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Posted by Craig Basinger on Dec 8th, 2021

It’s Beginning to Look a Lot Like Market Recap Time

In now what is a time-honoured two-year tradition here at Purpose, we recruited a handful of our favourite PMs and asked them to reflect on 2021 and what they anticipate for the year ahead.

Read on for their thoughts on inflation, 60/40 portfolio construction, Zuck’s Metaverse, the best gifts for this market environment, what sectors and asset classes were on the good and bad list this year, and more.

Investment Strategies and Portfolio Construction
Comments on the Future of Tech
Analysis of ESG Investing and Climate Funds
Reflections on the Cannabis Market
Best Gifts for the Market Environment

Craig Basinger Talks Investment Strategies and Portfolio Construction

Speaking broadly, what was on the naughty and nice list this year? Do you expect the same trends to continue in 2022?

In 2021, seems just about everything made it onto the ‘nice’ list with only a few pockets landing on the naughty list. As of the beginning of December, equity returns have been very pleasant, with most major markets enjoying strong double-digit returns.

The majority of commodities rose on the year, notably energy and industrial-related inputs. There were a few blemishes, but these were mainly in the safe-haven defensive assets—something you might expect in such a good year. Bonds were down a bit as yields rose, thanks to an improving global economy. Gold suffered. But, overall, the good news stories really outnumbered the bad news.

Percentage of commodities' growth (Year-to-date)

2022 will likely prove to be a tougher year, and not just because things went so well in 2021. Inflation pressures continue to build, which is starting to creep into longer-term expectations. Combine this with central banks starting to tighten and/or reduce quantitative bond-buying programs, and it sets the stage for yields to continue their trend creeping gradually higher.

This is an important pivot as easy monetary policy certainly provided a lot of lifting for the markets in the back half of 2020 and 2021. Volatility and market swings are likely to become larger, especially compared with the pullbacks of 2021, which all proved short and shallow.

On a positive note for 2022, the global economy does continue to emerge from the pandemic overhang: not in a straight line— it’s more akin to two steps forward, one step back (Delta, Omicron)—but the trend appears favourable. This should continue to help earnings growth, which is the bedrock of the markets.

When it comes to giving holiday presents, you have to balance the fun with the practical. When it comes to portfolio construction, is the 60/40 split still a valuable rule of thumb?

Proper asset allocation sits at the foundation of just about every portfolio, and there is no denying the 60/40 has delivered over the decades, including in 2021. As of the end of November, a global balanced allocation is up a little over 10%, even with a slight drag from the bond side, as equities more than compensated.

That being said, the bond allocation will likely continue to be a drag as we head into 2022. Rethinking a portion of that defensive component to include alternative defensive strategies that will hold up as yields normalize will likely continue to be prudent.

When analyzing their portfolios for the year ahead, what should investors be sure to check twice?

Inflation risk – while we don't believe runaway inflation is coming, the trend is higher and depending on your allocation, this is an added portfolio and financial plan risk. Tilting a bit more into investments that can maintain their real value would help mitigate this risk should this bout of inflation prove resilient. There are many options from real assets and commodities—tilting to value from growth could go a long way to protecting not just your portfolio but the resilience of your financial plan.

Nick Mersch Talks Tech Investing

In your opinion, was the technology sector on the good or bad list this year?

2021 has been yet another rollercoaster year for tech stocks. Over the first half of the year, growthier names within the tech sector had a much slower start than the rest of the market. High-growth names pulled back after fatigue seemed to set in after a landmark 2020, and rising interest rates made investors question valuation levels. In the second half of the year, as rate worry subsided, growth names caught up and surpassed both the NASDAQ and the S&P.

Dominating the discussion in technology nowadays is interest rates. Since high-growth names are longer-duration assets with their cash flows pushed out to later periods, they are more adversely affected by upward movements in interest rates. However, current inflation readings are starting to hit new highs, causing real rates to be deeply negative. In a continued negative real rate environment, assets will crowd around growth equities as there are no growthier equities than technology stocks.

It seems like Mark Zuckerberg is giving us the gift of the Metaverse. How do you think the advent of the Metaverse will affect the technology sector going forward?

Facebook underwent a massive rebrand towards “The Metaverse” with the new company name “Meta.” They did this because they realized that only boomers now boot up the “blue F” website/app and that it’s time to pivot. But don’t be fooled. This is not like when Google renamed itself Alphabet then just kept doing the same thing. This is a fundamental change in the path of the company that is going to be incredibly exciting.

They are now laser-focused on building the Metaverse, which is a persistent online space where people will work, play, and participate in a new socioeconomic arena. Why be a version of yourself limited to the physics of the real world when you can shoot fireballs out of your hands?

This concept is at the center of convergence, where all intellectual property is starting to blur the lines across platforms (Netflix, Facebook, Instagram, Pinterest, and Discord) and mediums (TV, movies, music, and video games). The most exciting part of this ecosystem is when you attach real-world economics in a play-to-earn (P2E) economy, which fundamentally changes what “work” looks like.

When people talk tech investing, you hear a lot of acronyms: whether that’s FAANG (Facebook, Amazon, Apple, Netflix, and Google) or the newly coined MAMAA (Meta, Apple, Microsoft, Amazon, and Alphabet). If you could invent a new acronym of tech companies that are on your holiday wish list, what would it be?

In the Purpose Global Innovators Fund, we focus on a core holding of software companies. I believe that these companies are at the forefront of digital transformation and have the most attractive business models out of any publicly traded companies.

Software companies have (1) scalable products, (2) highly recurring revenue, (3) high gross margins, (4) bulletproof balance sheets, and (5) massive and expanding addressable markets. The “Four Horsemen of Software” (in this analogy, the horsemen are harbingers of good things...) are Microsoft, Adobe, ServiceNow, and Salesforce, or as I like to call them “MASS.” If you don’t go to mass on Christmas, at least go to MASS in your portfolio.

Jeremy Lin Talks Climate Funds and ESG Investing

This year, your team launched Purpose Global Climate Opportunities Fund. What type of investors might find this fund to be a good stocking stuffer to round out their portfolio?

Reducing our carbon intensity is not just limited to clean energy or electric vehicles, it's a new way of doing business. We look for leaders across the entire energy value chain that are actively doing their part to enable the world for decarbonization.

We provide investors with incremental diversification from a variety of industries including renewables, autos, utilities, metals & mining, cleantech and much more— all with the tailwind of increasing pressure from consumers and governments for corporations to achieve carbon neutrality.

How can we as a society balance today's energy needs while continuing to push forward advancements in decarbonization?

It's easy to paint the entire oil and gas industry as a villain, but industries such as marine transport, aviation, petrochemicals, cement & steel, and fertilizers are just a handful of examples of sectors that are hard to decarbonize today. Plus, our way of life as we know it would come to a quick end if the entire oil & gas industry was to disappear overnight.

This means we must come to peace with our need for traditional fossil fuel today, and reward best-in-class companies that can provide transition fuels with the lowest emissions.

What advice would you give to an investor whose New Years resolution is to invest more sustainably in 2022?

There are many promising cleantech companies coming to market every day, but not all of them will prove to be economically viable. Diversify your bets and invest in a portfolio that can incrementally reduce emissions and serve the energy needs of today while also addressing emission reductions for tomorrow.

Nawan Butt Talks the Future of the Cannabis Market

In your opinion, was the cannabis market on the good or bad list this year?

The cannabis industry was on its best behaviour this year. There were large strides in expansion of the total addressable market with many states shifting gear into medical use or going full steam into the adult-use market.

Operators took full advantage and grew their toplines aggressively while churning handsome profits. The industry took strikes in the discussion of further federal reform in the United States. Meanwhile, Canadians started better understanding their consumer and have been right sizing their supply imbalances. Both sides of the border have shown significant progress in their market development.

Despite all these strides, the industry was given a lump of coal for Christmas. Stock performance has struggled on the backs of slower-than-expected reform. What remains undeniable though is the spirit of these operators as they are sure to shine that coal until it turns into a diamond.

If you could give the gift of investment advice this holiday season, what would you tell prospective cannabis investors?

Patience is the virtue that ultimately wins in the struggle of cannabis proliferation. The question of cannabis reform is a question of "when" and not "if." For those who are patient, there will be rewards to reap. There is a clear disparity between fundamentals and valuations—something all savvy investors are watching closely. But it’s only the Canadians who are ahead of the pack and already in.

What’s on your holiday wish list for the cannabis sector next year?

Comprehensive reform is the big wish, but we will settle for incremental reform as well. If politicians can come together and help the US cannabis industry compete on equal footing as other industries, that would be a huge win for the patient. We think this can be achieved incrementally by the SAFE Act, the re-instatement of Cole Memorandum, or the STATES Act. However, comprehensive reform could also be around the corner as cannabis decriminalization becomes a mainstream issue in the US.

Greg Taylor Talks Best Gifts for this Market Environment

Given everyone’s concern with inflation and tapering, if you could give the gift of investment advice, what would you tell investors to help arm them for a successful 2022?

There is a chance 2022 will be a very different year from what we have gotten used to. Since the start of the pandemic, the global central banks and governments—to their credit—have done everything they can to keep their economies and markets moving higher. But with the pandemic fading away and inflation returning, their tone is going to change. The ‘Fed put’ may disappear, and if inflation rates keep spiking, investors may have to adapt to a more hostile Fed. Expect more volatility and that the “buy the dip” mentality may fade.

Purpose Specialty Lending Trust was certainly on the nice list this year—winning first place in the Private Debt category for best one-year return at the Canadian Hedge Fund Awards. What do you think has been key to the fund’s success?

The PSLT fund is setup to give Canadian’s access to many of the world’s best private debt managers. This is a fund we are very transparent with by marking monthly to market and making sure the NAV is fully representative of what the fund is worth.

This resulted in some performance pressure in 2020 as we proactively adjusted the NAV for market conditions, but as the economy and markets have recovered and the funds have performed as expected, we have seen the portfolio recover and act much better of late. In a low interest rate environment, we expect private debt to continue to hold a place in investors' portfolios and believe this structure is a great way to get access to it.

Covid-related government stimulus measures might be one gift we may no longer see under the tree going forward. How concerned are you about how the removal of stimulus measures might affect the economy in the short term?

As we all get used to the “new normal,” financial markets will have to do the same. The stimulus efforts have been great to help many people, but it has also resulted in pockets of inflation and changed how many go about their daily lives. These efforts are about to come to their natural end: this may be challenging for some, but it could create opportunities as well.

Investors will need to be positioned for potential volatility around these events and look to overweight sectors that will benefit, while avoiding those that have been held up by artificial factors.

Sources: Charts are sourced to Bloomberg L.P. unless otherwise specified.

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Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Certain statements in this document are forward-looking.

Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments and the portfolio manager believe to be reasonable assumptions, Purpose Investments and the portfolio manager cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Craig Basinger, CFA

Craig Basinger is the Chief Market Strategist at Purpose Investments. With over 25 years of investment experience, Craig combines an educational foundation in economics & psychology with years of experience in both fundamental and quantitative research. A long-term student of the markets, Craig’s thoughts and insights can be seen in his Market Ethos publications and through his regular contributions on BNN.

Craig and his team bring a transparent and cost-efficient approach to investment management. The team provides asset allocation OCIO services and directly manages over $1 billion in assets. The team manages dividend mandates, quantitative risk reduction strategies and asset allocation services.

Nicholas Mersch, CFA

Nicholas Mersch has worked in the capital markets industry in several capacities over the past 10 years. Areas include private equity, infrastructure finance, venture capital and technology focused equity research. In his current capacity, he is an Associate Portfolio Manager at Purpose Investments focused on long/short equities.

Mr. Mersch graduated with a bachelors of management and organizational studies from Western University and is a CFA charterholder.

Jeremy Lin, CFA

Jeremy has over 11 years of investment management experience and has been with Purpose as a Portfolio Manager for 5 years. He oversees many Purpose credit products with Sandy Liang, the Head of Fixed Income, and has sector specialties including oil & gas, utilities, renewables, and petrochemicals. He holds an MBA from University of Toronto, Rotman School of Management and is currently a CFA charter holder.

Nawan Butt, CFA

Nawan has spent 5 years with Purpose developing a deep understanding of client needs with the product team before applying his skills sets in portfolio management starting in 2018. Nawan combines in depth fundamental research with quantitative overlays in contribution to the security selection processes for the firm. Working closely with the CIO, Nawan is also responsible for the implementation of asset allocation across multiple mandates. Nawan earned his MSc in Finance from Simon Fraser University and is a CFA charterholder.

Greg Taylor, CFA

Greg Taylor is the Chief Investment Officer of Purpose Investments. A data-driven manager with a focus on managing risk through active-trading strategies, Greg specializes in finding and exploiting pockets of volatility in the market to drive returns. He spent more than 15 years managing pension and mutual fund assets at Aurion Capital Management. He also held a role of senior portfolio manager at Front Street Capital and LOGiQ Asset Management before coming to Purpose Investments.

Greg serves on the investment committee for the MS Society of Canada and advises the finance program’s portfolio management course at Bishop’s University. He has won numerous Brendan Wood International “TopGun” awards and is a regular host and guest on BNN Bloomberg and Toronto’s all-news radio station, 680News. Greg is a CFA Charterholder and has a BBA in Finance from Bishop’s University.