Introduction

 

Hello everyone,

I have delayed writing this newsletter for as long as I could so as to include the latest geopolitical events (but still before tariffs unfortunately). In the coming years, they will have major impacts on optimal investment strategies. For 15 years now, Rivemont’s objective has been to build portfolios where the primary goal is to maximize returns for a given risk. In other words, we are not taking additional risks to achieve better results, quite the contrary. One of the characteristics of our portfolios is the protection of capital in less easy markets and efficient sectoral diversification. In other words, we did not blindly buy the assets of the riskiest companies for our clients and then boast about our performance.

That being said, 2024 was our best year since Rivemont was launched. The 40% gross return on the equity portion of the portfolios exceeds the benchmark by more than 15%, in a context where markets have generally had a good year. On the alternative side, the performance of the Rivemont Crypto Fund was 104% over the year and was named the best performing alternative fund in Quebec by Emerging Managers Board. (CGE-EMB). The Rivemont Microcap Fund, for its part, with an annual return of 93% in 2024, was named the small cap fund with the best return in Canada, according to eVestment. In fact, only the Long-Short Fund brings us down to earth a little with a negative return of 3.5%. We know that its primary use is in bear markets, so we can forgive it for that slight gap.

In this newsletter, I will be recapping 2024, which just came to an end, by also presenting our current equity positioning. I will then put my two cents’ in by commenting on the current political situation south and north of the 49th parallel and its potential impact on markets. As usual, we will conclude with our market outlook and our largest positions.

We hope you find this newsletter informative

 

About 2024

The present bull cycle in equity markets began in October 2022. What is noteworthy is that at that time, and shortly afterwards, interest rates were at levels that many investors had never seen before. During that period, many favoured fixed and often guaranteed investments in order to take advantage of the situation. However, we now know that this was a big mistake. The Canadian market has grown by “barely” 30% since then, while the Nasdaq has almost doubled.

No one ever said that being an investor is easy. And it’s normal to be worried about market fluctuations; that’s human nature. So why worry when things are going well, and especially when things are going badly? That would be tremendously stressful.

And things are currently going well. Indeed, all the indices are near their historical highs and some sectors are clearly riding high.

The first sector I would like to talk about is the financial sector. As you are no doubt aware, one of the objectives of our approach is to target the top performing sectors in order to determine where to choose our future champions. This is a purely quantitative approach at this stage.

Financial Select Sector SPDR Fund

Source: TradingView

 

The above graph clearly shows that the U.S. financial sector consolidated in 2023 and soared to new heights in 2024. For that reason, among others, we made this sector one of our favourites, and the results have been revealing. For example, we currently hold Intact, Manulife, CNO, and Donnelly in the sector. What is particularly interesting about these companies is that, in addition to the capital gain, they pay significant dividends that decrease the volatility of the investment. In other words, they generate excellent returns without additional risk.

However, there is one area where we would have liked to have been more involved: engineering. On the other hand, as I often say, investing in the stock market is really a number of regrets that build up over time.

The stock with the highest cumulative and time-weighted return currently held in our portfolios is from this sector. With a 220% gain since it was purchased in 2023, its impact was significant for our performance in 2024.

The origins of Howmet (HWM.N) date back to 1926 when Austenal, a company specializing in the manufacture of dental appliance materials, was founded. Its founders, Reiner Erdle and Charles Prange, worked to improve the chrome base. Their innovations enabled gold alloys to be replaced with vitallium, a solution that was especially valued during the Great Depression. 

In the 1930s, Austenal diversified into aircraft engine turbochargers, producing high-quality castings at the request of General Electric, which sought to improve its manufacturing processes to meet the growing production needs associated with the war effort.

In 1958, Austenal was acquired by the Howe Sound Company, which specialized in metals and mining. In 1959, Howe also purchased the Michigan Steel Casting Co. (MISCO), which specialized in the monolithic shell casting process, where a ceramic shell with thin, solid walls is used for better control of the solidification and production of high-quality castings.

The reason I share this company’s story is to show that the future is not just about software and artificial intelligence. The ultimate outcome is often an actual product with concrete applications. Howmet is the perfect example of this.

And as a final note, here is a funny story. One of the reasons this company piqued my interest is that its plant is located directly on Highway 15, north of Montreal, along the road I take every week from Gatineau to Montreal. In the words of legendary American investor Peter Lynch, “The person that turns over the most rocks wins the game.”

 

Geopolitics

 

Updated version of a text originally published in Journal Les Affaires.

A few days ago, the inauguration of the new President of the United States was held. For many, it constitutes a geopolitical catastrophe, while for others, he is the only person who can bring America back on course. As investors, do we really need to take sides and revise our portfolio according to our opinion about the democratic decision of the American people?

I think the beauty of an alternating electoral system like the one in the U.S. – or in Canada to some extent – is the ability of the people to change the direction a country is taking on some of the key issues. In other words, every decade or so, we see the pendulum swinging back toward an average acceptable by the majority. This is a normal and necessary cycle.

This is, to a certain extent, an interesting analogy to the financial markets. Indeed, once again, the cycles go from the irrational exuberance of the late 1990s to the catastrophic feeling of 2008 or March 2020. Fortunately for our equity investments, there is no correlation between the party in power in Canada or the U.S. and the simultaneous or subsequent performance of the markets. That being said, there are some ways to tell whether an administration will have a positive or negative effect over the short term on the markets. I believe these indicators to be:

1. Increase or decrease in corporate and personal income tax;
2. Level of oversight of business activities (e.g., regulations, tariffs, competition);
3. Government influence on investment decisions;
4. Perception of known or suspected corruption;
5. Central bank’s autonomy in controlling inflation.

It is important to note that what I am stating here is purely financial and pertains to the short term. For example, over a longer period of time, other interesting factors may influence consumer activities, such as:

1. Social cohesion and sense of security;
2. Level of debt and deficit;
3. Capital movement.

I can only see that the risks may potentially be greater in the long term than in the short term in North American markets.

What is certain, however, is that the election of Donald J. Trump will bring major changes to the current economy. Some sectors will be favoured while others less so.

In addition, the current polarization of political opinions is expected to increase investors’ use of asset classes acting as security, such as gold for many or bitcoin to a lesser extent. Since election night, there has been a positive and upward trend in the equity markets, and there is no indication that the new president will change course on his main political objectives. So I believe that in the current situation, active and effective management should enable investors to take advantage of the opportunities that should arise very soon.

 

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

 

Our trend and sector rotation tracking approach continues to pay off for our investors. However, we cannot expect that the situation will always be as easy. Indeed, there is an unfortunate tendency, called recency bias, which consists in placing disproportionate importance on current events by neglecting past or longer-term events. In finance, there is a tendency to extrapolate recent returns into the future, which can lead to disappointment if expectations are not met.

In short, the road ahead will be fraught with challenges. However, we thank you for choosing us as a guide to avoid these potential pitfalls.

In closing, I would like to mention that the format of this financial letter may very likely change and that it will be produced once a year. However, each month, I will share with you what I will be posting on my blog on the Les Affaires website. Time is definitely a factor, especially since I would like to ensure a certain level of quality in what I publish. Our firm’s assets have grown by almost 40% in just over a year, which pleases me greatly, but with that rise come additional challenges.

Thank you all for your trust,

Martin Lalonde, MBA, CFA

President