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2018 started with a great deal of investor optimism. Global economies were growing, US tax cuts were predicted to be a boost to earnings and shareholder returns, interest rates were still at low levels and expectations were that international trade tensions would be reasonably resolved. What a difference a year makes!
FOURTH QUARTER 2018
RETROSPECTIVE AND PROSPECTIVE
In like a Bull, Out like a Bear
10 King Street East, Suite 801
Toronto ON M5C 1C3
10 King Street East, Suite 801, Toronto ON M5C 1C3| Phone: 416.607.6642 | www. SprungInvestment. com | P a g e | 2
Sprung Investment Management our focus is to create investment portfolios for our clients that
enable them to achieve their unique, long-term investment goals. In this endeavour, we strive to act
with the utmost integrity, utilising all of our analytical skills, knowledge and intuitions.
PRIVATE CLIENT FOCUS
Sprung Investment Management is an independent discretionary investment management firm that
serves the investment needs of high net worth private clients including business owners and
entrepreneurs, professionals, family trusts, estates, and private charitable foundations.
At Sprung Investment Management, the investment team collectively has over 120 years of diversified
investment experience. All of our principals hold the Chartered Financial Analyst designation and as
such adhere to the CFA Institute Code of Ethics. Each has made a commitment to continuing education.
We understand that our clients have worked hard to get where they are and we appreciate that they don’t
want to lose it. As the chosen stewards of their investment assets, our risk management approach is to
preserve their capital by purchasing under-valued securities, with a margin of safety that we expect will
deliver income and capital appreciation over the long term.
Sprung Investment Management has a track record of low volatility of returns since company inception
in June 2005. This has served our clients well over this relatively difficult investment period that
includes the bear market of 2007- 2008. Our performance numbers are available by request.
At Sprung Investment Management, satisfying our client’s financial needs is our top priority. Each and
every client is special and receives individual attention and customized investment advice based on
his/her specific objectives and risk tolerance. Our principals are always available to speak directly to
In building equity portfolios, individual security selection is based on “bottom up” research that is value-
driven and often contrarian to current popular thinking. We assess quality and continuity of return on
equity, current price relative to intrinsic value, economic value added and quality of management.
Although our typical investment horizon is two to five years, we constantly evaluate our current
holdings against new opportunities that may offer better value. Our view is that a strong sell discipline is
a critical component to long-term investment success.
Our investment approach on the fixed income side is to conduct rigorous credit analysis in the context of
future economic and interest rate expectations.
10 King Street East, Suite 801, Toronto ON M5C 1C3| Phone: 416.607.6642 | www. SprungInvestment. com | P a g e | 3
FOURTH QUARTER 2018
RETROSPECTIVE AND PROSPECTIVE
In like a Bull, Out like a Bear
“If you want to have better performance than the crowd, you must do things differently from the
crowd.” Sir John Templeton
2018 started with a great deal of investor optimism. Global economies were growing, US tax cuts were
predicted to be a boost to earnings and shareholder returns, interest rates were still at low levels and
expectations were that international trade tensions would be reasonably resolved. What a difference a
As 2018 closed, global economies are no longer synchronized in a positive manner (some have actually
contracted), tax cuts have boosted earnings in the US but a lot of the returns to shareholders have been in
the form of stock repurchases at high valuations. The prospects for continued accelerating earnings have
been diminished with no great catalysts in sight. Interest rates have increased causing concerns over debt
burdens. Trade disputes, particularly between the US and China, have contributed to market jitters.
In Canada, the S&P/TSX Total Return Index declined 10.1% in the quarter, taking the annual return
down to a negative 8.9%. The US market declined 13.5% in the quarter as measured by the US dollar
denominated S&P 500 Total Return Index, taking the annual return down to a negative 4.4%. For the
year, larger capitalized companies fared better than smaller firms as the S&P MidCap 400 declined
11.1%. For the first time since 2008, the S&P 500, Dow Jones Industrial Average and NASDAQ were all
negative in the quarter. The Chinese, Japanese, Hong Kong, European and Emerging markets all posted
even worse results in the quarter. The Canadian dollar lost 6.4% to its US counterpart in Q4.
Canadian Dollar US Dollar
Q1 Q2 Q3 Q4 YTD Q1 Q2 Q3 Q4 YTD
Exchange -4.5% 6.8% -0.6%-10.1% -8.9%
S&P 500 1.7% 5.4% 5.9% -8.6% 3.7% -0.8% 3.4% 7.7% -13.5% -4.4%
MSCI EAFE* 0.0% -0.3% -1.0% -7.9% -9.1% -2.4% -2.2% 0.8% -12.9% -16.1%
91 Day T-Bill 0.3% 0.3% 0.3% 0.5% 1.4%
CUBI** 0.1% 0.5% -1.0% 1.8% 1.4%
CDN/US dollar -2.7% -2.1% 1.7% -6.4% -9.0%
* Europe, Asia and Far East Index
** Canadian Universe Bond Index
The year started with a great deal of optimism. As 2018 progressed, doubts began to surface as to the
sustainability of global economic growth as many economies exhibited slowing trends and some
10 King Street East, Suite 801, Toronto ON M5C 1C3| Phone: 416.607.6642 | www. SprungInvestment. com | P a g e | 4
economies actually contracted. Investors’ fears were most evident in the final two calendar quarters of
2018, but particularly in the fourth quarter. October saw a large selloff in global stock markets with
some reprieve in November, but December saw a crushing crescendo as the selloff accelerated. The S&P
500 was down 9.0% in December, a month that historically is up over 73% of the time, recording its
worst performance since 1931.
Many of the major global markets ended 2018 in the red (in US$ terms): Dow Jones Total Return Index
(-3.5%), NASDAQ Composite Price Return (-3.9%), Europe DJ Stoxx 50 Price (-17.0%), UK FTSE All
Share Price (-17.4%), China SE Shanghai Price (-28.7%), Hong Kong Hang Seng Price (-13.8%), Japan
Nikkei 225 Price (-17.8%), MCSI Emerging Markets (-16.6%), etc.. The 9.0% decline in the Canadian
dollar relative to its US counterpart mitigated some of the pain for Canadian investors.
Many of the global economies are showing declines in consumer spending and business investment. In
Europe, the central bank (ECB) is halting their program of quantitative easing (supporting bond issues
with purchases). Negative investor sentiment is reflected in the uncertainties surrounding Brexit, local
protectionism and trade disputes with the US, Italian and other debt concerns, as well as, signs of
slowing manufacturing. Resource economies such as Canada, Australia and many of the South America
and African economies have been hurt by low commodity prices. Canada, in particular, has suffered
from its inability to get crude oil to market, resulting in Canadian crude selling at severe discounts to
world prices. Note that in 2018, West Texas Intermediate and Brent Crude suffered pricing declines of
24.8% and 19.5% respectively.
The US has been the exception in terms of maintaining economic growth, but there are indications that
expectations are falling. The acceleration in earnings growth over the last year was fuelled in large part
by the one-time tax reductions initiated last year. Already there are indications that earnings growth is
contracting as recent announcements by Apple, Alphabet, Delta Airlines and others have reduced
guidance going forward. Plant closures by Ford and GM reflect declining sales prospects in the US and
China. The job market has thus far remained very tight but wage inflation has been less than expected.
In summary, we have seen a major selloff in capital markets after a ten year run.
Expansions and contractions are normal phenomena in the market cycle. It is not atypical to see a
sudden and dramatic end to advancing markets. It is entirely possible the current selloff may continue
for some time but we see some positive outcomes. Valuations are dropping with prices. Where we have
been having difficulty finding attractive opportunities, more are now coming into focus. The latter stages
in the run-up in market prices was concentrated in perceived growth prospects and investors caught up
in the euphoria paid extremely high prices to get in for the ride. Facebook, Amazon, Netflix and Google
are examples of this trend. Many of these growth companies have been the hardest hit in the selloff.
Investors will now focus more on longer term, fundamental valuations. So, it is critical not to run with
We remain invested in solid, well financed and managed companies and will continue to do so. The bulk
of our fixed income securities are in short term instruments that will be little impacted by rising interest
rates and are readily available to purchase securities at reasonable valuations.
10 King Street East, Suite 801, Toronto ON M5C 1C3| Phone: 416.607.6642 | www. SprungInvestment. com | P a g e | 5
We continue to advise caution. The bottom of a market is impossible to see a priori. We will invest
incrementally as candidates for investment are identified.
FOURTH QUARTER 2018 FIXED INCOME COMMENTARY
“The expected rarely occurs and never in the expected manner.” ~ Vernon A. Walters
In the fourth quarter both the Federal Reserve (FED) and the Bank of Canada continued their interest
rate hikes, each central bank increasing their trend setting rate by a quarter percent. While Canada is
trailing the US 1.75% vs 2.5%, the discrepancy is unlikely to widen as this would weaken our dollar
even further although possibly benefiting our exports.
In the US, President Trump mused about firing FED Chairman Powell. While this makes for great
headlines, the markets didn’t take kindly to his statement. It is not clear that the President actually has
the authority to fire the Chairman of the FED. Presidents do appoint the FED Chairman, who is then
confirmed by Senate. As it stands, there appears to be no way of removing a FED Chairman, except for
cause. If the President attempts to fire Chairman Powell, the issue will likely be challenged in the
Supreme Court with the inevitable political tussle that will ensue.
In any case, the press seems to be ignoring the fact that the rate setting FOMC (Federal Reserve Open
Market Committee) is made up of governors of the federal reserve system and a rotating roster of
regional reserve bank presidents, who act in a consensus-based, decision making process. In light of this,
firing the Chairman is unlikely to be fruitful.
While economic activity has been growing in both the US and Canada with a commensurate decline in
the unemployment rate, inflation has remained quite muted. It is this decoupling of the traditional
relationship that has critics of central bank policy stating that there is no imminent need for further rate
hikes. Of course, it is worthwhile to reflect on the fact that monetary policy acts with a lag which is
variable in duration. Normally it is stated that it can take up to eighteen months for the effect of a rate
hike or cut to manifest itself in a measurable manner.
On a geopolitical level there are numerous factors that could affect fixed income markets. Investors may
once again be looking for safe havens during a period of political turmoil.
The total return performance of the bond market as measured by the FTSE TMX Canada Universe Bond
Index for the fourth quarter was an increase of 1.8% bringing the year-to-date return to 1.4%. 91-day
Treasury bills returned 0.5% and 1.4% over the same periods.
The benchmark ten-year Government of Canada bond yield declined by 0.46% over the course of the
fourth quarter to end the year with a 2.0% yield. Over the same period the Canadian dollar depreciated
by 3.9 cents from 77.2 cents US to 73.3 cents US.
10 King Street East, Suite 801, Toronto ON M5C 1C3| Phone: 416.607.6642 | www. SprungInvestment. com | P a g e | 6
Michael Sprung, CFA: Chief Investment Officer
• Chief Investment Officer
• More than 30 years experience in Canadian Investment industry, overseeing portfolios up to $2.5B
• Senior level positions with YMG Capital Management, Goodman & Company, Ontario Teachers’ Pension Fund,
Ontario Hydro and Cassels Blaikie & Co.
• Frequent contributor to BNN-TV, Globe & Mail, National Post and Money Sense
Fred Palik, CFA: Vice President, Fixed Income
• Extensive experience in fixed income management in a variety of senior positions, primarily in the insurance
and hospital sectors.
• Member of the Toronto CFA Society and the CFA Institute.
Lois O’Sullivan, CFA: Vice President
More that 25 years experience in investment management.
• Co-founder of Sprucegrove Investment Management, specializing in international markets.
• Senior level roles at Confed Investment Counselling and Confederation Life Insurance Company.
• Fellow of the Life Office Management Institute (FLMI), the Toronto CFA Society and the CFA Institute.
Joie P. Watts, CFA, FSCI: Vice President & Portfolio Manager
• Over 30 years of progressive experience in the securities and investment industry.
• Senior level roles at Burns Fry Limited, Merrill Lynch Canada and Nesbitt Thomson.
• Managing Director of Instinet Canada Limited for over 10 years
• CEO of Shorcan ATS Limited, a specialized marketplace for equity dealers trading as principal.
Robert D. Champion, MSEd: Vice President, Client Services
• Joined Sprung Investments Management in 2012 after several years with Successful Investor Wealth
• Prior to that, he had a fifteen-year career in OEM industrial sales.
• Manager with investment-publishing division of MPL Communications in the 1980s and early 1990s. MPL
publish Investor’s Digest and Investment Reporter.
Stay connected with Sprung Investment Management:
See Michael on BNN Bloomberg’s Market Call http://www.sprunginvestment.com/videos/