January looked much like a continuation of 2017 with equity markets rallying higher, and volatility largely muted. February was a totally different story that saw the return of volatility which took equity markets on a roller coaster ride, with swings that were very reminiscent of 2008. The S&P/TSX Composite Index peaked in early January, and bottomed in mid-February, for a total peak to trough drop of more than 8%. South of the border, it was a similar story with the S&P 500 falling more than 10% peak to trough.
Fortunately, calmer heads prevailed, and markets were able to pare back some of the losses. For the month, the S&P/TSX Composite ended the month down by 3%, the S&P 500 ended 3.7% lower in U.S. dollar terms, and the MSCI EAFE Index was down 4.5%. throughout the selloff, the U.S. dollar showed strength, which muted losses for investors with unhedged currency positions. In Canadian dollar terms, the S&P 500 rose by 0.6%, while the MSCI EAFE Index was down by a very modest 0.3%.
Turning to the portfolios, they each had a solid month given the market environment. The worst performer was the Moderate Balanced Portfolio, which was down 0.4% in the month. Our Conservative Portfolio was lower by 0.2%, while the Balanced Growth Portfolio and Growth Portfolio finished modestly higher, posting gains of 0.1% and 0.3% respectively.
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.
Digging deeper into the portfolios, the defensively positioned equity funds performed as designed during the selloff, with each protecting capital much better than the broader markets. The Fidelity Canadian Large Cap Fund was down 0.7%, handily outpacing the S&P/TSX Composite Index. The Mackenzie Ivy Foreign Equity Fund rose by 0.5%, besting the MSCI World Index.
We also saw strength from the more growth focused TD U.S. Blue Chip Equity Fund. With its overweight exposure to technology names, including most of the FAANG stocks, investors were taken on a wild ride, falling by more than 7% during the selloff, but bouncing back sharply in the latter half of the month, ending 2.6% higher.
Most of the headwinds in the portfolio came from the fixed income holdings. With bond yields sliding modestly, the shorter duration of the Dynamic Advantage Bond Fund held it back, as it trailed the FTSE/TMX Universe Bond Index in the month. The largest drag on the portfolio came from the RBC Global Corporate Bond Fund, which sold off by 0.7% in February. Despite the blip, it remains well positioned with a diversified portfolio of predominantly investment grade, high quality bonds, offering a higher yield to maturity than Canadian bonds, and a slightly defensive duration positioning.
There are many theories as to why the markets sold off including the elevated market valuations, increasing bond yields, worries over inflation, and the unwinding of complicated financial instruments that are linked to market volatility. Unfortunately, we’ll never really know what caused markets to sell off, and truthfully, it really doesn’t matter. Each is a valid reason in its own right, and the reality is that with bond yields moving higher, the markets need to adjust valuation levels. Market valuations have been well above normal for some time, and some level of correction or adjustment is needed. But I certainly don’t see this correction as the beginning of another 2008 or the bursting of the tech bubble, or anything else that calamitous. Far from it. The global economy continues to show mostly positive signs, inflation remains reasonably well contained, and corporate profitability remains strong. I see this as a normal market correction that has resulted in a modest repricing of risk.
Looking ahead, I believe the portfolios are very well positioned for a more volatile equity environment. Still, I will continue to monitor each of the holdings closely to ensure they continue to stick to their disciplined process.