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Here are the highlights from our October quarterly webinar with our Portfolio Manager Sam LaBell. Key topics include the transition from the baby boomer generation to millennials, fiscal deficits, inflation risks, employment trends, consumption patterns, bond yields, and potential scenarios for equity market performance.
00:00 – Introduction and Fund Performance
The Veritas Canadian Equity Fund is outperforming due to positions such as Manulife Financial Corp. (NYSE, TSX: MFC) and Canadian Western Bank (TSX: CWB), as well as various energy and gold names. “Bottom-up stock picking is always what Veritas has been known for,” Sam said. He also goes over some of the names the Veritas Absolute Return Fund has been short. “Even with the market that’s done really well this year, we’ve been able to find a number of really good short ideas,” he said. “We’re not looking for shorts that necessarily go to zero. We’re looking to build a portfolio that, averaged out, will underperform the index and underperform our longs.” The Veritas Next Edge Premium Yield Funds is a long-only fund that’s overlaid with an option writing strategy to reduce risk and yield 5% annually.
08:44 – Demographic Shift: Baby Boomers to Millennials
Millennials now outnumber baby boomers in Canada and the U.S. As boomers retire and adjust their spending and savings, the question is whether millennials’ increased spending can compensate for the effects of boomer retirement. This demographic shift has implications for economic growth, consumption patterns, and market behaviour.
13:45 – Asset Ownership and Savings Rates
The 55-years-and-older bracket dominates equity and mutual fund ownership in the U.S. “They are still willing to take quite a lot of risk. They haven’t shifted towards yield products.” Sam also analyzes savings rates, noting that the post-pandemic excess savings have largely been spent, and the current savings rate of around 4.5-5% is likely the peak. “As an investor, you’re looking for sectors where the demographics are in your favour. So in areas where the boomers still plan to spend, and the millennials are also spending, the confluence of those two generations spending at the same time is very good for your investment returns.”
18:04 – Sector Implications and Case Study: Automotive Industry
Declining driving activity among boomers and lower driver’s license rates among millennials pose challenges for automotive demand and sales.
20:14 – Fiscal Outlook and Inflation Risks
Sam argues that the sustained deficits above 5% of GDP in the U.S. are highly inflationary, posing risks for bond yields and inflation. He also examines the relationship between the 10-year Treasury yield and the Fed funds rate, suggesting potential scenarios on yields and their impact on equity valuations.
23:07- Economic Conditions and Employment Trends
Sam analyzes current U.S. economic conditions, including consumption expenditures, employment trends, and wage pressures. While consumption remains strong, driven by a robust employment market, there are signs of inflationary pressures from factors like declining hours worked per worker and higher wage settlements. Retail sales are fairly weak, but there are pockets of strength.
27:33 – Direction of Bond Yields
Sam explains the scenarios for when the 10-year bond yield is at a discount to the federal funds rate, as it is now.
33:37 – Interest Rates and Earnings Risks
Using a valuation model based on earnings forecasts and required earnings yields, Sam presents positive and negative scenarios for the S&P 500 index. The positive case assumes strong earnings growth and a modest equity risk premium, resulting in mid-single-digit returns. The negative case considers an earnings recession, leading to potential declines of around 8-9%.
41:10 – Conclusion and Advantages of Veritas Asset Management Funds
In conclusion, Sam emphasizes the importance of participating in equity markets while being prepared to pivot to lower-risk alternatives. He highlights the need for growth, even in yield plays, as well as global champions and diversification. “There is a temptation after having multiple years of very strong equity returns to go all in on growth and all in on equities. That’s the wrong instinct at the top.” Finally, he provides advantages of our Veritas Asset Management funds, including low correlations to the index and lower standard deviations, offering smoother, competitive returns.