July was a continuation of June, with bonds down on worries over higher interest rates, and equity market were mixed with a stronger Canadian dollar acting as a further headwind. In this environment, the portfolios were again in negative territory. The Conservative Portfolio lost 1.1%, the Balanced Portfolio was off by 1.4%, and our Growth Portfolio fell by 1.7%.
For a detailed review of the portfolios’ performance and risk reward metrics, you can download our standard monthly portfolio report here. Additional detail can be found in these reports generated by Morningstar. A summary report can be downloaded here, while the more detailed report can be downloaded here.
July saw Bank of Canada Governor Steven Poloz pull the trigger, pushing the Bank’s key overnight lending rate higher by 0.25%. This move has sent yields up, with the yield on the Canada five-year bond move from 1.38% on June 30, to 1.65% on July 31. There was similar movement across the yield curve, with the Canada ten-year moving from 1.75% to 2.06%, and the long bond moved from 2.13% to 2.47%. This rise in yields pushed bond prices lower, with the long end of the curve taking most of the damage.
The FTSE/TMX Long-Term Bond Index fell by 4.3%, while short-term bonds were down 0.4%. Government bonds, with their higher interest rate sensitivity were hit harder than their higher yielding corporate brethren. The FTSE/TMX All Corporate Bond Index was off by 1.4%, while Government bonds lost 2.1%.
The S&P/TSX Composite Index was mostly flat, with a very modest 0.1% drop. Strength in energy and materials couldn’t offset weakness in consumer names, industrials, and health care. In the U.S., corporate earnings have been stronger than expected, job growth remains strong, and inflation is well contained. This saw the S&P 500 gain 2.1% in U.S. dollar terms, but another sharp appreciation in the Canadian dollar resulted in a loss of 1.7% once the currency effect was taken into account.
The dollar moved from $0.7713 US to $0.8001 US in the month, on strength in energy and higher interest rates. This meant that again, any investment with an unhedged currency position experienced significant headwind from the dollar.
This saw many global markets see gains in U.S. dollar terms, only to see them turn to losses in Canadian dollar terms. The MSCI EAFE Index gained 2.9% in U.S. dollar terms, but lost 0.8% in Canadian dollar terms. The MSCI World Index gained 2.4% in U.S. dollars, only lo be down 1.3% in Canadian dollars.
Turning to the portfolios, all were down in the month. The fixed income funds each outperformed their respective benchmarks, while the equity funds lagged. The biggest drag on the portfolios was the Mackenzie Ivy Foreign Equity Fund, which lost 4.2% in the month. This is particularly disappointing, given the nearly 30% cash weight. However, many of their key holdings including Amcor Ltd, W.W. Grainger, and Hyundai experienced losses on the month, which were then compounded because of the loss on the currency.
Another laggard was the Fidelity Canadian Large Cap Fund, which was down 1.5% in July. A few of its top holdings, namely Empire Co, Imperial Oil, and Canadian National Railway all struggled in July. Further, manager Dan Dupont held some short-term bonds as a cash replacement, which were hurt in the bond downdraft. Further, there was a modest currency headwind, with nearly a quarter of the Fund invested outside Canada.
Looking ahead, I remain confident in each of the funds in the portfolios. As we head into a potentially volatile time for both equities and bonds, the Dynamic Advantage Bond Fund, the Fidelity Canadian Large Cap Fund, and Mackenzie Ivy Foreign Equity are well positioned, with defensive, quality focused portfolios, and with the Dynamic offering, a much lower than index interest rate sensitivity. Also, the Funds in the portfolios have a decided quality focus, which will perform well when the market returns to valuing securities more on fundamentals, rather than liquidity and momentum.
I continue to monitor the portfolios and funds closely.