Despite finishing in positive territory for the month, each of the portfolios trailed their respective benchmarks. Again, it was the conservative positioning, particularly of the global equity funds, which continues to act as a headwind in the portfolios.
For a review of the portfolios’ performance, you can download our standard monthly portfolio report here. For those looking for even more detail, I am also providing additional reports generated from Morningstar which show more detail regarding the portfolios. A summary report can be downloaded here, while the more detailed report can be downloaded here.
The recent bout of underperformance is certainly a test of one’s patience. It is particularly frustrating because I understand what each manager is doing, and why, but unfortunately the market is moving in a different direction. When I look at the fundamentals of the markets, particularly valuation, I can’t justify shifting the positioning of the portfolios for the sake of capturing stronger performance at the expense of capital protection. When markets correct, and they will, I firmly believe that each of the funds in these portfolios is positioned to better manage that downside.
I have always said I am willing to forgo returns and lag in a rising market if I can do a better job protecting capital in a falling market. I stand by that, despite the recent underperformance. If I look at the biggest sources of underperformance, they are Dynamic Advantage Bond, Fidelity Canadian Large Cap, and Mackenzie Ivy Foreign Equity.
Dynamic Advantage Bond Fund has been very conservatively positioned to protect against interest rate volatility. In periods of volatility, it has done exactly what I expected it to do. Unfortunately, bond markets haven’t been as volatile as I had expected. But now with the Fed likely to move at least a couple more times this year, we should see a return of volatility, and see this fund earn its keep.
The Fidelity Canadian Large Cap is managed in a very disciplined manner. The result is a portfolio that has delivered better than average returns with significantly lower levels of volatility. Now, the portfolio is defensively positioned, with a significantly high cash balance, and an underweight in financials and energy, two recent winning sectors. Valuation metrics look attractive compared with the broader market and peer group. In time, I expect this fund to improve its relative performance.
Mackenzie Ivy Foreign Equity has been a staple global equity fund for me since 2008. The discipline and consistency shown by the management team is impressive. However, that discipline can be a double-edged sword, as evidenced by the past years performance, with the Fund lagging the benchmark and peer group considerably. Nothing has changed in the investment process used, it’s just the areas they are investing aren’t currently being rewarded by the market. Longer term, this fund will lag in rising markets, but more than make up for it when things get rocky. And when things go off the rails, this is a fund I want to own in my portfolios, and this time around is no different.
I can appreciate any frustration you may have with the recent performance of the portfolios. Rest assured, I am monitoring these funds and portfolios on an ongoing basis, and am fully apprised of what each manager is doing. I remain confident in each of them for the long term, but understand there will be periods where underperformance is going to happen. This is unavoidable when you have a manager who follows a disciplined investment approach. Still, I believe the portfolios remain well positioned to deliver strong risk adjusted returns over the long term.