Uncertainty and volatility rule the markets in first half. Expect more of the same for second half
When we last reviewed our model portfolios, our expectation was that the first half of 2012 would be very much like the latter half of 2011. We were pretty much right, as the European debt crisis, worries over the U.S. economy and concerns of a slowdown in China continued to weigh on investors. As a result, volatility, particularly in the second quarter, was high, with the more defensive sectors outperforming while energy and other cyclicals lagged.
Virtually all the factors that drove performance in the first half remain firmly entrenched as we enter the second half. Europe is trudging along making very little progress on its debt issues. The U.S. is in recovery mode, but is not growing at a pace that is quick enough to make much of a difference, and China and other emerging markets are experiencing a pronounced slowdown. This is having an impact on global growth, and of particular interest for Canadian investors, the demand for commodities. We expect more of the same in the second half of the year; low inflation, stable interest rates, high volatility, large caps outperforming small caps, pressure on resource stocks, and modest gains from fixed income investments.
Despite the first half volatility, all of our portfolios managed to post respectable gains during the first half of the year. Perhaps more impressive, except for the Beutel Goodman Small Cap Fund, all of the funds used in the portfolios posted gains. What this demonstrates is that by following a disciplined portfolio approach, you can earn decent returns without taking substantial risks, regardless of your investor profile.
As a refresher for our long time readers and for the benefit of new readers, our model portfolios were created on January 1, 2009, each with an initial value of $25,000. All mutual funds and ETFs are eligible for inclusion except for those which are only available to “sophisticated investors” through offering memorandum. Here is a quick summary of the objectives of each portfolio.
The Ultra-Safe Portfolio: As the name suggests, this portfolio is designed for people who don’t want to worry about their money but are looking for better returns than they’ll get from GICs or money market funds. If it is used in a registered account, you’ll have to substitute for the RBC Monthly Income Fund, which cannot be held in RRIFs, RRSPs, etc.
The Non-Registered Defensive Portfolio: There’s a little more risk and extra cash flow in this portfolio. It is best suited to non-registered accounts where safety and income are the main priorities. The fund targets an average annual compound rate of return of between 4% and 6%.
The RRSP Portfolio: This portfolio is structured in much the same way as a conservatively managed pension plan. Risk is kept to a reasonable level consistent with a long-term annualized growth target in the 6% to 7% range.
The RRIF Portfolio: Cash flow and capital preservation are the goals of this portfolio. It is designed to provide enough income to avoid dipping into capital, while shielding investors from heavy losses in market downturns. The target return is approximately 6% a year.
The Growth Portfolio: This is suitable for investors seeking higher returns over the long term and who are willing to accept more risk. We aim for a compound annual growth rate in the 7% to 8% range. To date, the return has averaged 8.0% per year. This target allows us to maintain risk at reasonable levels. We avoid highly speculative funds.
Here are the latest results to June 30:
ULTRA SAFE PORTFOLIO
| Fund Name |
Weight |
6 Month Return |
Value |
| PH&N Canadian Money Market Fund |
10% |
0.32% |
$2,938.01 |
| PH&N Short Term Bond and Mortgage |
15% |
1.04% |
$4,438.64 |
| National Bank Mortgage |
15% |
0.15% |
$4,399.54 |
| CIBC Canadian Short Term Bond Index |
15% |
0.44% |
$4,412.28 |
| Beutel Goodman Income |
10% |
1.39% |
$2,969.34 |
| PH&N Total Return Bond |
10% |
1.96% |
$2,986.04 |
| iShares DEX All Corporate Bond Index |
10% |
2.94% |
$3,014.74 |
| RBC Monthly Income |
15% |
2.11% |
$4,485.64 |
| Totals |
100% |
$29,644.23 |
PERFORMANCE TO DATE
| Initial value (January 1, 2009) |
$25,000.00 |
| Value at last review (December 31, 2011) |
$29,286.35 |
| Current value (June 30, 2012) |
$29,644.23 |
| Change since last review |
$357.88 |
| % change since last review |
1.22% |
| % change since inception (3 1/2 yrs) |
18.58% |
| Annualized Compound Return since inception |
4.99% |
COMMENTS
The portfolio continued to do exactly what it was designed to do – protect capital while generating a return that is higher than what is offered by a GIC. All of the funds were positive during the first half, but the majority of the gains were the result of the iShares DEX All Corporate Bond Index ETF and the RBC Monthly Income Fund.
CHANGES
Historically, the second half of the year is prone to periods of higher volatility, particularly in the months of September and October. Further, given the relatively strong performance of the RBC Monthly Income Fund, we will be taking some profits off the table and reducing its weight within the portfolio. We will be increasing the exposure to the PH&N Short Term Bond & Mortgage Fund. We are removing the National Bank Mortgage Fund from the portfolio and replacing it with the TD Mortgage Fund. This change was made because we believe that the TD Mortgage Fund has a higher quality portfolio and a lower duration which will better help protect investor’s capital.
REVISED ULTRA SAFE PORTFOLIO
| Fund Name |
% Allocated |
| PH&N Canadian Money Market Fund |
10% |
| PH&N Short Term Bond and Mortgage |
20% |
| TD Mortgage Fund |
15% |
| CIBC Canadian Short Term Bond Index |
15% |
| Beutel Goodman Income |
10% |
| PH&N Total Return Bond |
10% |
| iShares DEX All Corporate Bond Index |
10% |
| RBC Monthly Income |
10% |
DEFENSIVE PORTFOLIO
| Fund Name |
Weight |
6 Month Return |
Value |
| PH&N Canadian Money Market Fund |
10% |
0.32% |
$3,166.53 |
| iShares DEX Short Term Bond Index Fund |
10% |
0.81% |
$3,181.99 |
| National Bank Mortgage Fund |
10% |
0.15% |
$3,161.16 |
| PH&N Total Return Bond Fund |
10% |
1.96% |
$3,218.29 |
| Steadyhand Income |
10% |
3.59% |
$3,269.74 |
| Mackenzie Sentinel Income (Series B) |
10% |
1.38% |
$3,199.98 |
| BMO Guardian Monthly Dividend Classic |
10% |
1.31% |
$3,197.77 |
| RBC Monthly Income Fund |
15% |
2.11% |
$4,834.54 |
| Fidelity Canadian Balanced |
15% |
1.62% |
$4,811.34 |
| Totals |
100% |
$32,041.34 |
PERFORMANCE TO DATE
| Initial value (January 1, 2009) |
$25,000.00 |
| Value at last review (December 31, 2011) |
$31,564.25 |
| Current value (June 30, 2012) |
$32,041.34 |
| Change since last review |
$477.09 |
| % change since last review |
1.51% |
| % change since inception (3 1/2 yrs) |
28.17% |
| Annualized Compound Return since inception |
7.35% |
COMMENTS
Like the name suggests, this portfolio is defensively positioned with no direct equity exposure. All of the funds in the portfolio posted gains in the first half of the year, allowing the portfolio to post a 1.5% gain. Steadyhand Income and RBC Monthly Income Fund were the main contributors to the overall performance.
CHANGES
While this portfolio is very defensive, we are going to gradually position it to be able to participate more in the upside movements of the equity markets, while still providing strong downside protection. To do this, we are making three changes to the portfolio. First, we are replacing the National Bank Mortgage Fund with the TD Mortgage Fund based on the reasons discussed above. Second, we are substituting the PH&N Short Term Bond & Mortgage Fund for the iShares DEX Short Term Bond Index Fund. We are making this change because we feel that with the upcoming challenges in the fixed income market the PH&N fund is better positioned. Third, we are bringing in some direct equity exposure through the addition of the Mackenzie Ivy Foreign Equity Fund. It is a very conservatively managed fund that provides global equity exposure with a major emphasis on capital preservation.
REVISED DEFENSIVE PORTFOLIO
| Fund Name |
Weight |
| PH&N Canadian Money Market Fund |
10% |
| PH&N Short Term Bond & Mortgage |
15% |
| TD Mortgage Fund |
10% |
| PH&N Total Return Bond Fund |
10% |
| Steadyhand Income |
10% |
| Mackenzie Sentinel Income (Series B) |
10% |
| BMO Guardian Monthly Dividend Classic |
10% |
| RBC Monthly Income Fund |
15% |
| Mackenzie Ivy Foreign Equity |
10% |
RRSP PORTFOLIO
| Fund Name |
Weight |
6 Month Return |
Value |
| PH&N Canadian Money Market |
5% |
0.32% |
$1,516.32 |
| PH&N Short Term Bond and Mortgage |
15% |
1.04% |
$4,581.60 |
| Beutel Goodman Income |
15% |
1.39% |
$4,597.47 |
| PH&N Total Return Bond |
15% |
1.96% |
$4,623.31 |
| Steadyhand Income Fund |
15% |
3.59% |
$4,697.23 |
| BMO High Yield US Corporate Bond |
5% |
4.66% |
$1,581.91 |
| Fidelity Canadian Large Cap Fund |
15% |
2.64% |
$4,654.15 |
| BMO Guardian Monthly Dividend Classic |
15% |
1.31% |
$4,593.84 |
| Totals |
100% |
$30,845.82 |
PERFORMANCE TO DATE
| Initial value (January 1, 2009) |
$25,000.00 |
| Value at last review (December 31, 2011) |
$30,229.59 |
| Current value (June 30, 2012) |
$30,845.82 |
| Change since last review |
$616.23 |
| % change since last review |
2.04% |
| % change since inception (3 1/2 yrs) |
23.38% |
| Annualized Compound Return since inception |
6.19% |
COMMENTS
While the portfolio has delivered a reasonable rate of return for the market environment, we believe it is too conservatively positioned to meet its return target going forward. It has more than half of its assets in fixed income funds, and given the interest rate outlook, the likelihood of meeting the return objectives has decreased. As a result, some changes are needed in an effort to increase the expected return profile.
CHANGES
To do this, we are making a number of changes. We are removing the Beutel Goodman Income Fund. While we believe it is a high quality bond fund, it is our opinion that the PH&N Total Return Bond Fund is a better choice for the current environment, given its ability to be fairly tactical and lower cost structure. We are adding the Mackenzie Ivy Foreign Equity Fund into the portfolio to provide some global equity exposure, while providing downside protection.
REVISED RRSP PORTFOLIO
| Fund Name |
Weight |
| PH&N Canadian Money Market |
5% |
| PH&N Short Term Bond and Mortgage |
15% |
| PH&N Total Return Bond |
15% |
| Steadyhand Income Fund |
15% |
| BMO High Yield US Corporate Bond |
5% |
| Fidelity Canadian Large Cap Fund |
15% |
| BMO Guardian Monthly Dividend Classic |
15% |
| Mackenzie Ivy Foreign Equity |
15% |
RRIF PORTFOLIO
| Fund Name |
Weight |
6 Month Return |
Value |
| PH&N Canadian Money Market |
10% |
0.32% |
$3,247.30 |
| PH&N Short Term Bond and Mortgage |
15% |
1.04% |
$4,905.90 |
| Beutel Goodman Income |
15% |
1.39% |
$4,922.90 |
| iShares DEX All Corporate Bond Index |
10% |
2.94% |
$3,332.10 |
| BMO High Yield US Corporate Bond |
10% |
4.66% |
$3,387.78 |
| Mackenzie Sentinel Income B |
10% |
1.38% |
$3,281.61 |
| BMO Guardian Monthly Dividend Classic |
15% |
1.31% |
$4,919.01 |
| Fidelity Monthly Income |
15% |
3.29% |
$5,015.15 |
| Totals |
100% |
$33,011.74 |
PERFORMANCE TO DATE
| Initial value (January 1, 2009) |
$25,000.00 |
| Value at last review (December 31, 2011) |
$32,369.37 |
| Current value (June 30, 2012) |
$33,011.74 |
| Change since last review |
$642.37 |
| % change since last review |
1.98% |
| % change since inception (3 1/2 yrs) |
32.05% |
| Annualized Compound Return since inception |
8.27% |
COMMENTS
Performance, while positive, was a bit off of our targeted pace during the first half of the year. Still, the portfolio has returned an average annualized return of more than 8% since its launch. Nearly half of the gain in the first half came from two funds, the Fidelity Monthly Income Fund and the BMO High Yield U.S. Corporate Bond ETF. The portfolio produces a reasonably stable stream of income, which at current prices works out to a yield of approximately 4.1%.
CHANGES
Given that this is an income focused portfolio, we are making a couple of changes that will increase the yield, while providing potential for increased returns without substantially increasing the risk. To do this, we are removing the PH&N Money Market Fund and adding the iShares S&P/TSX Capped REIT Index. We are also reducing the weighting of the Fidelity Monthly Income Fund by 5% and increasing the weighting of the PH&N Short Term Bond and Mortgage Fund. We are adding the REIT exposure for two reasons; an increased distribution and potential for improved return. By increasing the exposure to the PH&N Short Term Bond and Mortgage Fund, it helps provide a volatility buffer against the riskier REIT exposure. The distribution yield on the portfolio improves to 4.5%.
REVISED RRIF PORTFOLIO
| Fund Name |
Weight |
| PH&N Short Term Bond and Mortgage |
20% |
| Beutel Goodman Income |
15% |
| iShares DEX All Corporate Bond Index |
10% |
| BMO High Yield US Corporate Bond |
10% |
| Mackenzie Sentinel Income B |
10% |
| BMO Guardian Monthly Dividend Classic |
15% |
| Fidelity Monthly Income |
10% |
| iShares S&P/TSX Capped REIT Index |
10% |
GROWTH PORTFOLIO
| Fund Name |
Weight |
6 Month Return |
Value |
| PH&N Total Return Bond |
10% |
1.96% |
$3,224.18 |
| Fidelity Canadian Large Cap |
15% |
2.64% |
$4,868.53 |
| Mawer Canadian Equity |
15% |
2.81% |
$4,876.59 |
| Beutel Goodman Small Cap |
15% |
-1.34% |
$4,679.74 |
| Beutel Goodman American Equity |
10% |
7.18% |
$3,389.25 |
| Mawer U.S. Equity |
10% |
5.53% |
$3,337.07 |
| Mackenzie Cundill Value |
10% |
4.95% |
$3,318.73 |
| Mawer International Equity |
15% |
5.96% |
$5,026.01 |
| Totals |
100% |
$32,720.10 |
PERFORMANCE TO DATE
| Initial value (January 1, 2009) |
$25,000.00 |
| Value at last review (December 31, 2011) |
$31,622.03 |
| Current value (June 30, 2012) |
$32,720.10 |
| Change since last review |
$1,098.07 |
| % change since last review |
3.47% |
| % change since inception (3 1/2 yrs) |
30.88% |
| Annualized Compound Return since inception |
7.99% |
COMMENTS
The performance was roughly in line with our target return. Beutel Goodman Small Cap was our only losing fund, dropping 1.3%. Despite posting a loss, it was still a very strong relative performance, experiencing half the loss of the average small cap fund. Our bigger concern in the portfolio is the significant increase in volatility that the Mackenzie Cundill Value has experienced in the past few quarters as a result of the fund’s overweight exposure to U.S. financials. Also, during the period, Mawer World Investment changed its name to Mawer International Equity.
CHANGES
Given this significant jump in volatility with the Cundill Value Fund, we are removing it from the portfolio and replacing it with the Mackenzie Ivy Foreign Equity Fund. Ivy, at least of late, has been significantly less volatile than Cundill. While we expect that Cundill will outperform Ivy in a rising market, we expect that market volatility will remain high for the balance of the year, making Ivy the preferable choice. We are also removing the Mawer U.S. Equity Fund from the portfolio while slightly increasing the weighting of the Beutel Goodman American Equity Fund. They are fairly similar in terms of mandate and risk reward characteristics, so having them both in the portfolio offers little in the way of diversification benefits. In our opinion, Beutel offers a slightly more favourable risk reward profile than Mawer. We have also tweaked the weightings of some of the other funds in the portfolio.
REVISED GROWTH PORTFOLIO
| Fund Name |
Weight |
| PH&N Total Return Bond |
10% |
| Fidelity Canadian Large Cap |
15% |
| Mawer Canadian Equity |
15% |
| Beutel Goodman Small Cap |
15% |
| Beutel Goodman American Equity |
15% |
| Mackenzie Ivy Foreign Equity |
15% |
| Mawer International Equity |
15% |