APRIL SHOWERS BRING MAY FLOWERS

The analogy may not be perfect, but "weather" is the best way to characterize the first quarter. With this winter being longer, colder and snowier than recent history, it is not surprising that weather did have a material impact on the North American economy. While some companies (notably retailers) frequently lean on adverse weather as an excuse for poor results, this is one quarter where the meteorological explanations are somewhat justified. The good news is that this economic rough patch will be followed by better times.

During the first quarter, cancelled air flights were at record levels. United Airlines alone cancelled four times as many flights in the first two months of the year as they did in the same period last year. In some parts of the country, construction crews lost over half their work days due to adverse weather conditions. The weather also played havoc with shipping schedules such that very little was arriving on time or with any sort of predictability. It is difficult to quantify lost productivity due to workers arriving late or their just staying home. Housing and car data was also less robust than last year. The inclement weather also impacted US regions that are typically insulated from winter, such as the South and Mid-Atlantic. Overall, investors were willing to accept management’s weather excuses at face value and thus maintained a positive attitude.

When companies report earnings in April, investors are likely to give them a "mulligan" or "pass" for sub-par results. Investors will overlook Q1 results in anticipation of better numbers for the rest of the year. US GDP growth estimates are starting to inch up closer to 3%.

A significant portion of the weather related economic activity that did not occur in the first quarter is not gone forever but just postponed. We anticipate that consumers who delayed major purchases, such as cars or homes, will for the most part proceed with these decisions. On a similar vein, consumers who stayed home to avoid the winter weather will purchase preplanned items in the electronic and clothing sectors. The same does not hold true for all expenditures as can be seen from restaurant visits. For example, if you did not go out for dinner in February due to weather, you are unlikely to make up for it by going out for dinner in a future month.

While weather remains an unpredictable element, demographics is more of a predictable quantity. Based on historical birth statistics, we can make reasonable predictions for future population numbers in various age groups. This is useful from an investing perspective due to its implications on economic growth. The future growth projections of the 30-39 age group are for a progressive rise over the next couple decades. The growth in this age group growth will have a long term positive impact on the economy and the stock market.

People in their thirties typically increase their spending levels more than any other age cohort relative to the prior decade of their lives. This is due to significant lifestyle changes experienced by this age group. This age group is more likely to get married and have children. These activities results in spending growth on houses, cars and all things kid related. As consumer spending accounts for 2/3 of economic activity, any sustainable increase in consumer spending is positive for the economy and the stock market. What's interesting about the chart is the contraction in the US population in this age group over the last fifteen years (due to the baby bust) and the corresponding sideways move in the market.

              CHART 1: US POPULATION AGES 30—39 vs. S&P 500

             Source: BMO Investment Strategy Group, Bloomberg, Census Bureau

We are now at the nadir for the size of this population cohort. Historical birth data projects the 30-39 year olds will begin growing and continue growing for a least the next 15 years. While stock market corrections are still possible, the data should be viewed as a long term positive for the market.

Due to the recession and higher than normal unemployment rates for young people, household formations (marriages, people moving out of their parents homes etc) was below what it should have been. This pent up demand has potential to further boost housing and the economy over the next few years as housing demand moves closer to the long term trend.

Housing prices and home sales have rebounded sharply since the recession, but there still exists more upside. Chart 2 shows housing starts for the last twenty five years. Housing starts averaged 1.0 – 1.2 million per year pre-recession (ignoring the immediate lead up to the recession) versus four to eight hundred thousand since the end of the recession. New residential building activity has the potential to continue to increase without the risk overbuilding. Any increase in building activity would be incrementally positive for the economy.

              CHART 2: US NEW RESIDENTIAL HOUSING STARTS

             Source: Datastream

While weather cast a pall over the business environment, there was other news that impacted the market. As expected, the Fed commenced tapering on their quantitative easing program. Political tensions in the Ukraine led to geopolitical uncertainty and fears about a new cold war. These events translated into higher than normal volatility for the stock markets. In spite of this, the US market (as measured by the S&P 500) still managed to eke out a 1.3% gain. The Dow Jones Industrial Average, which is a measure of 30 super large cap stocks, declined during the quarter. The Canadian markets fared much better gaining 5.2%. The resource heavy S&P / TSX Composite benefited from rising oil and gold prices in January.

Assuming current economic forecasts of 2 – 3% growth are realistic, bond returns will approximate the current coupon rate of 2 – 4%. If the economy accelerates, interest rates will rise and bond returns will be less than 2 – 4%. The magnitude of the shortfall will be dependent on the strength of economic growth versus current expectations. The sluggish Q1 economy was primarily related to an unusually challenging winter. We believe that the economic rebound will continue and strengthen as it makes up for lost activity related to the large number of winter storms.

Based on the low single digit return potential for bonds, our preferred investment is in stocks. Stocks are reasonably valued and are poised to benefit from increasing economic momentum. Stocks are offering high single digit to low double digit (8-10%) returns based on current earnings estimates. Condor Asset Management has successfully positioned our client portfolios to take advantage of the opportunities in the stock market. If the economy accelerates as we expect it will, revenues and earnings will come in higher than current forecasts.

CANADIAN FAMILY OFFICES FACE STIFF COMPETITION

Family offices in Canada are a rarity, given the iron grip Bay Street exerts over the wealth management industry. Independent wealth managers are themselves becoming an endangered species.

Mutli-family offices are even rarer, numbering perhaps five or six.

“In Canada, that industry, that segment, doesn’t really exist,” said Arthur Salzer, CEO and chief investment officer of Northland Wealth Management, which has $300 million in assets under management. “Basically there’s ourselves and a couple of other providers and that’s really the extent of things. So we’re a bit of an anomaly in Canada from that perspective.”

In the United States, a segment of the RIA space operates as multi-family office, and many of them typically originate from a single family office, a family that created significant liquid financial wealth and is not only looking to manage it but also to manage the family and the family dynamics around it. Not so in Canada.

“To a large degree, either through their private banking or through their brokerages, Canadians in general deal with something with a name bank behind it and the independent space is very tiny,” Salzer said. “Most providers that call themselves wealth managers tend to be working at broker dealers that are owned generally by the Canadian banks, and they tend not to work as a fiduciary, which an RIA would or a multi-family office would, but really as a salesperson.”

Independent wealth managers can provide unbiased advice, noted Stephen Kahn, CEO of Condor Asset Management, which has assets under management of $15 million. “There is another subset of people are not 100% comfortable with the banks because of the inherent conflicts of interest,” he said. “They’re not always looking out for the clients the way maybe an independent will. You can get lost in a large organization, whereas if you go with an independent, typically, they are not as large, and your account manager is not going to change every 4 or 5 years. It is more of a longer-term relationship.”

A multi-family office typically begins its life as a single family office which then decides to offer its services to additional clientele that are not family members. For example, a single-family office that serves large and extended families may serve someone who is a 5th cousin.

“In this regards you are related, but not quite,” Salzer said. “It’s not a large step to extend the family office offering to someone who may be your neighbor. “The advantage is that these non-family clients may now have access to additional asset classes, managers or investments that a family offices typically can.”

The impetus behind Salzer forming his company was a family that he was serving took its company public in 2003, and as a result its financial assets became significant.

“Once that happened, things became much more complex because you end up investing in both direct and through private equity funds, hedge funds, farmland and real estate,” he said. “Large amounts of financial wealth act as an amplifier, so you need to have a firm that spends as much time on the intrinsic wealth of the family as the actual investments. We enable families to live the way they want to and do it in an intelligent fashion.”

Salzer views himself as a consigliere. “We’re the family member that’s not a family member,” he said. “If you take the illegalities out of the Mafia and you look at the family basis, then they were families that stuck together for generations. You get rid of the bad part and there’s something very good going on.”

http://marketsmedia.com/canadian-family-offices-face-stiff-competititon/