  Is there any answer to this question that isn’t a headwind for equity markets in 2022?  As we head into the year, we still see a path forward to attractive returns, but it involves careful de-risking of our portfolios and diversification away from specific excesses.

Our working thesis is that 2022 will look a lot like 2018, the last time the Fed attempted to meaningfully shrink its balance sheet. As the Fed steps back from buying Treasuries, bond yields will have to find their own level.  This process of normalization is likely to be volatile, as it was in 2018.

In general, 2018 showed that equity markets can stomach higher rates, but that stock prices are prone to corrections if yields move up too quickly.  That year, markets rallied whenever it looked like Treasury yields would stabilize; however, each time yields tested new highs, markets dropped quickly.  In 2018, the S&P 500 was roughly flat in Q1; made single digit gains in Q2 and Q3; but dropped 13.5% in Q4, after 10-year yields hit 3.2% in September.

What’s different in 2022?  We think there may be even greater volatility this time around given two factors:  complacency and inflation. 

Complacency:  In 2018, the financial crisis hadn’t yet much dimmed in people’s minds.  Now, after a year of record equity inflows in 2021 – more than the prior 19 years combined – and across-the-board gains in almost every sector (except Cannabis), investors appear to be more complacent.  This is evidenced by the punishment we are currently seeing meted out to companies that miss guidance or announce negative news.

Inflation:  There are two emerging aspects to inflation:  1) Commodity and supply chain inflation – with COVID disruptions and strong demand, the Fed must wait for economic constraints to resolve; and 2) Wage inflation – rising wages are the result of a pandemic induced drop in labour participation rates and growing pressures on an already tight employment picture. The good news is that the last period of Fed tightening coincided with rising participation rates, which could moderate wage inflation over time.  The bad news is that we still don’t know if the pandemic will have long-term effects on the labour market.

Why the inflation/complacency mix is dangerous:  Inflation and higher borrowing costs are likely to eat into corporate margins in the short-term, raising the risk of earnings disappointments.  And the average investor is not prepared to be disappointed.  Right now, every blip is being blamed on supply chain disruptions, but when do short-term disruptions become the new industry normal?  If long-term expectations for equities get re-rated, markets are in for a rough stretch.

Our strategies for 2022:  We continue to invest in companies with capable management teams, strong balance sheets and sustainable, growing cash flows.  We are watching industry conditions closely, with a view to avoiding negative changes in the direction of growth and margins at individual companies.  We retain a preference for larger cap names over mid and small cap, at least for this year.  We think Consumer stocks, Utilities, Energy and REITs are likely to fare better than most, with Financials offering decent returns as well.

As always, we rely on the analysis and ideas generated by Veritas Investment Research, whose fundamental and accounting-based research has performed well in all types of markets dating back to their first report in 2000.

In 2021, our Absolute Return Fund returned 22.8% and our Canadian Equity Fund returned 23.8%, both with low correlations to the market.  (Performance based on F series).     

We thank you for your continued support.

Your fellow investors,

Anthony Scilipoti
Sam LaBell

Please see below for links to client-friendly fund profiles and commentaries.

Veritas Absolute Return Fund December 2021 Performance Sheets
Veritas Canadian Equity Fund December 2021 Performance Sheets

November 2021

November 2021

A Brief History of Buy-the-Dip

After tapering fears and news of the Omicron variant drove the S&P 500 to a lower close entering December, investors bought the dip, temporarily pushing the index back to its mid-November highs.

The strategy of deploying more money in the weeks following an index decline – buying the dip as it were – performs well in most markets because, more often than not, stocks go up. 

But just how risky is the strategy now, with uncertainty over interest rates and inflation swirling, and valuation metrics pushing towards all time highs?

Buy-the-Dip since 1980: Based on Friday-to-Friday performance, the S&P 500 has provided an average weekly return of 23 basis points since 1980, and a positive return in 58% of weeks.  In the period following a negative-return week (i.e. the week after the dip), the index has posted an average return of 41 bps, and a positive return in 61% of weeks. So when buying the dip, returns are in fact stacked in investors’ favor.  Results on the S&P TSX are similar since 1995, with the probability of a positive result increasing by about 130 bps following a down week, and average returns about 15 bps higher.

Except when the market is correcting: The main exceptions to buy-the-dip occurred in years that most seasoned investors will recognize:  1987, 1990, 2002, 2008 and 2018. In these years, average returns following a negative week were negative 37 basis points, versus the all-week average of negative 23 basis points for those years.  In other words, investors who bought the dips in these years generally did worse than those who did not. For the S&P TSX, the list of years where buy-the-dip did not work also includes additional years affected by commodity price turmoil:  1998, 2001 in place of 2002, 2013, 2014 and 2020.

Will 2022 join the list?  As we look at the years listed, the most relevant of the group may be 2018, as this was the last year in which the Fed tried to meaningfully ratchet down its balance sheet. Markets entered 2018 on a tear, as the October 2017 Fed announcement of planned ‘balance sheet normalization’ (a.k.a. tapering) was seen as a sign of a strengthening economy.

Lessons from 2018:  The year is a cautionary tale on periods of tapering: expect volatility, many rallies and corrections, and a potential flight to safety. In Q1 2018, as the Fed backed off bond purchases, U.S. 10-year rates jumped 44 bps to 2.84%, and the S&P 500 dropped 0.8%. In Q2, as rates stabilized below 3.0%, the S&P was able to post a 3.4% gain. The period of rate stability continued in Q3, allowing the market to stage a 7.7% rally. The trouble came in Q4. By the end of September, 10-year rates had moved above 3.2%, leading to a rapid sell off of the S&P. Yields flattened once again as investors shifted to safe havens, but the damage was done with the index declining 13.5% in the quarter.

How 2018 played out:  The path back to a Fed-free market in bonds is likely to be a rocky one. As the Fed leans away from treasury purchases, bond yields will undergo their own price discovery, which can trigger a series of rallies and corrections. Not the best climate for buying the dip. For the year, S&P large cap outperformed small and mid cap, and the only sector gainers were Health Care, Utilities and Consumer Discretionary. Communications, Financials, Industrials, Materials and Energy all saw double digit declines.

What’s different this time?

  • Pandemic effects:  Arguably, the economy is in weaker shape today than it was in 2018, despite low unemployment. Growth is far slower and much more dependent on government spending.
  • Rampant inflation:  The global economy is experiencing its highest inflation since 1982, which is pushing real rates down, not up. All things considered, this makes monetary policy less effective.
  • Fed experience:  There were fewer JPow memes in 2018, but Mr. Powell was head of the Fed then too. Hopefully, he learned a few things about pacing the taper that can be applied today.

On balance, we think the Fed is likely to be forced into a go-slow approach on rate hikes and tapering, which suggests interest rates may rise more slowly than many expect. Consumer stocks, Utilities and REITs are likely to fare better than most, with Financials offering decent returns as well. We expect many sectors to be re-rated on lower growth expectations, margin pressures and a renewed emphasis on quality.

Heading into 2022, we are actively de-risking our portfolios with a view to minimizing exposures to companies whose outsized valuations are most likely to be affected by normalizing rates and further inflation. We continue to benefit from the analysis and ideas generated at Veritas Investment Research, which remains one of the best equity research shops on the Street.

Year-to-date through November 30th, our Absolute Return Fund has returned 15.5% and our Canadian Equity Fund has returned 18.3%.  (Performance based on F series).     

We thank you for your continued support.

Your fellow investors,

Anthony Scilipoti
Sam La Bell

Please see below for links to client-friendly fund profiles and commentaries.

Veritas Absolute Return Fund November 2021 Performance Sheets
Veritas Canadian Equity Fund November 2021 Performance Sheets

October 2021

October 2021

How to Land a Helicopter

Quantitative Easing is ending. As we have come to know it, QE is the artificial lowering of interest rates that results from central banks using printed money to purchase government bonds and other assets. Faced with an economic crisis, QE purchases fund government deficits and lower interest rates to keep credit flowing. But what happens when the crisis eases and QE is withdrawn?

For answers, we turn to the parable of ‘helicopter money’ put forward by economist Milton Friedman. If a helicopter flew over the economy and dropped a fixed amount of money on every household, Mr. Friedman asked, what would happen to output and prices? Since there is only so much cash each household would want to hold, he argued, the extra money would find its way back into the economy and the price of everything would go up. The resulting inflation would reprice assets, goods and services, to the new level of money supply. Mr. Friedman didn’t foresee much effect on economic growth since, in his example, the economy was at full employment.

As central banks around the world dial back their bond-buying and governments scale back emergency support programs, how does the latest global QE measure up against Mr. Friedman’s predictions?

Money supply is up … way up:  After growing 6.3% in 2019, the U.S. M2 money supply had expanded 36% through September 2021; in Canada, the M2 money supply is up 27% through the end of August.

The price of everything is up … way up:  Versus the end of 2019, Canadian home prices are up more than 24% (Teranet composite index, September 2021); U.S. house prices are up more than 27% (Case Schiller index, August 2021). Through the end of October, the S&P/TSX is up more than 30%; the S&P 500 is up more than 43%. Versus the end of 2019, crude is up 36%; copper +62%; and lumber +45%.

Other than stock purchases and homes, households haven’t rushed to spend their cash:  Household savings are through the roof. Based on U.S. data, by the middle of 2021, cash deposits had reached 95% of disposable income, up from about 81% pre-pandemic. Household stock holdings (direct and indirect) now exceed 260% of disposable income, versus 208% pre-pandemic.

Inflation is rising to multi-decade highs:  Canadian inflation hit 4.4% in September, while in the United States, CPI inflation has topped 5% in every month since April 2021. We are watching the big-ticket items carefully. Transportation and Shelter make up about 45% of Canada’s CPI but are driving more than two thirds of topline inflation. Specifically, vehicle prices, fuel costs and home ownership are getting pricier. Demand is bumping up against supply constraints due to past underinvestment, bottlenecked production and/or a shortage of inventory.

Growth remains anemic:  In real terms the U.S. economy has grown by an anemic 0.7% annualized since the middle of 2019. With asset prices way up relative to economic output, the risk of a correction increases by the day.

Which brings us to our current investment strategy. With so much cash on the sidelines, we can’t rule out that the current appetite for equities will continue, at least in the short term. However, many of the forces pushing stocks higher – flush consumers, pent-up demand, supply constraints, shifts in spending on reopening, price inflation – risk seeing near-term reversals. After all, most of these tailwinds are the direct result of helicopter money and the disruptions brought on by COVID.

In the absence of stronger growth, once demand normalizes and conditions in the supply markets catch up, we would expect price momentum and margins to reverse, potentially quickly. Which is why central banks are not rushing to deal with current inflation, in the hope that it will be transitory. In the near term, the rebound in household spending will continue to drive inflation, but central banks go-slow approach on rate hikes; a weak economic backdrop; and investors’ growing desire for safety, bond yields and interest rates are unlikely to rise by as much as many expect.

Now, more than ever, we think a close read of company filings and detailed fundamental analysis are the keys to identifying which business models and industry trends have staying power, and which are likely to fade as economic conditions normalize. For individual stock selection, we continue to benefit from the great work being done by the independent analysts at Veritas Investment Research, which remains one of the best research teams on the Street.

Year-to-date through October 31st, our Absolute Return Fund has returned 17.7% and our Canadian Equity Fund has returned 21.4%. (Performance based on F series).     

We thank you for your continued support.

Your fellow investors,

Anthony Scilipoti
Sam La Bell

Please see below for links to client-friendly fund profiles and commentaries.

Veritas Absolute Return Fund October 2021 Performance Sheets
Veritas Canadian Equity Fund October 2021 Performance Sheets

September 2021

September 2021

TINA and the Taper

As the market begins to look beyond the reopening trade, expectations become more important. We see a stark contrast between the market’s current outlook and its outlook prior to the pandemic. Despite a clear deterioration in growth and inflation forecasts versus pre-pandemic levels, forward valuation multiples for the S&P500 are up more than 25%. At this stage in the recovery, we think it’s worth contrasting the market’s current consensus with its outlook prior to the pandemic:



Sep 30, 2019

Sep 30, 2021

S&P500 closing price



Consensus next calendar-year operating earnings



Consensus YoY growth in operating earnings



U.S. 10-year Treasury rate



5-year expected inflation rate



Multiple of forward operating earnings



Increase in forward multiple vs. 2019



Source: S&P, Refinitiv, Federal Reserve data (FRED), Veritas

Today’s much higher forward multiple for the S&P500 is in stark contrast to the deterioration in outlook for growth and inflation. With real rates on 10-year Treasuries now in negative territory, equities appear to offer the only real possibility of getting ahead of inflation.  FOMO (Fear Of Missing Out) on the rally has given way to TINA (There Is No Alternative).

In our view, TINA is at best, a weak argument for higher stock prices.  Low interest rates may keep people invested in equities, but there are some things they can’t do: they can’t kick start global growth until consumers are ready to spend and companies are ready to invest; and they can’t prevent global supply disruptions from driving inflation when spending resumes.

Which brings us to the Taper. Of the US$5.2 trillion increase in publicly-held U.S. debt since the start of the pandemic, the U.S. Fed has purchased approximately 55%.  The Fed is now dialing back its purchases, which means rates will have to rise to attract replacement buyers. 

Despite Fed tapering, however, we expect high asset valuations and tepid global growth to work against any quick rise in interest rates.  Even in September 2019, when times were better, real rates were near zero.  We see a greater risk of a valuation reset on lower growth expectations and a bigger bite from cost-push inflation.  In that scenario, stocks may correct significantly if weaker earnings forecasts roll in, without necessarily triggering much higher interest rates.

Veritas’ portfolios are positioned to counter inflation through our ownership of companies with scale and pricing power.  Scale offers the possibility of reducing unit costs to absorb inflation (think global services companies and IT).  Sectors coming out of a supply crunch, with inelastic or rebounding demand are also good bets to pass on their costs (think commodities, utilities, autos and business jets). 

But it does not end there because individual company performance, even in the most protected sectors, ultimately drives stock performance.  For individual stock selection, we continue to benefit from the great work being done by the independent analyst team at Veritas Investment Research, which remains one of the best research shops on the Street.   

Year-to-date through September 30th, our Absolute Return Fund has returned 16.1% and our Canadian Equity Fund has returned 17.7%.  (Performance based on F series).     

We thank you for your continued support.

Your fellow investors,

Anthony Scilipoti
Sam La Bell

Please see below for links to client-friendly fund profiles and commentaries.

Veritas Absolute Return Fund September 2021 Performance Sheets
Veritas Canadian Equity Fund September 2021 Performance Sheets

August 2021

August 2021

Taking Stock of the Election

Former Prime Minister Kim Campbell famously said during her 1993 campaign: “an election is no time to discuss serious issues”.  The statement was considered a gaffe at the time, but over the years the assessment has appeared all the more true.  Come election time, Canada’s Federal parties are good at proposing small tax measures and new spending, but long-term vision is increasingly a scarce commodity.  And the shorter the election cycle, the shorter-term the thinking seems to be. 

So what’s at stake for Canadian investors this time around?  With a high likelihood of a minority government, either Liberal or Conservative, we expect a notable shift towards new spending and tax breaks as parties jockey to expand their base of support. 

At the top of the policy platforms, each party’s climate plans have a cost that is likely to filter down to consumers.  The Liberals have floated a proposal for special levies on the banks, should they win.  The NDP and Bloc Quebecois, should they hold the balance of power, have traditionally supported greater regulation of telecommunications and banking.  Changes to income taxes and capital gains are also likely to be on the table.  And the usual debate continues over health transfers and new social programs (child care, pharmacare, etc.).

All told, with the current fiscal gap and economic climate layering on policy pressures, Canadian investors may be in for more regulation, cost of living increases and higher taxes going forward.

Without getting too political, how are we positioning our funds for the election?  As fiscal and economic pressures build on the domestic front, we think the best Canadian investments over the next few years will be in companies with a global outlook and access to international growth.  Some of our top performers this year reflect that view, including TFI International (TSX: TFII), Alimentation Couche-Tard (TSX: ATD.a), SNC-Lavalin (TSX: SNC) and Bombardier (TSX: BBD.b). 

Elections are also important because of the decisions they put on hold.  Most regulators will not comment or rule during an election for fear of looking partisan.  We expect the proposed Rogers/Shaw merger will come into greater focus after the election.  Similarly, a decision is pending on whether banks can reinstate dividend increases – which OSFI has forced banks to defer during the pandemic. 

In short, while we are not expecting a landslide in any direction, we think the political ground is likely to shift enough to create investment opportunities.  As always, we benefit from the analysis and ideas generated at Veritas Investment Research, which remains one of the best equity research shops on the Street.

Year-to-date through August 31st, our Absolute Return Fund has returned 15.7% and our Canadian Equity Fund has returned 17.5%.  (Performance based on F series).     

We thank you for your continued support.

Your fellow investors,

Anthony Scilipoti
Sam La Bell

Please see below for links to client-friendly fund profiles and commentaries.

Veritas Absolute Return Fund August 2021 Performance Sheets
Veritas Canadian Equity Fund August 2021 Performance Sheets

July 2021

July 2021

Much More than a Single Event

In one of the greatest Olympic performances ever, Canada’s Damian Warner set an Olympic record in the decathlon that surpassed 9,000 points, winning gold and reaching a point total only achieved by three other men in history. 

The feat required incredible performances in ten separate disciplines.  Consider that had Mr. Warner’s jump been included in Tokyo’s long-jump final, he would have earned a bronze medal, while his 100-metre and 110-metre hurdle times of 10.12 and 13.46 seconds, respectively, would likely have qualified him for the semi-finals of each event. 

There are some key lessons here for investors.  Mr. Warner’s record combined world-beating results in several disciplines with competitive scores in all ten events.  In terms of money management, short term wins are nothing without broad consistency over time.

As we look back at our July results, we see big wins in at least three stocks, Bombardier, MTY Food Group and TFI International, each of which posted returns of more than 20% for the month.  Of course, we would love to have had larger weights in each of these names, but not at the expense of our long-term portfolio goals. We held meaningful weightings in each name in the Absolute Return Fund, based on our risk considerations and diversification strategies, and a core position in TFI in the Canadian Equity Fund given that fund’s more concentrated focus on larger cap names and its long-only mandate. 

We view our holdings of less volatile names as equally important to our strategy.  Names such as Alimentation Couche Tard, George Weston and Metro, although defensive in nature, performed well in July as risk-off sentiment once again gripped markets.

In the decathlon, it also pays to know how the point totals are calculated.  Outperforming in multiple events is not enough to win – each event generates points and requires close attention.  Extending the analogy to the Canadian index, it is rarely enough to match weights with the TSX; outperformance requires an understanding of how the index is laid out and careful stock selection in each sector.

For the S&P/TSX, Financials represent more than a 31% weight by market cap, with a relatively tight dispersion of returns, making it difficult to outperform on Financials picks alone.  Energy and Materials, on the other hand, represent ~24% of the index, and offer a much wider dispersion of returns given their ties to commodity prices. Even though Energy and Materials have been a net drag on returns over the last ten years, the sectors have been prone to sharp declines and rallies, making their weightings a key differentiator among funds. Beyond commodities and Financials, the remaining 45% of the index tends to be far less uniform, offering considerable opportunities for stock picking and outperformance.

Given the need for breadth and actionable ideas, we continue to benefit from our access to Veritas Investment Research.  The Veritas team’s consistent outperformance across sectors and time horizons has been recognized as one of the best research offerings on the street. To find out how Veritas Investment Research makes it top picks for its V-List model portfolio, please see this short video: Consistent Long-Term Outperformance: V-List Overview First Half 2021.

Year-to-date through July 31st, our Absolute Return Fund has returned 13.9% and our Canadian Equity Fund has returned 15.8%.  (Performance based on F series).     

We thank you for your continued support.

Your fellow investors,

Anthony Scilipoti
Sam La Bell

Please see below for links to client-friendly fund profiles and commentaries.

Veritas Absolute Return Fund July 2021 Performance Sheets
Veritas Canadian Equity Fund July 2021 Performance Sheets

June 2021

June 2021

Sizing the New Normal

2021 has seen a lot of attention paid to how work and consumption patterns might evolve post-COVID.  And certainly, there are a lot of opportunities for mispricing tied to these debates. As we look forward to the second half, we note a few things that haven’t changed as the global economy reopens:  the world is still dominated by China-U.S. trade and China is still the largest buyer of most commodities.  How these two economies manage their reopenings has important implications for Canadian investors.

For interest rates:  China’s Treasury purchases remains a key factor moving long-term U.S. rates.  To keep its currency level, China has generally routed some of the excess dollars it generates from its trade deficits into buying U.S. Treasuries.  That was put on pause in 2020, as China’s trade deficit narrowed and the risk-off trade into USD assets propped up the greenback, taking pressure off the Yuan, despite massive stimulus spending and QE in the U.S.  In response, China let its Treasury holdings decline to their lowest level since 2017.  As yields began to march up in early 2021, China’s Treasury purchases picked back up.  With the Fed signalling its longer-term rate plans, investors seem confident enough in China’s Treasury demand to push yields down, with the reversal helping dividend stocks and risk assets toward the end of Q2.   

For commodities:  China remains the largest importer of key commodities such as iron ore, copper and met coal, and an important destination for most other commodities globally. After allowing reserves to decline in recent years, China was in the process of rebuilding inventories heading into 2021.  At the same time, the slow reversal of COVID-induced demand shocks has been bumping up against underinvestment and supply constraints, also brought on by COVID. The result has been a rapid appreciation in commodity prices this year.  China triggered a broad sell-off in commodities when it announced a crackdown on speculators and the sale of key metal reserves in June. As effective as China’s campaign appears to be in curbing pricing and speculation, we expect the downtrend to moderate as underlying demand continues to recover and march higher. 

For the USD/CAD exchange rate:  Commodity prices, interest rate differentials and relative economic performance explain most of the moves in Canada’s currency versus the United States.  Canadian exports, which set our terms of trade, are heavily skewed to commodities, particularly oil & gas.  On interest rates, any attempt by Canada to follow low U.S. rates is likely to hurt our dollar, while bolstering our dollar with higher rates is likely to hurt our economy and fiscal position – Catch 22.   In the end, Canada has a keen interest in seeing commodity prices go up, otherwise we could face growing fiscal challenges and a sustained slide in our exchange rate. 

The larger problems of deficit spending, bloated money supply and supply chain disruptions still loom, however, which we think warrants increased caution in the second half.  As we position ourselves for the ongoing recovery, we retain our preference for companies with sustained cash flow growth, balance sheet strength, and capable management teams, while we continue to be wary of high beta names with questionable future prospects and significant requirements for capital.

Year-to-date through June 30th, our Absolute Return Fund has returned 12.4% and our Canadian Equity Fund has returned 15.1%.  (Performance based on F series).  Our funds continue to benefit from the ideas generated by one of the best equity research teams on the street, Veritas Investment Research.   

We thank you for your continued support.

Your fellow investors,

Anthony Scilipoti
Sam La Bell

Please see below for links to client-friendly fund profiles and commentaries.

Veritas Absolute Return Fund June 2021 Performance Sheets
Veritas Canadian Equity Fund June 2021 Performance Sheets

May 2021

May 2021

Fewer Rabbits in the Hat

With most of Q1-2021 earnings in the books, 2021 estimates for the S&P 500 are up about 16% on the year.  Had the index simply risen with estimates, it would also be up 16%.  Instead, the S&P 500 is up about 12%.  The index multiple is contracting. 

There are a few reasons why this should worry investors.  First, there probably aren’t many more double-digit earnings revisions ahead.  Second, we may not be able to count on low bond yields forever.  That means the tide may no longer lift all boats, making stock selection all the more critical.

Just to stay where it is, the market will need a steady diet of cheap money, risk-on equity premiums AND upwards earnings revisions.  To illustrate:

  • If the Treasury yield hovers at 1.6%;
  • The earnings yield premium continues at 2.9%; and
  • 2021 earnings come in 10% higher than the current estimate of $174 …

…  the index reaches 4,253 by next March, only slightly above its current level (i.e. $174 x 110% / 4.5% earnings yield).  If Treasury yields or the risk premium rises, such that the earnings yield expands to 5%, the implied S&P target falls to 3,828, or 9% below current levels.

The potential for upwards earnings improvement is also not a given.  Current-year S&P 500 operating estimates are already above 2019 levels in all but three sectors:  Financials, Industrials and Real Estate.  Even if these sectors were to jump to 10% above 2019 levels, we estimate overall 2021 S&P earnings would rise less than 5% from current levels.

Similar to the S&P, we think it will be hard for most TSX sectors to improve on their estimates from here.  Market-weighted forecasts for 2021 now exceed 2019 earnings levels in 7 of 10 sectors, the exceptions being: Communications (-7% vs. 2019), Real Estate (-36%) and cannabis-heavy Health Care (-13%).  On the plus side, Consumer Discretionary (+12% vs. 2019) and Staples (+28%) are up significantly, as are Utilities (+34%).   

We see opportunities in individual names.  Our funds continue to benefit from the ideas generated by one of the best equity research teams on the street, Veritas Investment Research.  Following their advice, we are diligently sticking to companies with strong free cash flows, high quality reporting and room to improve their outlook.  The flow of cash onto the balance sheet should grow equity value, even if multiples continue to contract. 

Year-to-date through May 31st, our Absolute Return Fund has returned 13.5%.  Our Canadian Equity Fund has returned 14.4%, equal to the 14.4% for S&P/TSX.  (Performance based on F series). 

We thank you for your continued support.

Your fellow investors,

Anthony Scilipoti
Sam La Bell

Veritas Absolute Return Fund May 2021 Performance Sheets
Veritas Canadian Equity Fund May 2021 Performance Sheets

April 2021

April 2021

Will the Beats Go On?

The story of this earnings season has been the steady stream of Q1 earnings beats and upward revisions for 2021.  In a typical quarter, roughly 71% of S&P 500 companies beat analysts’ earnings estimates; so far, for Q1-2021, that figure is 87%. 

Predictably, the steady stream of earnings surprises has resulted in a series of upwards earnings revisions that now predict 2021 earnings will far exceed those in 2019. 

Two things stand out for us:  the relatively narrow breadth of these earnings increases and the fact that, in many sectors, updated estimates now far exceed pre-pandemic earnings.  In terms of 2021 bottom-line earnings estimates:

  • For the S&P 500:  2021 earnings forecasts are up ~17% YTD and now exceed 2019 levels by ~26%.
  • For the S&P/TSX:  2021 earnings forecasts are up ~15% YTD and now exceed 2019 levels by ~17%.

For the S&P 500, Financials, IT and Communications account for close to three quarters of this year’s upward move in 2021 operating estimates.  Add in Energy & Materials, and this rises to 92%. 

For the S&P/TSX the sector mix is even narrower.  Financials, Energy and Materials account for ~87% of the YTD increase in 2021 bottom-line earnings estimates.   (S&P/TSX earnings based on Refinitiv data.)

The lack of breadth means many sectors have yet to recover their pre-pandemic outlook.  And the driving forces of this year’s earnings momentum are in sectors that are prone to shorter-term reversals.  With markets still debating the direction of interest rates, inflation and government fiscal policies, higher earnings expectations leave considerable room for sentiment and valuations to soften from here.

On the whole, we think this year’s broad sector differences and uneven progress so far, set up favorable opportunities for stock picking.  As always, our funds benefit from Veritas’ unique forensic-accounting based research, which remains among the best equity research on the street. 

Year-to-date through April 30th, our Absolute Return Fund has returned 8.96%.  Our Canadian Equity Fund has returned 10.71%, versus 10.63% for S&P/TSX.  (Performance based on F series). 

We thank you for your continued support.

Your fellow investors,

Anthony Scilipoti
Sam La Bell

Veritas Absolute Return Fund April 2021 Performance Sheets
Veritas Canadian Equity Fund April 2021 Performance Sheets


March 2021

March 2021

Pacing the Marathon 

Relative to the last thirty years, the TSX sprinted out of the gate in 2021, posting a top ten Q1 return of 8.05%.  Our Canadian Equity Fund (CEF) continued its outperformance in Q1 and is now up 20.3% over the last six months – 251 basis points (bps) ahead of the Index. Meanwhile, our Absolute Return Fund (ARF) bested the Index by 300 bps in March and is up 7.7% YTD with low volatility and correlation to the S&P/TSX. (Performance based on F Series Units.)

The marathon is just beginning, however.  Q1 and Q2 returns tend to be negatively correlated, with a strong Q1 typically followed by a weak Q2.  While not necessarily guaranteeing a reversal, experience suggests that investors should prepare for a choppy second quarter.  Of the 11 times where Q1 returns have exceeded 5% since 1991, in Q2 the TSX has been flat to down 6 times, with returns averaging 1.8% overall. 

They say never look back until the race is over.  But with more than a year passed since the pandemic lows of 2020, it may now be safe to look back, if only to acknowledge how extraordinary the rebound has been.  Early U.S. data suggests corporate profits slipped to 8.7% of national income in 2020, down from 9.0% in 2019, while national income contracted by just 2.6%; the result was a relatively shallow drop in corporate profits of ~6%.  Public company earnings, which are typically more levered, declined by more, with S&P 500 operating earnings estimated to have dropped 22% last year.

But how much worse would things have been had the U.S. government not upped its deficit to ~14.7% of national income, from 5.8% in 2019?  This was a much more dramatic intervention than in 2009 when the deficit hit 10.9%.  Last time around, deficits continued into 2010 (10.7%) and 2011 (9.6%), helping shore up the economy and stock markets. 

U.S. legislators along with their Canadian counterparts appear to understand the need to keep spending.  The U.S. has already rolled out another US$1.9T stimulus package (~9% of GNP) with the Biden administration announcing plans for a US$2T infrastructure package over the next eight years.  The go-forward effects on markets may be muted, however, as the administration plans to fund most of its infrastructure plan by hiking U.S. corporate tax rates to 28% and tightening offshore profit rules.             

We anticipate U.S. stimulus cheques will continue to buoy markets in the early parts of Q2, with volatility returning over the remainder of the year.  CEF is invested to benefit as the economy ramps back up, while defensively positioned should reopening take longer than expected.  ARF is similarly positioned to capitalize on the transition, using strategies to enhance returns and maintain its low correlation and volatility versus the market. (For further details please see our monthly commentaries, linked below.)

In our view, markets are facing a much different race in 2021.  What worked last year is unlikely to work again. Managing this year’s risks requires even greater focus on the fundamentals and careful stock selection.  Research still makes all the difference.

We thank you for your continued support.

Your fellow investors,

Anthony Scilipoti
Sam La Bell

Veritas Absolute Return Fund March 2021 Performance Sheets
Veritas Canadian Equity Fund March 2021 Performance Sheets


February 2021

February 2021

Tantrum Part II 

There was no shortage of commentary about frothy markets in February, even as indices marked new all-time highs.  With valuations continuing to climb, it also doesn’t take much to rattle markets these days.  Exhibit A is the rise in long bonds, which were up 45 bps last month, reminiscent of the beginnings of the 2013 Taper Tantrum, when U.S. 10-year treasuries rose 120 bps.

In 2013, the Fed triggered a sell-off by saying it would slow its bond-buying. This time it only took the Fed saying that it was happy with its current pace.  And unlike 2013, when the Fed reacted to the tantrum by launching a new QE, this time around the Fed seems more reluctant to fuel the market’s already-rampant speculation. As a result, equity investors remain on edge, particularly where valuations are stretched and growth faces a re-rating.  With certain companies investing their cash balances in Bitcoin, we don’t think analogies to March 2000 are too far fetched, at least in some corners of the market.

Most recently, we have highlighted Technology and Renewables as two areas of concern. These sectors now appear to be correcting. We also see pressures ahead for perceived ‘work-from-home’ stocks, as many valuations have raced ahead of fundamentals. With the pace of reopening likely to be uneven and many stocks already recovered to pre-pandemic levels, we think research and active stock-picking will be critical this year and next. We are proud to be backed by some of the best research on the street. 

We are positioned for the market’s change. Over the last six-months, Our Canadian Equity Fund is up 12.77%, 175 bps ahead of the S&P/TSX Index.  Our Absolute Return Fund is up 6.77%.

Thank you for your continued support.

Your fellow investors,

Anthony Scilipoti
Sam La Bell

Veritas Absolute Return Fund February 2021 Performance Sheets
Veritas Canadian Equity Fund February 2021 Performance Sheets


January 2021

January 2021

Barbarians at the Gate

This past year’s market rally has been chalked up to many things – helicopter money, rock-bottom interest rates, FOMO, etc. – but one of its ugly truths was laid bare in January:  global markets have become overly dependent on a quasi gold rush of new retail money.  

GameStop, AMC and Blackberry are merely the latest symptoms.  For some time now, investors have been paying more attention to themes and storylines than to balance sheets and income statements.  And in the short term, it must be said, it is hard to distinguish between this herding and a successful investment strategy.  

The universe of public assets in any sector tends to be relatively fixed – IPOs and secondaries remain a small percentage of market cap every year – so when new money flows in, asset prices are bid up.  The new money also supports trading, with the increased liquidity, all else equal, making assets more valuable.  It should be no surprise that Robinhood makes nearly all of its money from selling its users’ liquidity to institutional investors.  

The risk is that the latest wave of retail money is banking on quick gains and a short turnaround.  If this year’s asset prices are not matched by actual value creation – income, cash flow or otherwise – and relatively soon, sentiment could reverse and new retail money could dry up.  The resulting correction may not be so orderly.

During the extreme volatility, both our funds continued to outperform the market in January with less volatility, as we stick to the things that have always mattered: transparent reporting, excellent management, strong corporate governance, and growing cash flows.  

Your fellow investors,

Anthony Scilipoti
Sam La Bell

Veritas Absolute Return Fund January 2021 Performance Sheets
Veritas Canadian Equity Fund January 2021 Performance Sheets

December 2020

Playing Offense and Defense

Peace of mind was at a premium in 2020, with the S&P/TSX posting two of its worst months in twenty years (March was #239 of 240 and February #231) as well as two of its best (April #1, November #3). Volatility on the index more than doubled versus its long-term average. The incredible rally that brought the S&P/TSX back to life in 2020 was only lacking for two things: breadth and fundamentals.

In terms of breadth, Shopify contributed 4.7% of the 5.60% TSX return on the year, while Materials stocks added 3.4%. The remainder of the TSX composite was down 2.5% on the year. In terms of fundamentals, based on Reuters data, TSX stocks are now priced at more than 17x next-twelve-month earnings, versus just over 15x at the end of 2019, before the pandemic – despite expectations that 2021 earnings will be approximately 3% lower than 2019 levels.

There are few ways for a negative on earnings to trigger a multiple expansion: if investors are suddenly more optimistic than analysts, if new money moves into the market or if interest rates collapse. Buyer euphoria, record high stimulus spending and rock-bottom interest rates are clearly factors driving up current markets, however these factors can reverse quickly, which is why we continue to be cautiously positioned against the market’s rally.

With our focus on quality and capital preservation, the Veritas Canadian Equity Fund outperformed the index in Q1-2020 and again in Q4-2020. Most importantly, the fund is well positioned to both capitalize on the reopening theme and protect capital, because the timeline remains uncertain. In times like these, the role of the Veritas Absolute Return Liquid Alternative Fund has never been clearer. The Fund returned 3.27% in 2020 after fees, with less than half the volatility of the index and near zero correlation.

Diversifying portfolios against market exposure should continue to deliver benefits in 2021.  

Thank you for your continued support and trust.

Anthony Scilipoti
Sam La Bell

November 2020

What A Difference A Month Makes

At the end of October, the world still did not know if any vaccines would work, or if effective inoculation programs could be rolled out globally by the end of 2021.  Now, with seemingly every vaccine reporting promising results (even Sputnik V), confidence in a full economic recovery appears to have skyrocketed.  November was, in short, a great month to be fully invested.

Outside of the Materials sector where ~60% of stocks posted negative returns, more than 90% of TSX composite stocks were up and 60% of stocks were up by double digits.  In last month’s commentary we mused about how expensive both Tech and Materials were looking – while Materials traded down, Tech did not:  9 of 10 composite names in Information Technology beat the index.  In this case, investors appear to be betting that many of the societal shifts benefitting Technology will compound.  And the pursuit of growth over dividends continued, with stocks without yield posting a market-weighted +15.5% return versus +9.8% for dividend payers.

The question, of course, is how sustained the current rally might be.  Here we see a few potential risks:  rising interest rates, particularly if the Fed backs off its record bond-buying program in 2021; a normalization of earnings yields on stocks relative to bonds; and the potential for more normal levels of inflation.  Any or all of these factors could generate headwinds next year, even if the worst set of market outcomes now appears to be off the table.

Our funds did well in November, with the Canadian Equity Fund outperforming the index and the Absolute Return Fund posting a solid positive return, extending its performance for the year.  We continue to be cautious as we think the vaccine news has brought on a period of high expectations that may take longer to realize than may be imbedded in certain stock valuations. The flip side of anticipation is often disappointment. 

In our experience, companies are just as likely to stretch to meet expectations as they might be to gloss over poor performance.  We remain on the lookout for opportunities, both long and short.

We thank our fellow investors for their continued support.

Anthony Scilipoti
Sam La Bell