Spoiler: it’s good news ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ LETTER FROM BEN Chief Investment Officer Here’s what happened in Q4 COMING UP A strong end to 2023 An update on Private Credit and Private Equity A continued positive outlook As we finish off the first month of 2024, I’d like to talk about the end of 2023 and how it affected Wealthsimple’s various portfolios and assets. The markets ended last year with a pretty dominant theme: optimism. Thanks to the progress made in reducing inflation, investors began to anticipate the end of the recent cycle of interest rate hikes and priced in significant interest rate cuts over the next two years. This is a big change from the previous quarter, when many people expected the hikes to continue, and it was reflected in all risky asset prices, with stocks, bonds, credit, and gold posting large gains. Portfolio Performance Wealthsimple’s managed portfolios experienced extraordinarily strong quarterly performance (see below). All of our classic portfolios increased in value by 8-9%. Our Halal portfolios were up 5-7%, and SRI portfolios rose 9-10%. For the calendar year, Growth portfolios were up 13%, and our Balanced 60/40 portfolio rose 11% — both well above our long-term return expectations. Since inception, they both also beat median expectations, with the stock-heavy Growth portfolio (see below) out-performing those expectations even more than bond-heavy portfolios. This is not surprising, given that the stock market has performed better than usual and the bond market worse than usual since the beginning of our performance history, in 2016. Private Credit Performance Since it launched in June, total returns (the overall increase in the value of the fund) are at 7%, with 5% coming from income distributions. Increases in the value of the loans comprise the remainder of the total return. In terms of credit quality, the weighted average loan-to-value1 (the amount of money borrowed in comparison to the value of the collateral) is a conservative 43%, and all borrowers are making their agreed-upon payments. Private Equity Performance We launched our Private Equity fund in late December with LGT Capital Partners, along with three other institutional seed investors. The fund is globally diversified across North America, Europe, and Asia, and includes more than 200 companies in more than 20 sub-sectors. Half of the portfolio consists of investments in existing private equity portfolios purchased at significant discounts, while the other half is in direct positions in deals including Worldpay, Medivet, and Aldinger. We will continue to ramp up the portfolio in the coming months. Outlook Going forward, expected returns remain relatively normal, with assets that have outperformed over the past 5-10 years (like US stocks) having lower expected returns than those that have underperformed over the same period, like European and emerging-markets stocks. What’s normal? World stocks have earned about 5% more than inflation over the long term. Bonds tend to return roughly what their starting yield is when purchased, meaning Canadian investors should expect about 3.25% from their bond holdings over the long term. Expected returns for private credit are relatively strong with a sustainable distribution yield of 9%; even with rate cuts of 1% or more, which would reduce the distribution yield, expected returns remain attractive. As always, please let us know if you have any questions. WHAT I'M KEEPING AN EYE ON Microsoft and Tesla will kick off earnings season for the “Magnificent Seven” on January 24th. These seven companies (which also include Apple, Amazon, Nvidia, Meta, and Alphabet) represent 30% of the market capitalization of the S&P 500 and have driven a significant portion of equity market returns over the past several years. Those returns were due more to increased expectations for future growth than actual changes in realized earnings, so any shift in that outlook could have a large effect on the broader market. Time in the market is better than timing the market. Deposit now to give your money more time to grow (and take advantage of new TFSA and RRSP room). Open a Managed Account Thoughts on today's email? Yes, useful Could be better Not for me Wealthsimple, 80 Spadina Ave Suite 400 Toronto, ON, M5V 2J4 Refer a Friend Privacy Policy Unsubscribe Replies to this email address are not monitored. Have questions? Visit our Help Centre or submit a request to our Client Support team. 1 based on par value as of September 30, 2023 Distribution yields are not guaranteed. Past performance does not guarantee future results. Private credit involves risks including, but not limited to, credit risk, liquidity risk, leverage risk and value fluctuation. See here for more information. All information and commentary provided is for illustration purposes only and is not investment advice or recommendations. All investments involve risk. To get more info on our products, investment decisions, fee schedules, user testimonials, promos & more visit wsim.co/disclaimers. Indicated performance data are historical for the period indicated. Rates of return do not take into account any fees or tax payable. Past performance may not be repeated. Managed accounts are offered by Wealthsimple Inc., a registered portfolio manager in each province and territory of Canada. © 2024 Wealthsimple Technologies Inc.