2018 started much like 2017 ended, with U.S. and global markets rallying higher. The S&P 500 gained 5.7% in U.S. dollar terms, and the MSCI EAFE Index gained 5.0%. Emerging markets, driven by a 12.5% surge in China were also very strong, as the MSCI Emerging Markets Index gained 8.3%. Closer to home, the S&P/TSX Composite bucked the global trend, and sold off modestly, falling 1.4% on weaker energy. The Energy sector lost 5.4% even as the price of oil rallied higher by more than 7%.
Interest rates were also on the rise in January, which put pressure on Canadian Bonds. The FTSE/TMX Universe Bond Index was lower by 0.80%, with government and long bonds leading the way down. Strong demand for corporate bonds muted losses in the month, with the FTSE/TMX All Corporate Bond Index declining a very modest 0.24%.
Turning to the portfolios, it was also a continuation of 2017, with the portfolios mostly trailing their respective benchmarks. The Conservative Portfolio was down by 0.2%, the Balanced Portfolio rose by 0.4%, and the Growth Portfolio gained 2.0%, the only portfolio to best its benchmark. 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.
Also like in 2017, it was largely the defensive positioning of many of the funds in the portfolios which was the key reason for this under performance. One notable exception was the Dynamic Advantage Bond Fund which outpaced the Canadian bond market thanks to it’s shorter duration positioning. The Fidelity Canadian Large Cap Fund trailed its benchmark only slightly. The growth focused TD U.S. Blue Chip Equity Fund handily outpaced the broader market
But again, it was the Ivy Foreign Equity Fund that was the biggest drag on relative performance. In the month, it gained 0.3%, trailing the MSCI World Index, which gained 3.2% in the month. Part of the underperformance is the high cash balance, which was 28% of the Fund at the end of December. In addition, the Fund continues to be dragged by retailer H&M, a 4% holding which fell by more than 14% on worries over the health of the retail sector in general, combined with the rapid growth of Amazon. Ivy management believes that H&M is uniquely positioned and their investment thesis on the company remains intact. An underweight allocation to technology also hurt the Fund.
Volatility has returned so far in February, and the Funds which have been anchors of the portfolio have held up exceptionally well in the market selloff, highlighting a key reason of why I have included them in the portfolios.
I will be watching closely to see how the managers allocate their cash holdings in this volatile time, and if they fail to take advantage of the volatility, I will be looking to make changes in the portfolios. Still, on balance, as we head in to a period of higher market volatility, I remain comfortable with the portfolios and the positioning of the underlying funds.