Investing Perspectives Q4 2024
Financial markets recorded a strong performance in 2024 as short-term interest rates around the world continued to decline, boosting stocks, bonds and many private asset segments. These gains occurred, however, against a turbulent geopolitical backdrop.
In the US, the presidential election campaign saw Trump survive two assassination attempts and Biden bow out of the race three months before election day over issues of mental competence. North of the border, Canada finds itself in an economic malaise and with a suspended (prorogued) parliament as we likely head to a spring election and possible change of government. 2024 also brought major power shifts in the Middle East and deepening tension between China, Russia and the West.
For the year ended December 31, 2024, the S&P 500 and TSX Composite indices returned 25% and 22%, respectively, while the Bloomberg Canadian and US Aggregate bond indices gained 4% and 1.3% (all in local currency). In particular, the S&P500 has delivered exceptional returns over the last several years, although its lopsided construction has been problematic for some time with the ten largest stocks in the index now making up close to 40% of its composition. That level of concentration is at its highest in at least the last 30 years and would be very damaging should these heavily weighted, large cap technology-oriented stocks suffer a reversal.
Our typical client portfolio, which contains a balanced allocation of publicly traded equities, bonds and private assets, generated annual returns of approximately 10% or more in 2024. Indeed, our aim is to achieve returns in this range but with lower volatility than the broader equity markets and smaller losses in times of distress. We assert that the key to achieving long-term objectives for our clients lies in maintaining a consistent investment approach, which helps avoid the common errors of buying high and selling low due to emotional biases.
Bridgeport Canadian Equity Fund increased approximately 17% on a gross basis in 2024 led by holdings in Brookfield Corporation (+55% share price appreciation in 2024), Dollarama (+47%) and Constellation Software (+35%). Changes in the fund during the year included the sale of Quebecor and the addition of Toromont and Tourmaline Oil.
Bridgeport US Equity Fund gained 16% on a gross basis in 2024. Top contributors to the fund’s return were Meta (+65%), Fiserv (+55%) and Alphabet (+35%). Highlights during the year included the addition of investments in Becton Dickinson (health care products) and LVMH (global luxury goods) and exiting our holding in Pioneer Natural Resources (acquired by ExxonMobil).
Bridgeport Small & Mid Cap Equity Fund earned a gross return of almost 6% last year. Topaz Energy (+44%), Lumine Group (+38%) and Park Lawn (+34%) were some of the best performers in the fund. Significant changes during the year were the addition of MGM Resorts International and the disposition of long-term positions in Atlanta Braves Holdings and Park Lawn (acquired by private equity).
2024 was one of Bridgeport High Income Fund’s best years from an investment return perspective. The fund achieved a 14% gross return, its highest since 2019. The fund holds a diversified mix of North American corporate bonds, floating rate senior loans and preferred shares as well as a modest allocation to dividend paying equities (less than 25%). The fund benefited over the year from strong income generation and strengthening prices for many of its holdings including several preferred shares and dividend-paying equity investments.
Bridgeport Alternative Income Fund, which focuses on income-generating private asset strategies, also had a good year, finishing up 9.5% (gross) for 2024. This fund received performance contributions from a wide array of lending, leasing and royalty-oriented portfolios including strong results from (i) Bain Capital’s special situation lending strategy, (ii) residential, commercial and agricultural lending funds managed by several Canadian and US specialty firms and (iii) ITE Management’s US rail car leasing fund.
Bridgeport Private Equity Opportunities Fund earned over 8% (gross) in 2024, despite a relatively slow year in the broader private equity markets. The performance of this fund was driven by strong returns from managers focused on secondary fund investments (i.e. the purchase of interests in other existing private equity funds usually for a discounted price), co-investment and industry-specific strategies.
Bridgeport Private Real Estate & Infrastructure Fund generated a gross return of approximately 2% last year, the majority of which was earned in the fourth quarter. The real estate sector has been depressed for the past several years as a result of the higher interest rate environment, lack of demand in certain sectors like office and elevated construction costs. We expect some of these pressures to gradually ease in 2025 and for investment returns to improve. In the interim, the component of the portfolio allocated to infrastructure strategies (with managers such as Brookfield and Hamilton Lane) continues to perform well, offsetting weaker results in real estate.
As we start the new year, the US and Canadian economies appear to be travelling on different tracks. US GDP growth is strong and the unemployment rate is hovering in the 4% range, while inflation has gradually declined (even if it’s been a bumpy descent). This provides a positive backdrop for the year ahead, although uncertainty around the implementation of tariffs and the rest of President Trump’s economic agenda is clouding the picture. While less regulation and a more business friendly U.S. administration is generally good for financial markets, tariffs and immigration curbs have the potential to be inflationary.
The picture in Canada is much less rosy than in the US. The country is currently in a state of political paralysis until a likely election later in the year, while facing the real possibility of the US imposing steep tariffs which would significantly curtail economic growth. While inflation in Canada is already well under control and less than the Bank of Canada’s 2% target, our unemployment level remains perpetually above US levels and our real GPD per capita has been stagnant over the last decade and is now 7% below its historical trend.
Predicting how all these economic and political factors will impact portfolios in 2025 is obviously not for the faint of heart. That being said, we are always of the view that volatility is useful to the extent it creates attractive opportunities for long-term investors like Bridgeport to acquire high quality assets.
Finally, as we begin tax filing season, we would be remiss not to highlight the ambiguity around the tax treatment for 2024 capital gains. As many of you are undoubtedly aware, the new capital gains rules have not yet been passed by Parliament and will likely never be passed. Despite this, the Canada Revenue Agency’s (CRA) administrative practice is to treat the new rules as if they are currently applicable and will ultimately become law. We will be issuing tax slips and other information in the coming months that will include information about the portion of capital gains earned before and after the June 2024 transition date.
The emerging consensus in the financial community is that taxpayers should file their 2024 returns as if the new rules apply with the expectation that the CRA will subsequently issue refunds if they don’t ultimately come into effect. While less than satisfying, this approach avoids the potential for interest and penalties. We urge you to consult with a tax accountant if you wish to delve into this issue further.
We wish you all the best for 2025. As always, please feel free to reach out if you have any questions.