It was another tough month for the portfolios, with each finishing firmly in negative territory in the month, as bonds sold off on the worry over higher rates, and global equities were mixed, with a surge in the Canadian dollar holding back returns. Still, the defensively positioned portfolios did what they were designed to do, and held up much better than their benchmarks, only participating in a fraction of the downside.
For a detailed review of the portfolios’ performance and risk reward metrics, you can download our standard monthly portfolio report here. For those looking for 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.
With it looking more likely Central Banks around the world are looking to begin moving towards are more normalized level of interest rates, yields around the world started moving higher. In Canada, the market sentiment has shifted dramatically, with many now expecting the Bank of Canada to move higher at their July meeting, rather than later in the year. True to form, Mr. Poloz bumped rates on Wednesday, bringing the key overnight rate to 0.75%, up from 0.50%.
It was this sentiment shift that has pushed yields higher, with the benchmark Canada ten-year bond starting the month at 1.41%, only to see yields drift higher, rising by 34 basis points to end the month at 1.75%. At the short end of the curve, the move was even more pronounced, with the two-year gaining 40 basis points to end the month at 1.09%. This resulted in a strong selloff in the Canadian bond market with the FTSE/TMX Canada Universe Bond Index falling by 1.2%, with the higher yielding corporate bonds outpacing their government brethren.
With yields on the rise, we also saw a sharp rise in the Canadian dollar relative to the U.S. greenback. The Canadian dollar rose from $0.7407 U.S. to $0.7713 U.S. in June. This in turn hurt any foreign investments that did not have currency hedges in place. For example, the S&P 500 gained 0.62% in U.S. dollar terms. This translated into a loss of 3.27% when converted into Canadian dollar terms.
In Canada, the S&P/TSX Composite lost 0.75%, thanks largely to weakness in energy and materials. For the month, oil dropped by 4.7%, and gold lost 1.2%, which dragged the Canadian benchmark lower. Gains in financial stocks could not offset this weakness.
Turning to the portfolios, they behaved as expected. While they each finished in negative territory, they all handily outpaced their benchmarks, thanks largely to the defensive positioning. The Conservative Portfolio lost 0.93%, while its benchmark fell by 1.55%. The funds each outpaced their benchmarks, with strong relative showings coming from the Mackenzie Ivy Foreign Equity Fund, Sentry Small Mid Cap Income Fund, and the Dynamic Advantage Bond Fund. It is no secret I’ve been disappointed with the recent performance of both the Mackenzie and Dynamic funds, but I have kept them in the portfolios for their conservative positioning, with market volatility expected to be on the rise and market valuations elevated.
The Balanced Portfolio was down by 1.3%, while it’s benchmark lost 2.1%. The only fund which detracted from relative performance was the higher beta, growth focused TD U.S. Blue Chip Equity Fund, which lost 3.65% in the month, trailing the broader market. On the positive side, it was again the Mackenzie, Dynamic, and Sentry funds which were the largest contributors.
The Growth Portfolio lost 2.0%, while its benchmark was down by more than 2.6%. In addition to Mackenzie, and Sentry, the quality focused Fidelity Small Cap America Fund was a positive contributor to relative performance, outpacing its benchmark on the month.
Looking ahead, valuations remain a concern, and when combined with rising interest rates could make for a rocky fall. However, with the U.S. inflation numbers released on July 14, which came in below expectations, markets now don’t foresee a move by the U.S. Fed until early next year. In Canada, with the dollar now trading north of $0.79 U.S., combined with weaker oil, potential for a housing market correction, and uncertainty arising from upcoming trade negotiations with the U.S. have reduced the odds the Bank of Canada will move again this year. Still, there is a risk that we may see an equity selloff in the fall.
Even still, I remain very confident in the funds in the portfolios, and the overall asset mixes. My process focuses on managing risk, and as a result I believe the portfolios are well positioned to withstand any near-term volatility. I continue to monitor both the portfolios and the underlying funds closely.