Introduction

 

Hello everyone,

As I am writing this, the Trudeau government has just announced a significant increase in capital gains taxation in this country, with no income floor for corporations and trusts. This decision is, in my view, extremely bad for investment and risk-taking in Canada, and will have long-term negative consequences for the strength and health of the Canadian economy. It goes without saying that we hope this change will be withdrawn or even dropped as quickly as possible. In the meantime, we are already working with the accountants and tax experts of our clients who are most affected by this measure to minimize the impact of this new mistake made by our esteemed politicians.

On a more positive note, the first quarter ended on a roll for Rivemont’s clients. The equity portion of the portfolios continued the momentum started in the last quarter of 2023, resulting in a gross return of 18% over 3 months and 26% over 6 months. We will obviously be explaining the transactions that led to that return in greater detail.

We will begin this newsletter with a discussion on active management and investor behaviour. Indeed, some of the decisions made by our clients deserve our attention as they are not always the most advantageous. We will continue with a review of the first quarter and our thoughts on the market. As usual, we will conclude with our market outlook and our largest positions.

Good reading.

            

Behavioural Biases of Investors

 

Active management, such as that implemented by Rivemont, aims to obtain a higher return than the other options available to investors for the same asset classes, in particular and especially for equities. Various studies show that the more the composition of the investment portfolio differs from that of the index, the greater the probability of outperformance. This phenomenon is called “Active share.” However, in addition to the potential outperformance, holding a portfolio composed of securities that are different from those of the benchmark also results in returns that are significantly less correlated with the market than other approaches, such as mutual funds. These products often have higher fees that add to long-term underperformance relative to their benchmarks. However, since many of these products invest in hundreds of securities, the return will be roughly the same as that of the market, less significant fees. This is what I call “death by a thousand cuts.”

For the distributors of these products, the disastrous effect on the investor’s portfolio is only felt in the long term, which is why it can go unnoticed for a long time. The upside, however, is that investors will not question the business model that is in place; they will say that it’s the market and there is nothing they can do about it.

In active management, the behavioural biases of investors are exacerbated by their emotions and, obviously, they are the biggest losers. In a perfect world, the ideal time to add funds to your portfolio would be when the market is sharply down or the strategy underperforms its index. By investing during this period, you multiply the long-term return by buying low and eventually selling high. Unfortunately, the opposite is often the case, at the expense of the investor’s long-term return and not the strategy. In other words, the best scenario for the investor is always to stay the course over the long term.

 

Equities

Source: Rivemont website, gross yield as at March 29, 2024.

 

As I mentioned earlier, the portfolio that we put in place in 2023 came out of its transient torpor and exploded in the last two quarters. We took advantage of the interest in artificial intelligence firms by adding AMD (AMD.Q) and Lam Research (LRCX.Q) before the soaring price of their stock. We have (fortunately) exited from these positions in recent weeks to crystallize these rapid and significant gains. Although we would have

preferred to maintain our long-term winning positions and build a portfolio with a lower turnover, the market sometimes presents opportunities that we do not want to miss. Since selling our securities at around $193, AMD is down 25%.

 

AMD

 

Source: TradingView

 

We have been waiting a long time for it, which is why, in recent weeks, we have finally taken our first gold position in private management, adding Wheaton Precious Metals (WPM.N) to the portfolios. This initial “feel out” will enable us to test the waters. So don’t be surprised if we increase our exposure to this asset class in the next quarter. The price of gold is soaring, and now that it has broken through the historical barrier of $2,200 an ounce, we believe that this surge will be just the beginning of a bull market that may surprise many.

 

GOLD

Source: TradingView

 

The Rivemont Long Short Fund is currently more than 25% invested in the gold sector, with stocks such as Aya Gold and Silver (AYA.to), Artemis Gold (ARTG.v) and Lundin Gold (LUG.to). The fund also holds Invanhoe Mines (IVN.to) in the copper sector.

 

Market Prospects

 

 

Favorite Securities

You will find below a list of the individual securities with the largest weight in our portfolios. These stocks were selected based on their respective potential to outperform the market. You will find a short description of their activities, the annual dividend, if any, and the total return since their first inclusion in our portfolio.

 

 

Conclusion

Recently I had an interesting conversation with one of our clients. He said to me: “I have lost 30 to 40% of my investments in my life several times and I can no longer afford it. That is why I chose Rivemont, because of its active management, which does not hesitate to protect itself in the event of a bear market.”

This client clearly understood that active management is only truly “active” if the manager does not hesitate in having a concentrated portfolio or in doing a rotation across sectors. The manager must also have the flexibility to avoid making buying decisions under pressure when market conditions are not positive.

I personally believe that our management method is the reason that our retention rate is so high, in addition to the returns that come with it, of course. Our approach is really different from the traditional service offerings of banks and insurance companies that maximize product distribution and not management.

Sincerely,

 

Martin Lalonde, MBA, CFA

President