2024 Year in Review and our Outlook for 2025:
“Expect the Unexpected”
Solid 2024 returns across each WealthCo fund
We are pleased to report that each of WealthCo’s funds posted solid returns in 2024, including double digit returns for Core Equities, Alternative Income, and Alternative Growth. Each fund posted a positive return for the second consecutive year, and annual returns for Balanced investors exceeded 13% (net of investment management fees1). Despite the fact that the last 5 years included an unprecedented pandemic (2020) and an unprecedented inflation/interest rate shock (2022), WealthCo balanced investors saw annualized returns of 7.5% over the last 5 years with significantly lower volatility than retail balanced solutions. Consistent with our ‘slow and steady’ expectation, Balanced WealthCo investors enjoyed positive returns in 20 of the last 24 months.
So what drove WealthCo investor returns during 2024?
The diversified nature of WealthCo’s funds were key throughout 2024. WealthCo’s funds are designed to emphasize ‘downside protection’ over ‘upside capture’, and 2024 certainly featured plenty of upside capture!
Core Equity Fund
Public equity markets (in particular the ‘Magnificent 7’ US Large Cap holdings) continued their momentum from Q4 2023 and roared upward through 2024. Large stocks influenced by Artificial Intelligence were the clear winners in 2024 and skewed the performance of equity benchmarks higher, highlighted by a 25% local currency return for the broad US market. Other markets quietly posted solid local currency returns for their large cap indices as well (21% for Canada, 11% for Europe/Australasia/Far East, and 14% for Emerging Markets). Small cap indices underperformed their large cap counterparts by approximately 10% in 2024 and proved to be strong headwinds for the fund’s relative performance throughout the year. The majority of the fund’s holdings are denominated in US Dollars and the relative strength of the US dollar certainly helped. Overall, the Core Equity fund’s net return of 17.2% for the year was a strong contributor to overall portfolio performance.
Alternative Growth Fund
Alternative Growth posted a solid return of 15.2% in 2024. The fund was propelled by the strength of the US Dollar along with improving valuations across its Private Equity, Infrastructure, and Real Estate portfolios. The fund added new positions in secondary Private Equities, actively managed listed Real Estate, and US Real Estate holdings. We remain confident that untapped value remains within the fund which we expect to be realized once private market transaction volume returns to more normal levels.
Alternative Income Fund
Alternative Income posted an impressive return of 13.4% in 2024, the highest annual return in its 10+ year history. The strength of the US Dollar contributed to the performance of the fund along with strong returns across its Corporate Debt holdings. The fund added new corporate debt and mortgage holdings using proceeds from legacy investments and new capital inflows. Slightly more than half of the fund’s holdings are $US denominated floating rate loans which positions the fund nicely should US interest rates remain relatively steady through 2025.
Fixed Income Fund
Fixed Income posted a solid return of 5.1% in 2024, modestly higher than its beginning-of-year yield of 4.3%. Performance was aligned with its primary goal of capital preservation in additional to modest incremental returns.
2025: Expect the Unexpected
One of my mother’s favorite sayings is to “Expect the Unexpected”. She is into her eighties now and while her wisdom doesn’t come from a career in investment management, I do believe that it is particularly appropriate when it comes to financial implications as we kick off 2025. In particular:
It is unlikely that Trump’s second term as US President will look much like his first. He (and his team) have had much more time to prepare for his return to office, and he has actively leveraged the interim period between the November 7th election and his inauguration to negotiate and take positions on a wide range of topics without really being held to account on any of them.
Deciding how much credibility to put into anything that Trump says has always been a challenge, and that will continue in 2025. However, once he takes office his myriad of conflicting objectives (e.g. implement large tariffs vs. reduce US inflation) will need to resolve themselves. While the Republicans control the House and Senate, their willingness to stand up to some of Trump’s more provocative ideas remains an unknown.
Canada’s political future in the first week of 2025 when Prime Minister Trudeau prorogued parliament and announced he would eventually resign. While the short-term path forward is certainly unclear it will be important for the foundation of the Canadian economy to continue to thrive in order to avoid a recession.
Global leaders will need to choose whether to embrace or resist Trump’s tactics in 2025, which potentially heightens geopolitical risks going forward.
So what might 2025 bring for WealthCo’s Investment Funds?
Early January is always a time for investment professionals to dust off their crystal balls and prognosticate about the future. But short-term forecasting is difficult, especially when a new paradigm (led by Trump 2.0) is likely. That having been said, here are some of the key thoughts driving my perspective as we enter 2025:
It’s important to keep in mind that not all ‘unexpected events’ are ‘bad events’. In fact, many of them are good … although perhaps not obvious in the short-term.
The foundation of the US economy remains relatively sound. Unemployment is low and both inflation and interest rates are reasonable. The incoming Republican administration is very much expected to be more ‘pro-business’ than the Democrats. Overall, we expect that the change in US government to be accretive for US Small Cap equities in particular.
While across-the-board tariffs to all of its trading partners has proven to be an effective negotiating tactic, it’s very difficult to foresee a scenario where they are implemented to the extent that Trump has discussed. Even if Trump commits to them on his first day in office, numerous hurdles would remain before they are implemented. Further, they would trigger global trade wars and soaring inflation … neither of which would be welcomed by anyone.
While Canada will have a challenging start to 2025, our fund’s direct exposure to Canadian equities is relatively small. I don’t foresee significant change to the CAD/USD exchange rate in 2025. A rally in CAD is unlikely to occur until Canada gets its house in order while further declines in the value of the Canadian dollar are constrained by the massive debt of the US. Small declines in CAD may occur if Canada needs to cut interest rates more aggressively.
I’m comfortable with the positioning of each of our portfolios as we enter 2025, highlighted by the following:
Core Equities: The fund’s overweight to Small Cap is expected to add measurable value relative to Large Cap. Exposure to the ‘Magnificent 7’ is modest.
Alternative Income: The loan portfolio is very well diversified and focused on the US (the strongest economy in the world). It should perform well in a stable interest rate environment.
Alternative Growth: The fund is extremely well diversified across issuer and underlying investments. We continue to expect incremental valuations as transaction volume returns to normal.
Fixed Income: Credit quality is high and the fund’s duration is slightly lower than it’s benchmark. A modest return emphasizing capital preservation is a reasonable expectation given consensus interest rate views.
With over a decade of experience in managing pools that include bona fide Alternative investments, we remain confident that our disciplined and deliberate approach will continue to deliver the long-term results our investors seek. Our commitment to limiting short-term volatility while providing consistent returns underscores the strength of our model. We deeply appreciate your trust and support and look forward to helping you achieve your financial goals. Wishing you all the very best in 2025