Wealthsimple’s newest asset is here. ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ LETTER FROM BEN Chief Investment Officer Why I like private equity for (some) investors Hi there, As you may have noticed, we’re trying something new this month. Instead of addressing only one topic, we’ve added a couple new elements: a chart that reveals something about the markets, and an upcoming event that I think is worth paying attention to. Please let us know what you think in the feedback form at the bottom. –Ben Reeves COMING UP Perspective on interest rates A primer on private equity A big meeting on Tuesday the 12th CHART OF THE MONTH The rise in interest rates that started last year has been dramatic — and painful for many Canadians. The nearly non-existent rates that preceded it lasted so long that it seemed like they’d ever end. If you’re under 40, it’s basically the only investing environment you’ve ever known. But in the wider historical context, current rates are much more normal. As you can see in this graph, interest rates cratered after the 2008 financial crisis and stayed below 2% for the next 15 years. But that time may well be over. INVESTMENT INSIGHT We recently introduced private equity as an option for clients, and I’d like to talk about how it can fit in a diversified portfolio. For those who might be unfamiliar, private equity is the ownership of a stake in a private company. (By contrast, stocks are sometimes referred to as public equity.) Private equity funds look for companies that they believe are well-positioned to increase in value, buy them, make improvements to them over a period of time (often five to ten years), and later look to sell them at a higher price. Although there is risk involved, which I’ll get into below, I like it for a lot of our clients with long investment horizons because of the potential for high returns. From 2001 to 2023, private equity returned 10.5% vs. the global stock market’s 5.7%.1 Given the current economic conditions, going forward we estimate private equity to continue to outperform by about 3%, net of fees. Over a long period of time that extra 3% can improve outcomes considerably. The risk I mentioned is a big driver of those outsize returns. Underlying companies are riskier than the broader market, and investors are compensated for taking on that risk. Also, private equity managers tend to use more leverage than typical companies, which increases returns and adds more risk. There are implementation risks to private equity, too. They include illiquidity and a lack of index funds, which means you can’t invest in the overall market — and which puts a lot of pressure on finding the right fund manager. We’ve done a few things to mitigate risks in this asset class: We partnered with a manager who not only has a track record of above-median returns, but is a co-investor, which makes them highly incentivized to manage for returns instead of simply gathering assets to collect more in fees. We intentionally found a fund that invests only in the secondary market at a discount (the market average is currently 17%) or at market prices for new direct investments. This avoids the problems with many existing open-ended private equity funds, which contain deals that debt financed at low interest rates (which may be hard to maintain in times of stress) and whose valuations may be high relative to what the underlying assets would face in a sale (because they have not yet been marked down in line with public markets). Our partner uses less leverage than the industry average. It has not been a meaningful contributor to their approach or returns. For investors who can bear these risks, we think private equity is a valuable addition to portfolios as part of your managed investing relationship with Wealthsimple. But as I mentioned above, it’s not suitable for everyone. We’re making Wealthsimple private equity available to clients with $100,000 or more in deposits, a long enough time horizon to ride out volatility, and enough flexibility to deal with the fund’s relative illiquidity. If that sounds like you, you can apply to add it to your investment portfolio or read more here. WHAT I'M WATCHING Federal Open Markets Committee meeting, December 12-13 Bond markets are pricing in 4-5 rate cuts next year, while the median expectation from the Federal Open Market Committee in the U.S. (the 12-member group, including chair Jerome Powell, that most people are thinking of when they mention “the Fed”) is only one. That discrepancy means the stock market could be volatile. When the FOMC meets in a couple of weeks, members will say what they think rates will be over time. If a lot of them see rates as lower, that could support stock prices. But if many of them see higher rates, that could lead to some losses. Want to learn more about private equity? Wealthsimple senior portfolio manager Daniel Tersigni and I recently hosted a webinar with Pauline Wetter, portfolio manager at LGT (our management partner for the fund). The one-hour session covers what private equity is, how it can benefit your portfolio, and our unique approach to the asset class. Watch the recording Ready to invest? We’ll help you through a suitability check to make sure private equity is a good fit for you. Apply now 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. 1Based on Bloomberg MSCI World Total Return index and Preqin Global Private Equity Benchmark from 2001/01 to 2023/03. Noted return does not represent investments made by Wealthsimple’s Private Equity Fund. The past performance of private equity or any other security or investment strategy is not an indicator of future performance, and past performance may not be repeated. All investments involve risk. 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. Managed accounts are offered by Wealthsimple Inc., a registered portfolio manager in each province and territory of Canada. © 2024 Wealthsimple Technologies Inc.