Mapledene Financial Group

Mandeville Private Client Inc.

Second Quarter 2013 Review 

July 18th, 2013


Now that the summer is finally here, at least it is supposed to be, it is a great time to be spending relaxing time with family and friends. My semi-annual review will be a recap of the current markets for the first six months as well as other noteworthy items.

Here is a summary of market performance in the first half of 2013, all in local currency, as of June 30, 2013. This understates returns from investing in the US, as the strong American dollar has boosted returns. With its resource exposure, Canada has continued the pattern of the past couple of years of continued underperformance.

2013 Canada Stocks S&P/TSX U.S. Stocks S&P500 Europe Stocks Global Stocks Canada Bonds Global Bonds
Year to Date -2% +13% +4% +10% -2% -5%
Past 12 months +5% +18% +15% +19% 0% -2%
3 years average annually +2% +16% +5% +11% +5% 4%

Source: MSCI (Stocks) & Manulife Investments (Bonds), returns including dividends & interest, all returns in local currency. Canada bonds – DEX, Canada Bond Index, Global Bonds – Barcap Multi-universe

In my last letter, we pointed out the emerging strength in US markets based on the prospects for an ongoing economic recovery. The US economy seems to be finally emerging from a very deep, and long term slump. Housing is improving, unemployment is getting better and politicians seem to be making some progress on trimming spending deficits. In January, 2000 during the heights of the tech bubble, the S&P500 (US market’s major index of 500 large corporations) made a high just shy of 1500 points. It took over 7 years, but in July, 2007 the S&P500 made the same high just above 1500. Another six years later and the index seems to have finally broken out and is now at 1,631 points. In summary, the US stock market went sideways with a virtual zero return for 13 years. Now that the market appears to have broken out, many strategists feel that the market is set for a new upward trend that ought to last for several years. If indeed this is true, and the US economy is breaking out, this will eventually be very good for Canada as the US is still our largest trading partner.

Also in my last letter we pointed out the interest rate issues, and I felt that interest rates would be rising at some point. Indeed they have. In June, the US Federal Reserve announced that if the US economy continues to improve, that they would at some point start to reduce the amount of monetary stimulus that is being provided. In short, the Federal Reserve has been buying 85 billion of bonds and mortgages for about the past year. This is in effect printing money. The idea is that by buying bonds and mortgages, and flooding the financial system with money, that not only will interest rates remain low for an extended period, but that the extra money in the system will eventually lead to economic growth and an increase in the price of assets.

In other words, the Federal Reserve is trying to re-inflate the economy by its monetary policies. If the economy is improving and returning to normalcy, then the Federal Reserve should not be purchasing financial assets, nor should they be printing money. If they start to reduce this activity, or even stop it completely, the market will view this as the end of cheap money and interest rates will invariably rise. In May of this year, the 10 year US treasury bond had a yield of 1.63%. By Friday July 5th, the US 10 year treasury had a yield of 2.72%. This means that in six weeks, US interest rates have moved up by almost 1% which is a huge increase by any standard.

Increasing interest rates impact your investments in a number of ways. First, fixed income investments will fall in value. There is an inverse relationship between price and yield for a bond. If interest rates rise, the price of the bond will fall. As interest rates have increased these past couple of months, bonds, corporate bonds, high yield bonds have all fallen in value. Second, certain stocks will also fall in value, such as pipelines, real estate investment trusts, preferred shares and even some dividend paying stocks.

To put the current scenario in perspective, interest rates have been falling for 30 years. Many of you will recall the mortgage rates in the early 1980’s of 15% annually. Mortgage rates are now 2 or 3%. This trend of falling rates may finally be over, but that doesn’t mean we will see 15% mortgage rates again anytime too soon. In spite of the recent uptick in rates, most strategists feel that rates will stay low for years to come. If interest rates go up too much, the economy will go right back into a downtrend, which isn’t what anyone would want. So while rates may normalize in the coming years at a somewhat higher rate, they are not likely to be substantially higher.

For your bond investments, it is important to remember that you have them for a reason. Bonds are generally much safer than stocks and they fluctuate in value less. When bonds decline in value, the decline tends to be much less compared to when stocks fall in value. Bonds pay interest, which helps to offset any declines in price due to rising rates. Interest rates don’t rise forever, and when they stop rising, fixed income investments will once again be a lower risk place to achieve investment returns. I think that most of us would agree that rates are not likely to rise very much, and as a result, we will not overreact and move well diversified investment portfolios out of bonds just because they have fallen in value the past couple of months.

Everyday more clients contact me by email. I have email on my cellphone, my computer at work as well as my laptop at home. I will generally respond to your email within a very short period of time. If you haven’t received a response, please don’t assume that I received the email and am not responding. Some emails for some reason don’t make it to their intended destination. Spam filters at Manulife and at other corporations may hang the email up, and I might not see it. If you haven’t heard from me, give me a call with your question or inquiry. I would also like to remind you that for regulatory reasons, we do not accept trading instructions by email. This also includes requests for redemptions. Any redemption request or trade instruction requires verbal contact. In the months ahead, we will also be trying to ensure that we have every client’s email address if you have one. We will start sending newsletters by email in the near future.

Many of you have contacted me with regards to Manulife’s online Client Access system. Manulife is in the process of changing the online access from the former system to a new upgraded system referred to as ‘Client Access’. This system will allow you to view your accounts online and at your leisure. The new system also provides the opportunity to receive statements electronically instead of in the mail. If you are still using the former system to login, we will be re-enrolling you in the new system on a continuing basis. If you don’t have online access, but would like to, please let us know and we will set you up. If you are using the new system, your feedback is always appreciated.

As you know, Manulife Securities Incorporated is a wholly owned division of Manulife Financial. At our office, we provide much more than just stocks, bonds, mutual funds and other investment products. We also provide products sold through Manulife Bank such as mortgages, loans, lines of credit, credit cards, and savings accounts. Banking products and mortgages are offered through our office by referral. We also provide products sold through Manulife Financial such as travel insurance, health and dental benefit plans, as well as life insurance, critical care and disability products.

Truly, we can be your one stop for all of your financial service needs. If you don’t have travel insurance through your employer, give me a call before your next vacation and I will arrange it for you over the telephone.

Lastly, many clients have begun asking me about my own retirement plans. I guess my gray hair that used to be brown gives it away! This year I will be 48 years old, having been dealing with clients finances since I was 21. I love helping you achieve your financial goals and have made a commitment to you to do so for the long term. I intend to continue for many years into the future.

At the same time, we are open for business! While I do currently manage many client relationships, we are always looking for additional clients. Over the years, clients have graciously supported me by referring their friends and family. This is the only way to compete against other financial institutions that have millions of dollars available for marketing. I believe that we offer a higher level of service than our competitors alongside sound investment management that is based on years of experience and education. I would be honoured to receive your referrals and will do my very best to help your friends and family as we have for you.

Throughout the summer months, I will be at my office, available to meet with you at your convenience. I will keep an eye on the interest rate situation and continue to monitor the ongoing suitability of your portfolio.

It truly does look like the economy is finally improving and I am very excited about what that means for portfolio performance in the years ahead. We have all had to endure a particularly long period of generally subpar economic growth. I think the longer term reward of patience is straight ahead. The US market made a new high for the first time in 13 years and it looks to have just begun!

Thank you so much again for your business and support. I hope you and your family have a great summer!

Yours truly,

Jamie C. Hodgins, CIM, FMA, FCSI
Senior Financial Advisor, Branch Manager
Manulife Securities Incorporated

Life Insurance Advisor
Manulife Securities Insurance Inc.

Jamie C. Hodgins is a Senior Financial Advisor and Branch Manager with Manulife Securities Incorporated. He holds the coveted Fellow of the Canadian Securities Institute (FCSI). This publication is solely the work of Jamie Hodgins, for the private information of his clients. Although the author is a Manulife Securities Advisor, he is not a financial analyst at Manulife Securities Incorporated (“Manulife Securities”). This is not an official publication of Manulife Securities. The views, opinions and recommendations are those of the author alone and they may not necessarily be those of Manulife Securities. This publication is not an offer to sell or a solicitation of an offer to buy any securities. This publication is not meant to provide legal, accounting or account advice. As each situation is different, you should seek advice based on your specific circumstances. Please call to arrange for an appointment. The information contained herein was obtained from sources believed to be reliable; however, no representation or warranty, express or implied, is made by the writer, Manulife Securities or any other person as to its accuracy, completeness or correctness.

Mandeville Private Client Inc.
309 Commissioners
Road West,
London, Ontario
N6J 1Y4

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