How Are You Holding Up in This Market?

“How are you guys holding up”? It’s a question that I’m running into more and more often as stock markets wrap up their worst first half of the year in half a century. The strange part is, I’m not hearing this question from clients, but rather from other financial advisors and people who work in the wealth management industry (more on this later). As of the end of June, the TSX is down 9.6% on the year and the Canadian Bond Index is down 12.2%. The S&P 500 is down 18.5%, while the tech-heavy Nasdaq index is off 29.7%. A number of significant investment firms in the Canadian marketplace (no names) have balanced funds that are down more than 15% so far this year. Shopify has dropped in value by over 70% from the price it traded at in December 2021! Crypto is down....let’s not even go there.

So how are we holding up? Really well actually, considering the rocky environment.

The table below lists the relative performance of the main public market investment managers we use for our clients vs. the indices that we benchmark them against as of the midway point of 2022.¹

As you can see, our public market investment managers are significantly outperforming their benchmarks across each of the asset classes in the above table. Nobody ever likes to be down money halfway through the year, but we’re actually very happy with the performance of our managers over the last six months. It has been great to see this relative outperformance during a volatile time in financial markets, and reassuring after watching a few of our managers generate positive returns that trailed market indices during the bull market of 2020-21.

It’s a cliché at this point, but the majority of family office clients are not in the “Get Rich” business, they’re in the “Stay Rich” business. As a result, when we’re selecting investment managers, we focus on their overall risk adjusted performance, but we also zero in on how they’ve performed historically during the bad times (2000-2002 Dot Com Crash, 2008 Global Financial Crisis, Q1 2020 COVID Pandemic, etc.). Ideally, we look for managers that can mostly keep up with the market in the good years but be down significantly less than the market in the bad years. Based on the first half of 2022, it feels good to let our clients know that our investment managers are performing exactly as we hoped they would amidst challenging market conditions.

So, from a performance perspective, we’re holding up quite well. But what makes us happier than the outperformance of our managers, is the reaction of our clients to the events of the last six months. Even though war has returned to Europe, inflation is running at 40-year highs, and global stock markets are down ~20%, we haven’t received a single panicky phone call or email from a Northwood client so far this year. No one has sold out of risk assets and gone to cash while waiting for the storm to pass, or even called us to ask if that might be a good idea considering everything going on in the world.

Why is this? Well, for one, we have worked with all our clients to help them develop a long-term mentality and outlook when it comes to evaluating the performance of their investment portfolios. This isn’t always easy or intuitive, but if you’re able to tune out the short-term gyrations of the market and focus on the long-term picture, you’re far more likely to be a successful investor. At a casino, your odds of leaving with more money than you came in with fall with each hour you spend gambling. The odds for investing in the stock market are the exact inverse. As the below table illustrates, your odds of making money in the stock market increase substantially as you extend your time horizon from 1 month (63.1%) to 5 years (88.1%) and 20 years (100.0%).²

A second reason why we’re not getting any phone calls from clients is that people are less likely to worry and think about selling when their portfolios are down 0-10%, than when their portfolios are down 15-25% (or worse). The reason why we focus on risk-adjusted returns, and our manager’s historical performance in down markets, is that we believe that the ‘ride’ matters. If your portfolio moves slowly and steadily up over time, as opposed to swinging drastically in both directions, you’re less likely to make knee-jerk and sub-optimal decisions to buy or sell at the wrong time. To illustrate this point, check out the below chart comparing the stock price performance of Hilton Hotels and Zoom from the beginnings of the COVID pandemic in February 2020 to February 2022. They ended up in the same place from a performance perspective at the end of the two-year period, but they took drastically different routes to get there.

Beyond the two reasons cited above, I think it’s also worth pointing out that many of our clients have diversified investment portfolios that include material allocations to non-public assets. We currently offer our clients the opportunity to invest in real estate, private equity, venture capital, and infrastructure managers that many of them would not be able to access outside of their relationship with Northwood. Beyond these existing asset classes, we will be adding a new uncorrelated strategies manager to the mix later this year. We continue to believe that investors can experience significant risk-adjusted benefits from allocating a material portion of their overall portfolio (usually 10-30%) to these alternative asset classes.

This article isn’t meant to come across as us banging the table on how well our investment managers are performing. We’re still humble Canadians who believe that the management of a family’s wealth is a broader job than simply managing a family’s investment portfolio. We’re also very aware of the large portion of the Canadian ‘wealth’ management industry that is not interested in doing anything beyond managing their client’s investment portfolios. With that said, we’re proud of our manager’s performance during this time frame, and we figured that writing this piece would be a good way to answer the question in the title of this article.

To close, I have decided to include a testimonial that we received from a very financially sophisticated Northwood client earlier this week. This client is a retired executive who spent his career working in the financial services industry in Canada. I think his testimonial does a good job of illustrating what we do for clients, and what this means from an investment perspective.

‍“We have been Northwood’s clients since 2012 and our experience has been first-class. We particularly appreciate Northwood’s professionalism, attention to detail, willingness to hold us accountable, ability to look at issues from our perspective and their use of additional experts when required.  

From an investment approach, we found Northwood’s perspective on portfolio returns to be particularly useful and insightful. This perspective has led to a well-structured, conservative portfolio which has successfully weathered periods of high volatility and market declines. We do not hesitate to recommend Northwood to anyone in similar circumstances as our family.”

If you’re interested in learning more about our perspective on portfolio returns, and our overall approach to investing, please reach out to me, or your regular contact at Northwood.