February Investor Update


  • Interest rates break a 30-year trend line, causing a Brexit-like selloff. Who loses in a higher-rate environment and who wins.
  • US Treasury Secretary suggests reversing 25 years of staunch “strong dollar” policy. Setting the table for an environment of rising rates and a weakening dollar.
    • Our 3-pronged approach in the Vertex Fund & Vertex Growth Fund is exposure to: higher interest rates, value equities, and commodities. 
  • A Lost Decade for Canadian stocks.
  • Exciting month in the Vertex Value Fund – we were very active and its paying off.
    • Investors Behaving Badly – mistakes caused by behavioral biases. 
    • Energy stocks – the gift of an investing career.
    • FAANG – beware of the bite.
  • Where to From Here – positioning yourself for this investment cycle.


February marked the beginning of a higher interest-rate environment in the United States. Key rates to note are 2.63% for the 10-Year, and 3% for 30-year Treasury bonds. These trend lines on interest rates have not broken for over 30-years and breaking trend caused the market to sell-off in a similar fashion to the Brexit vote. Higher inflation caused by wages and higher interest rates will be hard on sectors like utilities, infrastructure, and real-estate. As well, private equity firms with leveraged investments.

In the Vertex Fund/Vertex Growth Fund, we have exited Mainstreet Equity Corp (apartment rentals), Sea-to-Sky Gondola, and reduced our position in Rise Properties (apartment rentals), as they will face headwinds for years to come under higher rates. All these were sold for a profit. We continue to add commodities (energy, cobalt, and nickel) which benefit from a weaker US dollar and higher rates.

Active-Value Managers have been hard hit, with the likes of Greenlight Capital down 12% year-to-date. The Canadian stock market (TSX) hit even harder, has seen lost decade, dramatically under-performing its American counterparts. However, 2018 should mark the turning point, as the script flips in favour of Canadian stocks. 

For the first time in over 25 years, a US administration looks to be endorsing a weak dollar policy. US Treasury Secretary, Steven Mnuchin left an underwhelming impression in Davos on the greenback. A falling US dollar will put pressure on interest rates, with global investors demanding a higher return for holding US treasury assets. A weaker currency increases US exports but also increases import prices, weakening Americans purchasing power for foreign goods.

With a weakening US dollar, our three-pronged approach in the Vertex Fund/Vertex Growth Fund is: carrying exposure to higher interest rates, value equities, and commodities.



Market sell-offs and corrections provide textbook case studies for behavioral biases, such as anchoring and focalism. These are times when decision making is driven by a singular event under focus, and outcomes resulting from the complexity of less-pronounced events are overlooked. In other words, investor returns are the result of countless benign days strung together; however, emotions anchor investors to that feeling when the evening news reported “Dow Plunges 1000 Points Today”. The product of these biases for many is panic-selling and a paralyzing sense of anxiety. Instead of buying low, investors sell low. Time shrouds memory and the flip-side to this is an overconfidence in what has worked of late – a snare called “chasing performance”.

As Active Investment Managers, market sell-offs are when we get to make the real money. In the Vertex Value Fund, we’ve been using this recent volatility to advantageously reposition the portfolio. We trimmed Qorvo, Overstock, Calamp, and BOFI (all trading at all-time highs) to buy more junior energy stocks (all trading at all-time lows). These energy stocks are categorically cheap:

  • Surge Energy (div. yield of 5.5%) sold as low as $1.57 in February, while oil was selling for over $60. Yet, when oil traded in the low $40s, Surge was priced above $2.
  • When natural gas hit its low in 2016, Painted Pony Petroleum traded around $3. Over the last month, PONY has traded from $1.7 to $2 while natural gas prices are 60% higher than their 2016 low. Just a year ago PONY was trading over $8 (gas prices were only 15% higher).
  • The list goes on…Energy Pessimism is the real bubble ready to pop.

Pipeline disputes and renewable energy, or not, this is The Upside Downworld type stuff. There is simply no bid left in the energy sector. At the moment, energy stocks are providing the gift of one’s investing career

Elsewhere, people remain comfortably complacent to hold highly-priced, mega-cap stocks. FAANG is an ominously appropriate acronym for the bite these stocks could deliver. One only has to look at General Electric for what can happen to a Goliath. Risk rarely advertises itself on a billboard, and to us, these current market influencers carry iceberg risk. A type of risk which tends to reveal itself when it’s too late for “hard-to-starboard” adjustments. 

We reason that our Vertex Value Fund portfolio is far safer than the broad equity market, and is geared with more upside potential. A notion supported by this recent downturn, wherein the Fund was positive by mid-February, while markets were down 3%.


 Stock markets are cyclical creatures with a history full of cautionary tales. We encourage investors to take this opportunity to position their portfolios for the developing cycle. It is highly likely, or inevitable, that the next decade will notbe as kind to passive investors of both equities and bonds.Act accordingly, we most certainly are.