Plus: a book that makes money fun ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ Letter from Ben Ben Reeves — Chief Investment Officer August 1, 2024 COMING UP AI’s effect on markets Alternative investments’ effect on our portfolios My new favourite old book A look back at Q2, and what’s ahead Hi there, Most portfolios offered in Wealthsimple’s managed accounts continued to grow in the second quarter as optimism around artificial intelligence pushed global stocks up (again). All of the money being poured into AI, along with the belief that users will pay for AI upgrades, had companies including Nvidia and Apple posting extremely strong returns. Because Big Tech makes up such a large portion of the world’s equity markets, this caused equities overall to increase — even though the markets for most developed countries outside the U.S. saw only modest gains (or in the case of the TSX, declined). MANAGED PORTFOLIO PERFORMANCE Our Classic Balanced 60/40 portfolio returned 1.6%, and our Classic Growth portfolio returned 1.9% (see chart below). That brings year-to-date returns to 6.5% and 8.9%, respectively. Annualized returns since inception are now 5% and 7.1%, respectively. SRI and Halal portfolios had lower returns because they don’t hold as many big technology companies. Our SRI Balanced portfolio declined 0.9%, and our SRI Growth portfolio declined 1.3%. Year-to-date returns are 2.2% and 3.5%, respectively. Halal gained slightly, thanks to more exposure to gold. The Halal Balanced portfolio rose 0.3% over the quarter, and Halal Growth returned 0.2%. That brings year-to-date returns to 6.9% and 7.7%, respectively. The overall market rally has continued into the third quarter. This month, classic portfolios have already returned another 2.5% (Balanced) and 2.7% (Growth). SRI portfolios are up 3.8% (Balanced) and 4.6% (Growth). And Halal gained 3.7% (Balanced) and 4.4% (Growth). ALTERNATIVE INVESTMENTS These funds allow our qualified Managed Investing clients to invest alongside institutional investors in strategies that offer higher expected returns or attractive returns and diversification. Wealthsimple Private Credit invests in senior-secured floating-rate loans (that just means we’re first in line to get paid back, and payments go up or down with interest rates) to medium-size companies. Wealthsimple Private Equity offers a globally diversified portfolio of private companies owned and operated by private equity managers who work aggressively to improve their value. Both funds are managed by experienced, institutional-quality investors, with track records of steady performance across economic cycles and aligned incentives. We believe both options provide an excellent way to build wealth and diversify portfolios, and we’re proud to be able to bring them to our Managed Investing clients. In fact, we’ll soon be lowering the requirements from $100,000 in total investable assets to $50,000 in order to give access to even more investors who meet other eligibility criteria. You can sign up here to be contacted when the new requirements are in place. Private Credit Private Credit returned 2.5% in the second quarter, bringing total returns since the fund’s June 2023 inception to 12.5%. The fund is distributing income at a 9% annualized rate,1 and borrower health is strong. The loan-to-value ratio2 (a measure of how much collateral a company has compared to how much they borrow) is a healthy 41%, and all borrowers are making regularly scheduled interest payments. Our management team is continuing to find attractive lending opportunities. Private Equity Our Private Equity fund returned 9.0% in the second quarter. That brings total returns since inception in December 2023 to 27.6%, which is at the high end of our expectations. The fund is growing nicely, with a diversified portfolio of more than 300 companies. The majority are split roughly evenly between the United States and Europe, and a few are in Asia. How alternatives can help a portfolio As I mentioned before, we think alternatives can be a great way to diversify portfolios and increase your overall returns. The chart below compares the historical returns of two different portfolios: Our Classic Growth portfolio, and; A hypothetical portfolio based on actual performance that includes allocations to Wealthsimple Private Equity and Private Credit. (The data begins this year, with the inception of our Private Equity fund.) While it is early days for these funds, including alternatives in a portfolio would have added value so far. OUTLOOK The performance of the U.S. stock market, and U.S. technology stocks in particular, has led to a historically large concentration of world markets in a few companies (aka Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla). This has investors asking questions. On one hand, they want to keep earning returns from companies that are poised to profit from AI — a technology that could transform the entire world economy. The U.S. has also been the world’s best performing economy for many decades, with the deepest and most liquid markets. If AI delivers on its promise, and the U.S. economy grows without another spike in inflation, returns could continue to be strong. On the other hand, having concentrated exposure in anything increases the risk of sharp losses. A number of other realistic scenarios — stagflation (when inflation and unemployment are high, and economic growth is low), recession, all this AI spending failing to pay off, or unanticipated growth elsewhere in the world — could result in an extended period of U.S. underperformance. That’s why I always come back to the same point: a portfolio diversified across geographies, stock types, and asset classes continues to be a good strategy to anticipate a variety of economic scenarios. It’s how we build our portfolios, and why we encourage other investors to do the same. WHAT I’M READING I get a lot of requests for book recommendations from friends who are looking to get a better understanding of finance. In case it’s helpful, I wanted to include a couple recent favourites here. And because I also like to read books that have nothing to do with finance, I threw in one of those as my third pick. “Bull! A History of the Boom and Bust, 1982-2004” by Maggie Mahar. We can escape our current conventional wisdom by understanding how it has evolved in the past. This book displays what common knowledge looked like after the 2000 market crash. “Master, Minion” by Paul Podolsky. My former colleague at Bridgewater used his insider’s knowledge of complex finances and geopolitics to write a page-turning thriller about the assassination of a Russian central banker. It’s a murder mystery that also stealthily teaches you how money and power work. “The Summer Book” by Tove Jansson. Through a series of vignettes, this 1972 novel tells the story of a 6-year-old and her grandmother as they spend a summer together on a tiny island in Finland. It’s about living in and closely observing nature, being open-minded and tolerant, and respecting each other. All the best, Ben Reeves Chief Investment Officer Want to learn more about what’s going on in the markets? On Wednesday, August 7, at 12 p.m. ET, portfolio manager Dan Tersigni and I will host a webinar covering recent market movement, the reign of big tech, and what might be coming next. Register now What did you think? Choosing one of the following ratings will shape the content you see from us in the future. You'll also get the chance to share more detailed feedback after clicking. Interested Not interested 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. 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. Returns shown for Private Credit and Private Equity funds include all applicable fund management fees and performance fees, but excludes Wealthsimple’s standard management fees for its advisory services. Past performance does not guarantee future results. 1 Annualized distribution yield based on $0.077/share, divided by a starting NAV of $10.298, and multiplied by 12. To calculate this rate, we take a partial year distribution and convert it to a full-year amount as if it were paid in each period. We then divide this annualized amount by the fund’s value at the start of the period. Distributions are not guaranteed. Past performance does not guarantee future results. 2 Based on par value as of June 28, 2024. Chart disclosure (“Alternatives and your portfolio”): The total returns shown for Classic Growth portfolio are calculated using the asset-weighted average of time-weighted returns of clients invested within the portfolio on a given month. The aggregated returns for Classic Growth portfolio that includes the performance of alternative investments, are based on actual returns of the underlying portfolios. However, Wealthsimple currently does not offer this hypothetical portfolio. The presented information is for illustrative and information purposes only. The hypothetical portfolio includes a performance composite of 20% Wealthsimple Private Equity fund, 20% Wealthsimple Private Credit, and 60% risk level 8 Classical Growth ETF Portfolio. Actual allocation of alternative investments will vary depending on actual recommended risk level and other circumstances. All returns shown include Wealthsimple’s standard management fees for its advisory services, ETF fees, alternative fund management fees (as applicable), and FX fees, but excludes taxes payable by clients that would have reduced returns. Dividends, if any, were reinvested. Past performance is not indicative of future results and future performance may materially differ from expectations. Managed accounts are offered by Wealthsimple Inc., a registered portfolio manager in each province and territory of Canada. © 2024 Wealthsimple Technologies Inc.