March 23, 2020


Industry News

This past week has been unprecedented as we receive daily (sometimes hourly) updates on the COVID-19 situation for our communities and globally.  At Capstone, our staff continues to work remotely and will do so until at least March 27th.  All of us are working normal office hours and we are fully equipped to continue business as usual.  We are always here to serve you, our clients, and we will strive to be as accessible and transparent as possible.  Should you need to come to our office location for any reason, please contact your portfolio manager to make any necessary arrangements.

As most have seen, during the past few weeks we have witnessed incredible volatility in traditional bond and equity markets.  Historically,  during times of crisis, traditional markets tend to become more positively correlated.  While stock and bond markets are typically negatively correlated, during the uncertainty surrounding this COVID-19 crisis, we have again seen these markets moving in the same direction.  While equity markets are falling, corporate bond spreads are widening causing losses on both sides of traditionally balanced portfolios.  But, as you have heard from Capstone in the past, we look to the non-traditional markets to provide more effective diversification to a balanced portfolio.  Today, we are seeing the results of this approach playing out.  The power of true diversification is mitigating these market risks which is providing investors with some calm during the storm.

Many clients have asked for information on specific funds and we will give you a brief update below.

Regarding the various mortgage funds: during this time there have been no losses in the mortgage portfolios and no notice of new issues arising in any projects.  Last month’s distribution, particularly in the Capstone Mortgage Pool, was lower than normal.  This was an intentional move to further bolster internal reserves in preparation for the possibility of issues that may emerge as the crisis unfolds.  We continue to work with our partners to closely monitor individual projects to ensure they stay on track and that any issues are dealt with quickly.  We are primarily looking to fund first mortgage positions to reduce risk and while this may in the long term reduce the interest rates we are familiar with, it will take some risk off the table which is a prudent trade at this time.  While performance is on track for a typical month, we may once again take the conservative approach and withhold a portion to further build the “rainy day” fund.

Our newest fund, the Capstone Private High Income Pool, continues to be an excellent portfolio diversifier as it currently provides non-traditional income opportunities within Canada and the US.  Similar to Capstone’s mortgage pools, this portfolio has not been affected over the past few weeks by widening corporate credit spreads, changing interest rates, or investor sentiment.  At present, 80% of this portfolio is invested in construction mortgages in the US and it is performing as expected.  Trades are still completing projects on time and we have adjusted the focus on this part of the fund towards the lower-risk market of multi-family homes.  We will continue to closely monitor the underlying projects to ensure this pool’s allocation is positioned appropriately and any issues that may arise are dealt with expediently.

The Capstone Fixed Income Pool pulled back a little in March, mainly due to the widening of corporate spreads.  However, we have worked to reduce this exposure and maintain the fund’s duration (vulnerability to interest rate changes), which is short compared to the index.  The non-traditional side of the Capstone Fixed Income Pool is positioned well, but due to its longer-term strategies does not add performance each week.  For this reason, we will have weeks where performance is derived mostly from traditional exposure.

The Capstone Traditional Equity Pool, by its very nature, has been the hardest hit by the stock market volatility.  We are currently not recommending any changes.  Considering the level of sell-off at this point, we do not believe it wise to sell into the volatility.  We are comfortable that the strategy currently employed is the best option in this difficult environment and are well positioned to take advantage when there is a rebound.  Also with the rapid speed of the sell-off over the past few weeks (and the nature of this sell-off being different from 2008) there is a chance that once the infection rate turns, combined with additional support through fiscal stimulus packages around the globe, the rebound could be equally as quick.  We do not want to miss this opportunity.  For many, this is a reminder that when investing in riskier assets, it is important to be diversified and to ensure you have a long enough time horizon to wait for recovery when necessary.

Lastly, our Non-Traditional Equity Pool has stayed true to its low standard deviation, meaning that we have not seen any big swings in any direction.  Some volatility would not be out of character, and we have seen this as some of the smaller global positions have certainly felt the strain from COVID-19 and sold off slightly through March.  Since this portfolio is almost entirely non-traditional in nature, it is important to remember that a characteristic of this type of investment is that it is not priced daily.  This means that a lot of performance is not yet attributed to the portfolio.  While this may immediately raise eyebrows considering market conditions, we have contacted each underlying holding and are watching them very closely.  At present, we have no reason to be alarmed as these investments are maintaining their value and riding out this storm.

We continue to monitor all the investments in the Capstone portfolios to ensure each is positioned appropriately.  We are here to serve you, and we will continue to provide you with updates.  We know it is easy to get caught up in the fear of the unknown, and want to remind you to persevere and to stay the course.

Your Capstone team will continue to be praying for health, peace, and wisdom for all of us during this time.

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