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It has been ten years since the great financial crisis. In the US, the S&P 500 peaked on October 9, 2007. The Canadian market continued its upward trajectory into the following year peaking in June as energy stocks were buoyed by high oil prices. While the bull market leading up to 2008 had duration of about five years, the current bull market has gone on for ten years without any significant setback.
THIRD QUARTER 2017
RETROSPECTIVE AND PROSPECTIVE
Ten Years Later
It has been ten years since the great financial crisis.
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
THIRD QUARTER 2017
RETROSPECTIVE AND PROSPECTIVE
Ten Years Later
“In economics, things take longer than you think they will, and then they happen faster than you thought
they could.”- Rudiger Dornbusch
It has been ten years since the great financial crisis. In the US, the S&P 500 peaked on October 9, 2007.
The Canadian market continued its upward trajectory into the following year peaking in June as energy
stocks were buoyed by high oil prices. While the bull market leading up to 2008 had duration of about
five years, the current bull market has gone on for ten years without any significant setback.
Global stock markets generally continued their upward bias in the third quarter of 2017. The US market
gained 4.5% as measured by the S&P 500 Total Return Index in US dollars. A strong Canadian dollar
had the effect of subduing that return to 0.5% when expressed in Canadian currency. With the exception
of Spain and the UK, European markets were positive. Asian markets were very strong in US dollar
terms with the Hong Kong market up 6.9% and China’s market up 4.9%. The Japanese market was
pulled into positive territory by a very strong September (up 3.6%) bringing the quarter to 1.6%.
Resource heavy markets such as those of Latin America, Australia and Canada improved as commodity
prices generally improved. The Toronto Stock Exchange recorded an advance of 3.7% led by Energy
(5.7%), Consumer Discretionary (4.2%) and Financials (3.7%).
Canadian Dollar US Dollar
Q1 Q2 Q3 Q4 YTD Q1 Q2 Q3 Q4 YTD
Exchange 2.4% -1.6% 3.7% 4.4%
S&P 500 5.0% 0.4% 0.5% 5.9% 6.1% 3.1% 4.5% 14.2%
MSCI EAFE* 5.4% 2.3% 0.8% 8.7% 6.5% 5.0% 4.8% 17.2%
91 Day T-Bill 0.1% 0.1% 0.1% 0.3%
CUBI** 1.2% 1.1% -1.8% 0.5%
CDN/US dollar 0.8% 2.5% 4.0% 7.6%
* Europe, Asia and Far East Index
** Canadian Universe Bond Index
10 King Street East, Suite 801, Toronto ON M5C 1C3| Phone: 416.607.6642 | www. SprungInvestment. com | P a g e | 4
Global economic growth continues to strengthen in both the developed and emerging economies
although at subpar levels compared with traditional recoveries. As central banks have cautiously raised
interest rates, bond prices have come under pressure. Wage demands in the developed countries have not
accelerated as inflationary expectations have remained low and productivity improvements have been
driven by technology. In this environment, central banks may temper their enthusiasm to normalize
interest rates and reduce their bloated balance sheets. Both the International Monetary Fund (IMF) and
the Organization for Economic Co-operation and Development (OECD) are forecasting modestly better
growth in 2018.
Among the advanced economies, Canada has posted strong growth primarily due to higher commodity
prices. The Canadian dollar has appreciated against other currencies as our interest rates have gone up
faster than other countries. This strength in the Canadian dollar has served to lower the returns from
In this environment, stock markets have continued to advance. The S&P 500 in the US has hit new highs
surpassing levels from before the economic crisis. Valuation levels have also hit high levels making the
search for new investment ideas challenging. Overall, we have been taking more profits than reinvesting
funds, causing cash levels to increase.
A number of factors could come into play that would precipitate a more meaningful market correction
than we have seen in the last ten years.
Foremost in Canadian concerns has been the resumption of NAFTA negotiations. Since the Brexit vote
and the start of the Trump presidency, a backlash against global free trade has been evident, causing
uncertainty in the business community, thus dampening the appetite for capital investment.
Other geopolitical factors are also of concern. North Korea’s nuclear threat and heightened discord with
the US has been very prominent in the headlines as have tensions in the Middle East, Venezuela, Spain,
Russia and the Ukraine. Monetary concerns in Greece, Italy, Spain and Portugal have not gone away.
Technology is also having an increasing impact on businesses and consumers. Disruptions in the retail
trade are changing the way supply and delivery systems operate. The hotel and taxi industries are
threatened by innovations such as Uber and AirBnB. Financial technology is changing traditional
banking. Artificial Intelligence (AI) threatens to cause massive changes in employment.
Demographics are also going to have an affect on employment and retirement as well as government
finances. As the population ages, the growing shortfalls in funding for health care and pensions will
All of these factors lead us to exercise caution and prudence in our investment practices. We will
continue to scour for well financed, well managed and reasonably priced companies in which to place
10 King Street East, Suite 801, Toronto ON M5C 1C3| Phone: 416.607.6642 | www. SprungInvestment. com | P a g e | 5
THIRD QUARTER 2017 FIXED INCOME COMENTARY
“Be thankful we’re not getting all the government we’re paying for!” ~ Will Rogers
Fixed income markets have started to react to the shifting winds of interest rate policies. With two rate
hikes so far this year and indications that the Federal Reserve will be slowly unwinding its quantitative
easing program, the trend seems to be firmly in the tightening mode. In light of this, markets are now
considering the increasing likelihood of one more hike in December by the Federal Reserve.
As we have stated in the past, much depends on economic variables both domestic and international.
Similarly, the potential impact of geopolitical events can have outsized shock effects on markets.
While President Trump has not been much of a supporter of Chairman Yellen, whose term expires in
January 2018, it may well be that a steady hand at the tiller will win the day. As Vice Chair Stanley
Fischer has recently resigned due to personal reasons, there are now two other vacancies in the Reserve.
Filling the Board to its full complement in a short period with members who may not be as well known
in the markets, could cause turbulence.
In Canada, Governor Poloz’s seven year term has three more years to run. Influences on his decision
making may well be coming from domestic economic factors which may be heavily influenced by the
impact of changing trade agreements and taxation policies.
The situation in Europe remains unclear. Chancellor Merkel’s majority has been significantly reduced
by the ascendancy of the nationalist AfD party. Their ascendancy may not directly affect her ability to
form a government; however it will influence her political decision making going forward. Increased
caution will likely be the German approach to a number of vexing European issues.
The enormity of the Brexit project is starting to sink in and indications are surfacing that there may not
be enough time for an orderly negotiated divorce. The spectre of a disorderly breakup is definitely
focusing the attention of various financial institutions and international corporations who are making
their own alternative plans in the absence of a clear direction from officials.
The total return performance of the bond market as measured by the FTSE TMX Canada Universe Bond
Index for the third quarter was a decline of 1.8%. 91-day Treasury bills returned 0.1% over the same
period. The benchmark ten-year Government of Canada bond yield increased by 0.35% over the course
of the quarter to end with a yield of 2.1%. During the third quarter the Canadian dollar appreciated by 3
cents from 77.1 cents US to 80.1 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 severalyears with SuccessfulInvestor 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 withSprung InvestmentManagement:
Twitter https://twitter.com/SprungInvest Twitter handle @SprungInvest
See Michael on BNN Market Call http://www.sprunginvestment.com/videos/