Ready for end of bull market

There are several dynamics at play in the global equity market that are rather unprecedented, whether that’s the sustainability of profit margins, the monopolistic power of several popular large-cap U.S. tech companies, or central bank policy.

Profit margins usually have a strong mean-reverting tendency, yet they’ve remain elevated, particularly in the U.S. At the same time, the dominance of FANMAG stocks (Facebook, Apple, Netflix, Microsoft, Amazon and Google) has created substantial barriers to entry in their respective markets. Then there is the massive impact stimulative monetary policy has had across the globe — all of which has investors constantly grappling with the question of where the market truly stands.

Greg Bainbridge, chief investment officer at Raintree Wealth Management, is no perma-bear when it comes to the outlook for equity markets. But he does expect lower returns going forward than what the market has become accustomed to.

“There are a number of factors at play that are a different than in the past, and they are slow-moving,” he said. “We can’t continue to appreciate in a market like this for the long run.”

The ongoing rally in global equities has made this difficult for investors to accept, yet Bainbridge likes to remind clients that we’re still somewhere near the halfway point of the market cycle.

“We haven’t gone through the other side of it,” he said. “So whether that is over the short or long term, it’s something that needs to be at the top of investors’ minds.”

Edmonton-based Raintree Financial Solutions was founded in 2010, and oversees more than $700 million in client assets, solely in the private alternative investment space. In an effort to provide a broader range of offerings, Raintree Wealth Management was created to build segregated portfolios focused on more liquid, traditional securities like stocks and bonds.

Managing risk is a focal point at the firm, and is achieved through active “We can’t continue to appreciate in a market like this for the long run,” says Raintree’s Greg Bainbridge. “These metrics do give us a sense of ... market and price risk.” asset allocation, tracking long-term potential future returns, and a macro-oriented focus. In the current environment, valuations are a constant topic of discussion, and Bainbridge noted that U.S. stocks are the thirdmost expensive (other than the Dot-com bubble and prior to the Great Depression) they’ve been since 1890.

“On many measures, we’re now well beyond what we saw prior to the 2008 financial crisis,” he said. “That’s not to say we expect a market drop-off right away, but these metrics do give us a sense of how much market and price risk there is right now.”

In addition to diversifying client portfolios not only by asset class, but also by investment strategy through an allocation to a tactical investment that uses a quantitative approach, Bainbridge highlighted the use of an absolute return fund and simply using cash.

“Anytime you’re long into a market, and future expected returns aren’t as great as you might hope, absolute return strategies that try to mitigate against general market risks can be very valuable,” he said. “This allows us to reduce market exposure for clients, while also earning a reasonable rate of return while we wait.”

When it comes to cash or other short-term investments that can be redeployed quickly, Bainbridge noted that the firm’s blended portfolios currently sit at about 15 per cent.

“It has the benefit of protecting in a downturn, but also allowing you to recapture a lot of that market upside when markets do turn up,” he said.

Another strategy the firm is fond of, especially at market tops, is put-selling. Bainbridge noted that the historical returns behind this approach are very similar to investing in the broader equity market.

“When investing in the whole market, you earn a return by the market appreciating or moving up. With put-selling, you earn a return by collecting a premium. So if you’re paid in the same amount for taking on the same amount of risk, those returns should be relatively equal,” he said.

“But if you’re in a market top, and you don’t believe the market is going to continue to appreciate from here, we’d rather be in a put-selling position because we’re able to collect those premiums in a very different manner.”

Bainbridge also pointed to the firm’s focus on highquality companies, noting that in adverse markets, investors typically flock to businesses with stable and growing dividends, relatively conservative balance sheets, a history of profitability, and high barriers to entry.

“Those types of businesses are the ones we want to be owning right now,” he said. Bainbridge highlighted

due to its dividend yield of above seven per cent, a more-conservative balance sheet relative to peers, and from a valuation perspective, a price-to-book ratio close to 1.

“If you look at how the market has beaten them up recently, I think it’s pretty overdone,” he said, adding that AltaGas’ valuation is on par with where it was at the bottom of the 2008 recession.

“There is a lot of negative commentary around the business, and on some of the large acquisitions they are pursuing in the U.S.,” Bainbridge said. “It’s a great example of a business that we look for in today’s market. It’s in a little more-stable industry — utilities, and is trading at a valuation that is a lot more attractive.”