The last three years were great for Canadian investors — but only if they were in U.S. stocks

As investors open their mid-year portfolio statements, many may be wondering if their investment manager has been doing a good job or not. The answer to this lies in your investment style, whether you were currency hedged and most importantly, the timing of when you got into the market.

The key is not to be blinded by all the bullish headline reporting that equity markets are setting new highs and that there has been a robust improvement in economic growth as this will only form a bias in your analysis.

Many may not realize that it hasn’t been a good three years for both Canadian focused investors and those invested outside of North America:  Only one market (S&P 500 and the U.S. dollar) has performed extremely well while every other major market has delivered discouraging results. The level of participation and return profile therefore depends on the style of your investment manager.

For example, the S&P TSX is the second-worst performing market in the G20 this year, just ahead of Russia. Looking out beyond that, Canadian stocks have only just returned above its 2014 peak thanks to an impressive 20 per cent rally last year — meaning very low returns over the past three years despite one heck of a roller coaster ride.

Specifically, those who changed investment managers or just began investing three years ago into the S&P TSX would have lost 1.3 per cent in the first year, lost an annualized 0.8 per cent over the following two years, and made only 3.0 per cent per year over the three years to the end of June 2017.

The situation gets even worse for those who invested in the developed markets outside North America (MSCI EAFE index) and emerging markets (MSCI Emerging Market index) with much lower returns.

EAFE markets lost 4.6 per cent one year post, lost an annualized 7.1 per cent for the two years post and made only 1.2 per cent per year over the three years to the end of June 2017. Emerging markets lost 6.3 per cent in the first year, lost an annualized 8.8 per cent two year post and made only 0.6 per cent over the three years.

It is important to note though that those with a longer time horizon such as five years would have fared much better than this thanks to strong returns in the two years prior to the peak in June 2014. This is something important to keep in mind when evaluating your investment manager to ensure an apples to apples comparison.

In addition, it may be a good chance to gut check your past activity to see if you were enticed by these returns allowing it to influence your behavior and thereby your returns.

The only exception globally to these aforementioned profiles has been the U.S. equity market that no doubt has been the place to invest given its unprecedented level of positive momentum. As a result, those managers who are underweight commodities heavy sectors or economies like Canada and Emerging Markets while overweight the broader U.S. S&P 500 have no doubt outperformed and they certainly aren’t shy about advertising this.

For example, the S&P 500 has returned a healthy annualized 9.5 per cent over the past three years (excluding the currency impact) compared to near flat returns in other markets. This return profile looks even more impressive when factoring in the rally of the U.S. dollar against the loonie bringing the annualized return to 16.9 per cent.

If one takes a balanced approach and gives an equal 25 per cent weight to all four market segments, the annualized return would be at about 3.5 per cent over the past three years assuming no currency impact and boosted to a 5.4 per cent return when factoring in the appreciation of the U.S. dollar.

This is also considering an all-equity portfolio, but needless to say bond markets wouldn’t have helped as for example, the FTSE TMX Canada bond index has delivered a modest 3.8 per cent annualized return over this period.

In conclusion, one should take a fair approach to evaluating their portfolio and remember hindsight is 20/20. This means not giving into a return-chasing mentality by making radical portfolio changes based on historical near-term performance and the fear of missing out.

Instead, a better approach may be to expand one’s investment horizon and ask whether now is the time for the lesser performing markets to shine once again.

Martin Pelletier, CFA is a Portfolio Manager and OCIO at TriVest Wealth Counsel Ltd, a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.

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