With a modest 2.3% gain in the final quarter of the year, and an 8.9% loss for 2015, this quantitatively managed U.S. equity offering was the worst performing funds on the Recommended List. There were a couple of key factors contributing to the underperformance. The first is the fund’s currency exposure, which is fully hedged back to Canadian dollars. Because of this, it missed out on currency gains of more than 19%. Another reason for the underperformance was its value biased stock selection process. Value names have struggled compared to more growth focused companies in the healthcare and technology sectors. A number of key holdings lost nearly half their value over the year including such names as Bed Bath & Beyond, Hess Corp., and Mosaic. A nearly 10% weight in energy was also a headwind for the fund.
Looking ahead, the currency position is not expected to be as large a detractor from performance as it has been of late. While some further erosion in the Canadian dollar is expected, particularly if the Bank of Canada cuts rates, or the U.S. Federal Reserve moves higher again, but I wouldn’t expect to see another 20% fall. If anything, once we see a stabilization in the price of oil, the Canadian should dollar start to move higher.
Also, as the market leadership returns to the more value focused names, I would expect to see performance improve. While there is no way to effectively forecast when that will happen, the valuations of the growth names, even after the recent selloffs still remain elevated. Regardless, I would expect to see more volatility in all areas of the equity markets.
Still, this remains an excellent long-term pick for those looking for U.S. equity exposure. It offers a disciplined, transparent investment process that has an excellent long-term track record, and it carries an MER of 1.49%, which is well below the category average. With a longer term time horizon, now may be an opportune time to add some exposure to this fund in your portfolio.