- Market Commentary
Maintaining Discipline During Challenging Times
March 18, 2022
On February 24th, Russia invaded Ukraine and set off a devastating humanitarian crisis that has gripped the world. At the time of writing, Russia’s relentless attacks continue as the world grapples with this unexpected challenge to geopolitical order. Our hearts go out to the citizens of Ukraine who are suffering incalculable and unimaginable losses. Their bravery and passion are awe-inspiring to say the least.
WealthCo welcomed Dave Makarchuk as its new Chief Investment Officer in early February. Dave’s grandparents emigrated from Ukraine to Canada in the early 1900’s, and Dave was able to visit Ukraine in the early 1990s. “My extended family are from the Western part of Ukraine, and fortunately for them the invasion hasn’t yet reached their area. But while the uncertainty is agonizing their resolve is strong. We are certainly praying for a quick and peaceful resolve to the situation.”
The series of destructive events in Ukraine have certainly contributed to another unprecedented and unpredictable environment. Makarchuk brings over 20 years of institutional investing experience to WealthCo and is confident that discipline and focus are the keys to long-term investment success during periods of market volatility such as this.
“The first reaction for many novice retail investors is to over-react to major geopolitical events, but past experience has definitely shown us that ‘staying the course’ is most likely to pay off. As a fiduciary making decisions on behalf of all of WealthCo’s investors, I’m committed to making prudent decisions that are best for them in the long-term.”
His personal investment philosophy aligns quite well with WealthCo’s, making for a smooth transition during incredibly choppy times. “Since joining the team,” Makarchuk shares, “I’ve been busy reviewing the current portfolio and planning our strategy for 2022 and beyond. I’m very happy with the foundation that has been built and am committed to ongoing identification and investment in future opportunities which are aligned with our four key deliverables.”
Those four deliverables are:
Deliverable #1: Enhanced Diversification
The reality of any war, or really of any broad and large-scale global event, is that some sectors will be hurt more than others and that some may be rewarded. That’s where diversification is really important, and this is why WealthCo focuses on being proactive with regards to portfolio decision-making.
“Diversification is a fundamental principal of prudent investing,” Makarchuk says. “Diversifying across asset classes is the most powerful strategy, and WealthCo offers individual investors the opportunity to diversify across alternative investments in a way that isn’t typically available via retail solutions. Our diversified pools of Infrastructure, Real Estate, Private Equity, and Mortgages very nicely complement our core exposures to stocks and bonds.”
But one needs to be careful not to over-diversify. “Investing in securities simply because they’re part of a market index, or because one’s portfolio doesn’t have exposure to that segment, doesn’t make sense. Especially in today’s environment, it is important that we focus on adding investments that are complementary to the portfolio we already have while keeping in mind that some exposures should be avoided right now.”
Especially in light of current events, and the high inflationary environment we are currently in, WealthCo expects to be increasing allocations to those asset classes that traditionally have performed well in times of inflation such as infrastructure and floating rate loans.
Deliverable #2: Reduced Volatility
With a strong background in pension funds and over 20 years of institutional investment experience, Makarchuk is well-suited to drive the ongoing evolution of the WealthCo portfolios. And finding ways to align enhanced diversification with reduced volatility is top of mind for him during these turbulent times.
Volatility and financial markets go hand in hand. The only way to eliminate volatility is to eliminate risk, but that means also eliminating returns. “I’m certainly hearing that our clients are seeking solid rates of return, but that they’d prefer less volatility along the way,” Makarchuk shares. To balance these competing objectives, Makarchuk explains that “a big part of our strategy is to build a diversified mix of ‘return drivers’. If we have a broad mix of exposures, we’re less likely to have periods of underperformance.”
“We’d much rather focus on hitting singles and doubles,” Makarchuk says. “We’re not designing a portfolio that is swinging for home runs and striking out a lot.”
Deliverable #3: Capital Preservation
Long-term capital preservation is a minimum objective for nearly every investor. “Most investors understand that in order to pursue healthy rates of returns over the long term, they need to be prepared to accept some risk of capital loss in the short term. But no one likes to lose money…least of all us.”
“Our Conservative model portfolio is best aligned with the capital preservation objectives of those investors with a lower risk tolerance,” Makarchuk states. “In this fund half of the investment portfolio is allocated to higher quality, shorter-duration fixed income investments. These investments are more likely to preserve capital than longer-duration investments should interest rates rise, so we’ll continue to tilt the portfolio in that direction.”
For investors with longer-term investment horizons, a WealthCo model portfolio with healthier allocations to equities or alternatives likely makes more sense. “Diversification helps to preserve capital over the long term,” Makarchuk says, “so we’re committed to continuing to implement a variety of investments so that losses in certain segments are complemented by gains in others.”
Deliverable #4: Adequate Cash Flow
Managing cash flow can be one of the more dynamic aspects of portfolio management, particularly in times of market uncertainty. WealthCo’s asset management team regularly updates our expectations of investor cashflows along with our expectations of future private market capital calls and redemptions.
Makarchuk gives the following insights into the WealthCo approach to managing an adequate supply of cash flow. “Excess cash holdings are a drag on long-term returns, so we strive to keep our cash levels relatively low in most instances. However, when market uncertainty increases or when we anticipate larger capital calls in the near future, we are comfortable with slightly higher cash levels to mitigate risk.”
WealthCo has had no issues meeting cashflow requirements for the funds since their inception, including that stressful first month of the pandemic when liquidity was a broader market challenge as well as the first few weeks of Russia’s invasion to Ukraine.
“Comparatively speaking, market execution following the invasion has been very strong as has investor patience. While we’ve assessed liquidity carefully, there haven’t been any issues.”
Getting to Know Dave
Q: Tell us about your family
A: My wife Sue and I have two amazing boys…both are now in the United States. Ben completed a Masters degree in Community Music at the University of Southern California and recently got married to his soulmate who he found there. Josh plays hockey for the University of Michigan-Dearborn and is completing his freshman year, we’re looking forward to having him home this summer!
Q: What is your ideal way to spend a Sunday afternoon?
A: Golfing at Mickelson National…the best course in Calgary!
Q: What is your favourite place to travel?
A: We’ve enjoyed adventure vacations rafting the Grand Canyon, hiking to Machu Picchu and exploring the Amazon, and cruising around Tahiti. But we love spending time in Invermere…it’s our home away from home.
Q: Who is someone you admire?
A: My boys! I’m so proud of how responsible, adventurous, and articulate they are!
Q: What is your favourite movie?
A: A Few Good Men…I can watch it over and over again.
Q: What drew you to working in the institutional investment field?
A: After completing degrees in Actuarial Science and Finance, I started my career as an actuary…but soon learned I’d much rather help people make money rather than focusing on how much they owed or how long they’d live.
Q: What are you most excited about in your new role at WealthCo?
A: Helping our clients meet their long-term objectives. I believe that combining prudent diversification, patient portfolio construction, and personal connections with our client base to understand their objectives and risk tolerance is the recipe for success.