The market rally that kicked off the year in January kept on rolling through February with nearly all asset classes ending the month higher. Investor’s appetite for risk remained strong with small and mid-cap stocks outperforming large caps. The Russell 2000 gained 5.2% and the S&P 500 rose by 3.2%. The trend held globally as the MSCI World Small Cap Index was up by 3.8%, outpacing the large cap focused MSCI World Index which rose by 3.1%. Closer to home, the SMID focused S&P/TSX Completion Index surged by more than 4% and the S&P/TSX Composite rose 3.2%.
Helping to fuel the rally were comments from central banks, particularly the U.S., Federal Reserve that they would continue to exercise caution and patience. This led investors to believe rates were likely on hold for the immediate future. Despite this outlook, bond yields moved slightly higher in the month keeping returns in check. In February, the FTSE/TMX Canada Universe Bond Index rose by 0.2%. Short term bonds outpaced longer-term issues in the rising yield environment. Corporate bonds outperformed governments as the view of a stronger economy saw the demand for corporate bonds increase.
Markets also cheered the prospects a deal could be reached on trade between China and the U.S. Reports seemed to indicate a deal could be reached within weeks.
Canadian equities were pushed higher on the back of a nice rebound in the price of oil. OPEC reiterated their plans to curb production, which pushed crude oil up more than 6%. This saw the heavyweight energy sector gain nearly 6% in Toronto. Unfortunately, the Canadian dollar weakened against the U.S. greenback as the differential between West Texas Intermediate Crude oil and Western Canadian crude widened, putting pressure on the dollar. Also keeping things in check was the news that the Canadian economy struggled in the final quarter of 2018 as several areas of the economy including consumer spending, business investment and residential investment showing a strong retreat. Despite this, the outlook for Canada remains upbeat as strong growth south of the border combined with a competitive dollar paint a strong picture for exports. In the U.S., economic numbers show a strong, but slowing economy.
Turning to the portfolios, each ended the month in positive territory, but trailed their benchmarks. The most defensive Conservative Portfolio rose by 1.0%, our 60/40 Balanced Portfolio was higher by 1.7%, and our most aggressively positioned Growth Portfolio rose by 2.8%.
For a more thorough review of the portfolios’ performance and risk reward metrics, you can download our standard monthly portfolio report here. More 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.
Digging deeper into the portfolios, the underperformance was again the result of two defensively positioned fund; the Fidelity Canadian Large Cap Fund, and yep, you guessed it, the Mackenzie Ivy Foreign Equity Fund. Well, I have finally reached my limit with Ivy. I completely buy in to the manager’s defensive outlook, however, the execution of the Fund has continued to disappoint. The Fund has not protected as much to the downside over the past three years as expected, but more disappointing is the Fund has not participated in much of the downside. Over the past three years, it participated in only half the upside of the market, yet experienced 90% of the downside. The three-year annualized return is 2.9% compared with a 12.4% gain in the MSCI World. Given this continued underperformance, I am immediately removing the Fund from the portfolios and replacing it with the TD Global Low Volatility Fund. Not only has the TD Global Low Volatility Fund outperformed Ivy on an absolute basis, it has done so with comparable levels of volatility and better upside and downside capture ratios. Considering that, combined with my absolute level of frustration with Ivy, I am making the change effective immediately.
In this environment, I remain positive, but defensive. While I don’t see a recession on the horizon, we are definitely in the later stages of both the market and economic cycle. As a result, I continue to emphasize quality both in fixed income and equities. I continue to favour equities over fixed income, although only slightly. For equities, I am favouring defensively positioned Funds that are expected to hold up well in volatile markets. I have a slight tilt towards U.S. equities, but may move to more neutral positioning if we continue to see valuations pushed higher.
Within fixed income, I continue to favour lower-duration, higher quality issues. I remain underweight high yield as there may be some more room for selling in the near term. Historically, the credit markets have been very strong indicators for the economy and equities, and they showed strength in both January and February. Thus far in March, credit markets have taken a pause and we have seen a modest underperformance from corporate bonds. According to traders, much of the recent weakness in corporate bonds is more a function of the large number of new bond issues that have come to market in March. However, I will continue to watch the markets closely for signs of a meaningful erosion.