October was a strong month for Canadian investors as both stock and bond markets rallied higher around the globe. This translated into positive returns for the portfolios, each finishing in positive territory. The Conservative Portfolio rose by 1.4%, the Balanced Portfolio gained 2.6%, and the all-equity Growth Portfolio was higher by 4.5%.
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.
In Canada, equity markets benefitted from a surge in oil prices which hit their highest level in more than two years. A barrel of West Texas Intermediate gained more than 5% on the month, pushing energy stocks, a key TSX sector, up by nearly 2%. Bank stocks moved higher on improving interest rate margins in the aftermath of the Bank of Canada rate hikes in the third quarter.
Global equity markets gained, with the S&P 500 gaining 2.3% in U.S. dollar terms, and the MSCI EAFE Index rising by 1.5%. However, with the Bank of Canada opting to sit on the sidelines at its October meeting, standing pat on rates, and the Canadian dollar fell by more than 3%, pushing up returns for non-hedged foreign currency exposure. In Canadian dollar terms, the S&P 500 gained 5.5%, and the MSCI EAFE was higher by nearly 4.7%.
With some pressure off the fixed income markets, bonds rallied higher, and the FTSE/TMX Canada Universe Bond Index gained 1.6%. It was long bonds that outperformed, gaining 3.3% while the short end of the curve rallied by 0.6%.
Turning to the portfolios, while they finished in positive territory, they failed to keep pace with their benchmarks. Again, it is the usual suspects that are they main sources for this underperformance; the Dynamic Advantage Bond Fund, and the Mackenzie Ivy Foreign Equity Fund.
With fixed income markets likely to remain volatile, I am comfortable with the Dynamic Advantage Bond Fund in the portfolios. Managers are keeping duration short and are ready to adjust as opportunities arise. It is expected to outperform in volatile markets, but will likely lag in a bond market rally. Given the potential volatility, I remain comfortable with that trade-off in the near term.
The Mackenzie Ivy Foreign Equity Fund continues to be another source of frustration. For October, the Fund gained 4.2%, and is up 3.0% year-to-date. In comparison, the MSCI World Index was up 5.1% in October, and is up 14.2% year-to-date.
There are a few reasons for this underperformance with the largest being the significant cash balance carried by the managers. At the end of October, the Fund held nearly 27% in cash. Over the past year, it is estimated this high cash weight has cost the fund nearly 400 basis points in performance. Other sources of underperformance include its underweight exposure to financials and technology stocks, and some company specific issues where the investment thesis have not played out as expected.
I understand that in a concentrated, high conviction portfolio it can be tough to hide mistakes, and I also understand that mistakes happen. I will not fault the manager for those mistakes, as over the long-term, they win more than they lose.
What is becoming increasingly frustrating is the high levels of cash have been, and continue to be a drag on the fund. I understand the manager’s rationale for carrying the higher cash balance, but history has shown the disciplined stock selection process can add value over the benchmark, even without carrying such a high cash balance.
I continue to monitor this situation closely.