2021 Q2 Investment Update

The Covid coaster discussed in my last letter is still rolling up and down the tracks. Fortunately, for our collective health and our financial markets, there has been a markable change in the ride. Vaccine science has given us the tools to dampen future waves. How quickly these waves flatten will depend on getting more people vaccinated and keeping apart when localized outbreaks occur. This won't always be easy. But, we're more likely to be successful working together rather than acting alone. Veritable believes in the power of strong teams. Over the past few months, Veritable has been fortunate to add four new investment partners. The Pillar fund added new managers in private equity and emerging markets equities. The Foundation fund added new managers in global agriculture and global real estate. From the families we're investing for to the investment partners we're investing with, we're excited that all of us at Veritable can work with this great group of people.

From a war to a race

From the November 2020 approval of Covid-19 vaccines through the end of the first quarter of 2021, global markets celebrated an upcoming victory. The virus that sent us into our homes would be defeated, and the economy would mount a triumphant restart. But, during the second quarter, investors realized that success wouldn't be easy.

In early February 2020, Chinese President Xi Jinping declared 'a people's war' on the coronavirus. As the virus spread, media, governments, and institutions adopted the war analogy. Prime Minister Trudeau warned the front-line was everywhere. President Biden called for a full-scale wartime effort. UN Secretary General Guterres said the world needs the logic and urgency of a war economy. Defending a nation at war requires a massive marshalling of people and resources. Defeating a global viral pandemic requires the same, yet there are important economic differences.

In past geopolitical wars we supercharged economies. Every possible worker was mobilized to push production beyond capacity. In viral wars, economies are shut down. All but the essential services and manufacturing are shuttered. All but the essential workers are sent home. A front line of physicians and health care professionals face wartime conditions treating the infected. The rest of us do our part by washing our hands and streaming Tiger King.

Financial markets reached their depths in mid-March 2020 as the world entered a global synchronous recession with the virus' ultimate impact uncertain. World equity markets had fallen by over 25%. Learning from the delayed, incremental response to the Global Financial Crisis, the policy response was impressive. Before month-end, investors were calmed with promises of ballooning central bank balance sheets and supersized government support cheques. Markets recovered as these promises were fulfilled. Equities erased their losses by November. Supported by promising safety and efficacy data, vaccines approvals began the same month.

No longer were investors trying to navigate a questionably forever war. With functional vaccines, Covid had become a winnable race. This recharacterized the pandemic and set off a surge in financial markets. During most recessions, families' balance sheets are battered or bruised. During Covid, government transfers outpaced the lost wages and months of reduced activity pushed up savings accounts. The Bank of Canada estimates the average Canadian ended 2020 with $6,000 more in the bank than they would have otherwise. Reduced transmission, removal of pandemic restrictions, and surplus savings ignited excitement for a grand reopening. World equity markets pushed 15% above their pre-Covid peak.

The next global Covid wave, driven by the Delta variant, tempered outlooks during the second quarter. Bonds yields fell back, a symptom of investors lowering growth expectations. Delta has shown Covid to be a formidable competitor. The virus doesn't care that we declared victory. It will use all its tricks to win some heartbreaking battles even if vaccines already won us the war.

Simple Science

The science behind vaccines is impressively confusing to most of us. But decades of research simplified the unlocking the A-C-T-G's of genetic code and targeting of viral spike receptors. Moderna finished its mRNA vaccine design two days after the coronavirus genome was made public. This was January 13, before most of us could spell Covid. Moderna never had nor needed a sample of the virus in its possession, just its code. It took ten years and billions of dollars to turn Moderna into an overnight success.

The science of virology gives us a simple answer to winning our race - speed. The slower our reaction, the longer the race. As the virus replicates, it makes mistakes. Most of those mistakes aren't important. The virus keeps going about its usual business. But the analysis of Covid-19 reveals that every 11 days or so, a new variant-of-interest makes its way into the population. These might be more harmful or less. It is not intelligent. It is viral dart throwing. With enough attempts, a new variant may hit on a dangerous combination of more transmissible and more harmful. The current Delta variant is spreading at four times the original strain. It is at least as harmful to the unvaccinated, if not more.

As we forego social distancing too soon or vaccinate too slow, the virus gets to throw more darts. Will more dangerous variants emerge? Yes. Can we counter them with vaccines? Yes. Is it that easy? No. It's not the science that is difficult.

People are the problem

We're not always good at doing what we should. Thriving on little sleep is often conveyed as a strength. The science of sleep has proved it to be the exact opposite. For adults, under 7 hours of sleep per night impairs learning and memory creation. It raises the likelihood of getting a cold and developing diabetes and cardiovascular disease. Three separate studies suggest less than 5 hours of sleep a night increases mortality risk by 15%. I know this. I believe the science. And still, each night, I stay up a little too late, and each morning I get up a little too early. I tell myself lies that one last chapter or a longer morning workout is more important than those extra Zzzz's. I'm wrong. I know I'm wrong. I tell myself I'll change my ways. My sleep data suggests otherwise. The long lines for coffee in the early morning suggest I'm not alone.

Science has proven what needs to be done to fight any future variant. From here, it's less about science and more about people. A future variant may require going back into our bubbles. None of us want that, and large populations are likely to reject another lockdown. If a future variant is borne with resistance to our current vaccines, we'll need new ones. Creating those will be simple. Getting them into people's arms won't be. Vaccination programs are not about science. They are about behaviour.

Vaccine availability suggests that most people in developed countries who haven't been vaccinated have chosen not to be. A large unvaccinated population gives the virus more opportunities to spread and more variants to spawn. The slower people decide to vaccinate, the slower we build the capacity to get vaccines to less developed countries, the longer it takes to reach global immunity and the more time the virus gets to throw its variant darts. When it gets lucky, we suffer, and the race lengthens. Success in this race depends on people doing things they'd rather not. As investors, that keeps us cautious.

People are the solution

Economics is not science. Economies are the result of each individual's decisions. It's simple to analyze what happened. It's harder to understand why it happened. It's proven impossible to predict what will happen. Financial markets reflect investors' views on the sum of future decisions. Those views are rarely correct. But decisions must be made. It's the quality of decisions that people make that set the path through market volatility and towards realizing financial goals. As discussed last quarter, your Veritable team relies on process and diversification to deal with the uncertain future. We seek out and select investment partners that execute within their asset class with a similar toolkit. We believe in the power of teams to uncover hidden biases, promote discipline, and provide a diversity of thought and expertise.

Our investment partners are the organizations and their people that we entrust to allocate the Fund's capital into specific equity and debt opportunities. We're looking for master craftsmen. Craftsmen deeply know the tools capable of creating superior goods. They understand why, how, and when each tool works and know its limits. However, tools alone are not enough. Craftsmen need to be thoughtful and creative. Sound judgement built over time is critical. That dedication provides the expertise required to create the superior investment opportunities we desire.

We feel fortunate to have identified four new investment partners for the Fund. These new additions provide ownership in fantastic assets managed by terrific people. We're excited to partner with them.

Continuous improvement

Management of the Veritable Fund is a continuous process. We can be happy with the Fund and our partners while working diligently to improve. The four new investments made so far in 2021 are great additions. We continue to search for others.

In Pillar, we added a new private markets fund consisting of private equity and debt investments. Our partner is one of the world's largest private market asset allocators, directing nearly $1 trillion of investable assets. It has been working with institutional investors for over 30 years. Their size and relationships provide access to great people and high-quality opportunities. They have gathered the most extensive collection of private market investment data available. A large, experienced team uses this data to assess which managers do well with which investments. The Fund's capital is invested when manager, investment, and opportunity align.

Also, in Pillar, we partnered with a pioneer of alternative indexing to add exposure to Emerging Market public equity. Emerging markets make up over three-quarters of the world's population, generate over half of global GDP and contribute two-thirds of global growth. Size and growth alone don't make for great investment opportunities. Unlike most indices and ETFs that buy companies in proportion to their market size, this team has built a $200 billion business allocating capital by the economic contribution a company is making today rather than the contribution investors hope it will make in the future. With nearly two decades of research, experience, and data, the team knows when this contrarian investment style is likely to produce superior returns. This is one of those times.

In Foundation, we added additional global exposure with two new investment partners. The first manages $9 billion in core real estate equity. This partner's international investment team operates from London, Chicago, and Singapore. Core is a specific real estate strategy that is conservative, high yield, and low risk. The team has built a portfolio of 7,300 fully developed and occupied buildings with long tenant leases in proven markets. As part of a multinational financial services firm's $150B real estate platform, the team has scale advantages that inform strategy and provide access to investment opportunities with excellent terms. As a result, better terms on individual investments roll up to greater returns for the Fund.

Finally, at the end of July, Foundation became a limited partner in a global agriculture partnership. Adding farmland and agriculture assets to the Fund adds a unique return stream with substantial diversification benefits. Agriculture land assets benefit from rising food demand and falling land supply. In addition, they are a good inflation hedge, with revenues linked to inflation-sensitive commodity prices. With prior experience building a similar strategy for one of Canada's largest pension funds, the investment partner's team has built a portfolio that gives the Fund partial ownership of 200,000 acres of farmland within seven farming platforms, including dairy, grains, nuts, tree fruit, and the world's largest maple syrup producer.

In Good Company

It's a team effort. Investing for your financial goals is not science. Even the most powerful computers and zettabytes of data won't reveal the choices people will make to shape the future. Investing for your financial goals is about assembling a powerful team. From the families we're investing for to the investment partners we're investing with, we're excited that all of us at Veritable can work with this great group of people.

Be safe, be well,

Douglas Schein

Chief Investment Officer

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