David Rosenberg recently suggested investments in sectors such as financial and consumer discretionary could be better for portfolios than consumer staples and health care.Deborah Baic/The Globe and Mail
Strong performance has prompted new investment from clients at Gluskin Sheff + Associates Inc., but amid all these positive results, the firm is adopting an increasingly cautious investment outlook.
The independent asset manager's fourth-quarter results, while generally positive with assets under management up 22 per cent over last year, revealed two noteworthy items on Friday: a lower than expected special dividend, and a hint that the firm foresees a market correction ahead, one that will affect its bottom line. The company's stock dropped by about 6 per cent midday Monday, recovering somewhat in the afternoon.
Gluskin Sheff's newly defensive market outlook caused analysts such as Scott Chan at Canaccord Genuity to adjust his expectations for management fees in the future, bringing market return estimates down to levels expected from other large asset mangers.
The question of how long the good times can last was one of the first themes addressed by Jeremy Freedman, chief executive of Gluskin Sheff, on the company's conference call following earnings results. He pointed to Canadian markets exceeding 2007's all-time highs, and the strong performance of U.S. and global equity markets.
"While the economic data and corporate earnings still paint a positive picture of the investment landscape and global growth over the long term, it is not unreasonable in our view to be prudently assessing whether equity markets have gotten a little ahead of themselves," Mr. Freedman said. "As a result, we have tactically adjusted the positioning of our [clients'] portfolios to become somewhat more defensive, as our starting focal point is always on capital preservation."
And the investment community has begun to account for Gluskin Sheff's changes in strategy, as lower returns for clients could bring in lower performance fees and revenue. "We assume lower investment returns over the next two years resulting in lower performance fees relative to an outstanding fiscal 2014," said Paul Holden, analyst with CIBC World Markets, in a note. He adds that he still expects net flows to stay strong due to investment performance.
Meanwhile, the company has already begun some of that defensive tightening through pulling back on hedge fund exposure, reducing leverage, and rebalancing long-only equity and fixed income portfolios by increasing cash levels. This would put the company in a better position should there be a correction, according to chief investment officer Bill Webb, on the call.
"We don't want to indicate that we think it's necessarily the end of the cycle, but the market has had ... very limited corrections over the last couple of years and we just think that we may be due for another one of those," Mr. Webb said.
Others at Gluskin Sheff, including chief economist David Rosenberg, have also expressed concern over the direction of the market. Mr Rosenberg recently suggested investments in sectors such as financial and consumer discretionary could be better for portfolios than consumer staples and health care.
The other market surprise in the quarter was that Gluskin Sheff's special dividend of 35 cents missed the Street's expectations, accounting for about 45 per cent of performance fees, whereas the company usually pays out more than 80 per cent of fees, said Gary Ho, Analyst with Desjardins Securities, in a note to clients.
While Gluskin Sheff's management said they intend to return to paying larger special dividends in the future, this quarter it used the funds toward the recent acquisition of boutique asset manager Blair Franklin.