We built Inukshuk Capital Management to serve the needs of clients looking for a unique approach – void of conflicts of interest, commission sales and pushed products. We began by putting our own money where our mouth is. With low fees and active risk management, we help families achieve financial longevity, that’s the bottom line.
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July 2024 – Private and Public
In this issue:
- Global Equity Market Performance
- Debt
- Trends
- Private Credit Promise
- Financial Follies
- Wrapping Up
- Health is Wealth
Global Equity Market Performance
It’s not often we see such a divergence in market performance. Once again, the tech-heavy S&P 500 outperformed, up 3.4%. In close second was MSCI Emerging Markets at 2.8%. Both MSCI EAFE and the S&P/TSX 60 posted losses of 1.3% and 1.8% respectively.
Year-to-date, the S&P 500 is almost 15% higher outperforming all the major indexes we follow. The S&P/TSX 60 is lagging the U.S. by 10% so far this year.
Our systems remain fully long both the S&P 500 and the S&P/TSX 60.
If you would like to stay current on our measures of trend and momentum in the markets we follow, please click here .
Debt
Last month we wrote about the woes of Canadians with mortgages. Roughly 50% have already had their mortgage rate reset higher. The other half will face that issue over the next two and a half years.
According to the Canadian Mortgage and Housing Corporation, the Big Six banks hold more than 70% of all mortgages. So far, they have been able to weather the storm.
The Bank of Canada (the Bank) reports that consumer loan impairments are still historically low. And the big banks have increased their loan-loss provisions to a level that is 20% higher than before 2020.
In the same ‘Financial Stability’ report the Bank observes that: Business insolvencies have increased steadily since early 2022 and more sharply since the middle of 2023.
This is what that looks like.
This note will be about non-bank lenders—private credit—the ones who are at risk of that blue line going higher.
Trends
A debt market that has grown significantly over the years is private credit.
The Federal Reserve recently reported that private credit in the U.S. …has grown exponentially in recent years, reaching nearly $1.7 trillion… from around $250 billion prior to the global financial crisis (GFC).
The same trends exist in Canada. Various reasons for this growth include stricter capital and regulatory requirements for banks, which have become increasingly cautious in their lending.
Private Credit Promise
Private credit has become easier for individual investors to access. It seems attractive because of relatively high yields and smooth returns.
They are marketed with consistent talking points:
- Attractive historical performance
- Consistent income
- Short duration
- Floating interest rates
- Collateral backing the loan
The manager of a private credit fund must have confidence in the business and their assessment of the value of the assets. If the business falters and it cannot pay the interest or the principal of the debt, the business and the collateral are supposed to pay it off.
Financial Follies
One factor that exacerbated the GFC was the mismatch in duration between the assets and liabilities of financial institutions—lending long and borrowing short. If a bank loses its deposits or access to wholesale funding it needs to sell something. And then everybody needs to.
That is why the above marketing highlights can be somewhat deceiving. Even though the manager is lending at shorter terms, if the borrower gets in trouble it will take a long time to get that money back.
This is where things get tricky for an investor.
If enough loans in a fund become impaired and the manager has not set enough cash aside to cover distributions or redemptions, you might have to wait to get your money back. The big banks have been increasing their loan-loss reserves. If the private credit manager has not foreseen that risk the fund has the right to stop paying interest and block you from selling the fund.
The term for that is ‘gated’. There is no unlocking the gate or jumping the fence.
Ninepoint Partners, a Canadian alternative investment manager, was in the news a few weeks ago because they gated three of their private credit funds that have assets under management of around $2 billion. Note: in March 2022 they did the same thing.
Wrapping Up
Investors in private credit need to be prepared for these events. It’s not for everyone. This used to be the realm of institutions like pension funds and ‘accredited’ investors. Accredited investors are considered by the Ontario Securities Commission to be wealthy enough to weather this kind of storm.
It’s hard to know what you own when you buy a private credit fund. Some of them can consistently offer steady returns and cash distributions. The next thing you know, you are relying on management or a receiver to sell assets to get paid back. An investor could effectively end up owning a distribution company’s warehouse in Markham and whatever is in it.
We like to know what we own. We also like to have the ability to sell when we want to. That’s why we only invest in highly liquid index ETFs.
The risks we manage are straightforward and mostly knowable. Broad stock market indexes can go down. Our systems are built to avoid prolonged drawdowns.
We have no idea if a case like Ninepoint is indicative of future broader problems. We will watch with interest over the next few years. And continue to follow our public markets process.
What we will also be watching is the summer Olympics that start in a few weeks.
Keep ‘er movin’.
Health Is Wealth
Athletes come in all shapes and sizes and the Olympics offers us an amazing opportunity to witness the best in the world at their sport. Their body types can determine what sports they excel at.
There are three body types (or somatotypes)—introduced by American psychologist and numismatis William H. Sheldon in the 1940s—and most of us fall into one, or a combination of the three.
- Ectomorphs—are long and lean. They have little fat and muscle. They also have a difficult time gaining weight. Ectomorphs dominate endurance sports.
Evan Dunfee- Ectomorph. Bronze medal 50KM race walk.
- Endomorphs—are heavier and rounder. They have lots of body fat and muscle. They gain weight easily. Endomorphs dominate power sports.
Maude Charon- Endomorph. Gold medal 64kg weight lifting.
- Mesomorphs—are athletic looking and solid. They are not over or under weight. They can gain and lose weight easily. Mesomorphs are good at most sports because they can lose or gain weight quickly.
Andre De Grasse – Mesomorph. Gold medal 200M sprint, Bronze medal 100M sprint and 4x100M relay.
Key components to physical fitness:
- muscular strength
- muscular endurance
- flexibility/mobility
- cardiovascular endurance
- body composition
Skills:
- speed
- agility
- balance
- power
- coordination
Gymnastics offers an example of everything, as these elite athletes require every component and skill to compete, whereas marathon runners exhibit outstanding cardiovascular and muscular endurance.
An elite athlete’s training is based on performance. They literally eat, sleep, train, and repeat! Some of the athletes have very little body fat, while others need body fat.
For the rest of us, just trying to improve our quality of life with fitness, remember, being fit is not a ‘look’ and there is no ‘ideal body type.’
Just get moving!
Victoria Bannister
ICM Health Ambassador
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