Then I realized how bad this idea was, especially after examining how these market sectors such as Canadian private equity, debt and mortgages behave in this current environment.
The nice thing about investing in public markets is that you get full price transparency and more often than not, liquidity is not a problem, as long as you stick to the stocks and / or ETFs of large companies. This does not mean that the markets are successful all the time, as they are known to incorrectly assess future expectations.
However, it can create opportunities for those who want to profit from pricing errors as they occur, while providing a powerful lesson for those who indulge in emotion and buy the tops for fear of missing or selling. down on loss aversion. At least for the most part, investors can withdraw their money and redeploy to other areas of the market to recover losses from any mistakes made.
Let’s move quickly to the current situation, where government procurement is still trying to assess the long-term risk of fallout from the coronavirus, with experts not knowing whether the assets are over, under, or undervalued. As a result, there are large daily fluctuations until a certain level of this uncertainty begins to dissipate.
For those who argue for a market closure until there is better forward visibility, we think it is worth examining these less transparent segments, such as the private debt markets. and mortgages, to determine compromises.
Ironically, because their assets are not priced on a regular and consistent basis, many private funds have reported a linear return profile which therefore offers a so-called “low correlation” to the traditional portfolio.
It works until there is a major event like this, plunging the mortgage market into complete chaos and putting asset prices at great risk.
To add perspective on the severity of the situation, nearly half a million Canadians have applied for mortgage deferrals and omitted payments in the past two weeks alone, according to a report by the Canadian Bankers Association. In total, the country’s six largest banks have carried over 10% of the mortgages in their portfolios. So ask yourself, how are the small private mortgage and investment companies going to fare in this type of environment?
Although there is a great deal of information on the depth of the situation in the US private debt markets, we have surprisingly heard little about it in Canada despite the fact that our shadow banking market is valued at over 1, $ 5 trillion and represents 10% of total financial assets, according to the Bank of Canada. The closest we are to Canada’s public REITs, which have sold nearly 30% this year, while higher risk publicly traded lenders like Home Capital Group and Equitable Group are down 50 to 60% – something to keep in mind when looking at the net asset value of your private fund on your end of quarter statement.
On the contrary, if it were a completely transparent public market, there would be a differentiation between good private debt managers and bad ones. Investors could finally have the opportunity to seek out the quality of the investments and managers of these funds and to make the appropriate reallocations to those who have assets capable of withstanding this crisis, and to sell those which are unlikely to survive. If the good funds were oversold, it might even be a good buy opportunity for those who are underweight real estate in their portfolios, which we think is a great diversifier.
That said, none of this really matters because these markets are essentially closed, liquidations are likely to be frozen and it is a roll call on what these valuations will ultimately look like in the months to come. If this is what happens if the stock markets were closed, it really is a terrible idea after all.
Martin Pelletier, CFA, is a portfolio manager at Wellington-Altus Private Wealth Counsel Inc. (formerly TriVest Wealth Counsel Ltd.), a private and institutional investment firm specializing in discretionary risk management portfolios, audit / surveillance of investments and advanced taxes and estates. Planning.