Insights Details

Economic conditions heavily influence returns investors experience. Throughout the past century we have seen a variety of different economic events ranging from wars to macroeconomic factors and trade tensions that all impact the financial markets. In the last 50 years, we have experienced two lasting market events that have significantly changed investor sentiment and investor returns. The first was the introduction to low risk, low return bonds products that initiated the risk/return mindset to investors. The second was the declining interest rate environment starting in 1980s which helped boost returns due to lower borrowing costs, accelerated the growth of the economy, and increased the fair value of assets.  

Howard Marks, founder of Oaktree Capital Management, one of the most well respected and successful investment organizations in the world, views the declining interest rate environment over the last 40 years as an “incredible tailwind” to investor success. Marks compares the declining interest rate environment to a moving walkway at an airport stating “… at some airports, there’s a moving walkway, and standing on it makes life easier for the weary traveler.  But if rather than stand still on it, you walk at your normal pace, you move ahead rapidly.  That’s because your rate of travel over the ground is the sum of the speed at which you’re walking plus the speed at which the walkway is moving.” Declining interest rates have served a similar purpose to a moving walkway; they have amplified and sped up investor returns. This allowed companies grow at a quicker pace, increased asset prices to higher valuations and significantly improved the situation of those willing to use leverage.  

As we now are leaving the declining interest rate era, it is important that we identify some of the challenges that may come from travelling in the wrong direction on the moving walkway found in airports. Inflation is at its 40-year all-time high, a recession is looming, fear of defaults is rising, growth companies have come down from their elevated valuations, investors can achieve nearly a 4% risk free return and interest rates are most likely going to stay elevated at 2%-4% (closer to historical norms). 

With these factors in mind, investors no longer need to rely as heavily on risky investments to achieve advantageous returns. The risk-return trade off as mentioned before is much more appealing than it previously was in a low interest rate environment. Investments that performed well in a low interest rate environment may not perform as well in an increasing rate environment.  

Clients at Northfront can be assured that we are continuously looking outward and adjusting for these changing conditions. Within each of the Northfront pooled funds (equity, income, and alternative) we continue to invest in assets that we believe will provide clients with good risk-return trade-offs given the current economic conditions. Many of the investments we own can benefit in an increasing interest rate environment, particularly floating rate notes in the Northfront Income Fund and farmland/timberland in the Northfront Alternative Fund. For further details, please contact our office at 403-571-8960.  

About Northfront Financial

Northfront Financial, based in Calgary, Alberta is a boutique full-service financial planning firm serving professionals and business owners. We pride ourselves on being a different kind of investment firm. This stems from our humble roots, entrepreneurial spirit, and a culture of integrity and professionalism. Our goal is to offer the best investment products, services, advice, and ideas the financial industry has to offer from our experienced team, which includes individuals with the Chartered Financial Analyst® (CFA®), Chartered Investment Manager (CIM®), and Certified Financial Planner™ (CFP™) designations.

Source: 

https://www.oaktreecapital.com/insights/memo/sea-change