Foresight - Spring 2019

Post the Winter 2018 edition of Foresight and our discussion of the recent global stock market correction to the end of November, global stock markets continued to drop throughout December, resulting in one of the worst Decembers ever. What followed in January was a rebound of 13%, recouping a good portion of that market correction over the previous two and a half months. Depending upon the asset allocation mix of the portfolio, we saw portfolios increase in value by 3%-4% in January from their low a mere 30 days previous. Quite the 60 day ride! 

We have completed the cycle of our annual reporting for calendar year 2018. The year started with our January reports averaging a return of 7.73%. The following months through to September saw a high of 8.71% and a low of 2.67%. September itself was 4.72%.  But then came the last quarter, during which the markets began to fall in mid-October. The annual report returns for October through December dropped quickly to averages of 0% to –3%.

Throughout calendar year 2018, the Portfolio returns above were largely dependent upon the performance of the stock market. As we have written extensively in  recent articles, in this long, low-interest rate environment, we cannot depend upon the bond portfolio component (which might be 40-60% of your asset allocation) to provide much return...typically 0%-2%. So, the turn-down of the Market in the last quarter pulled the rug out on those overall portfolio returns for year-end reporting periods from October through December.    

Understandably, investors never like to lose money; but, in the big picture, this Fall quarter correction to 0% to -3% would be a welcome sacrifice if that was the sum total of the correction to bear after ten years of rising Markets. Then we add to that narrative that all of that market loss was recovered in the first month of 2019. Of course, we don’t have the freedom to declare that the correction to this, the longest Bull Run in history, has run its course. But, for the first time in years, our January portfolio rebalancing call was to sell fixed income and buy equities.

How we execute this will vary by the individual circumstance of each portfolio. Many of you are making cash contributions to your RRSPs and TFSAs during the first quarter of 2019, allowing us to rebalance by way of how we deploy these funds. Others will have bonds maturing to cash at various times in the year...again allowing the same re-deployment. With others, we have been holding cash over the last 3-6 months, awaiting this re-balancing call. Lastly, those with 2019 RRIF payouts to be made also will have the call to address rebalancing.

As the Market continues through 2019, we will be responding accordingly to those developments. 

A Global Approach….

At Trivest, we take a global approach to investing in equity markets as part of our diversification strategy. Volatility in these international investment returns can be exacerbated, or  mitigated, by currency fluctuations. When investors buy an investment in a country, or ‘union of countries’ (as in Europe), they also implicitly are buying the underlying currency. At the end of an investing year, the investor’s return is equal to that foreign market’s return, plus-or-minus the exchange conversion back into the investor’s home currency. As you can see below, in any given year, the cross-currency exchange movements between two countries can be significant. The yen, in particular, is very volatile. 

The following chart shows the last five years of exchange fluctuations:

					Historical Annual Change in Canadian Exchange Rates From Canadian dollar to:
	2018	2017	2016	2015	2014
US $	-7.81%	+6.77%	+3.08%	-16.18%	-8.32%
Euro	-3.25%	-6.21%	+6.07%	-6.60%	+4.40%
Japanese Yen	-9.99%	+2.95%	+0.09%	-15.92%	+4.46%

(“+“ means a rise of the Canadian $)

We continue to augment your foreign content with a list of international ETFs that are “hedged” to eliminate the currency impact of international investing, and they span geographic regions and industrial sectors. You may see them on your NBCN statement by their ticker symbols, including XHC, XBM, XCD, XGI, XEU, XQQ, FHB, VUS, XEH, XIN, CJP, XSP, XSU and VEF.

The shaded returns across the diagonal in the chart below show the calendar 2018 domestic equity returns in the major economies. All of the other entries add the currency impact to these returns to show the effective returns for investors who are branching out internationally from their own domestic market. Global markets uniformly performed poorly in the last quarter of the year. The loonie declined against all of these currencies in 2018, giving Canadian investors who invested internationally some foreign currency gain to offset the world-wide negative market returns (far left hand column). Quarterly data that we track show that, over the past 12 years, the US/Canadian foreign exchange movements contributed approx. 13% to the overall return.    

				Annual Equity Index Returns that include Foreign Exchange Changes– Calendar 2018
Country/     Equity Index	Canadian Investor	American Investor	European Investor	Japanese Investor
Canada /TSX 60	-10.50%	-18.31%	-13.75%	-20.49%
US/S&P 500	2.28%	-6.20%	-1.63%	-8.82%
Europe/Euro 350	-9.65%	-17.37%	-13.00%	-19.93%
Japan/Japan 150	-5.40%	-13.81%	-9.05%	-16.50%

The following chart shows on the right the last five years of simple returns for a Canadian investing around the world. It also shows, on the far left column, the 14 year compound returns (2005-18). The difference between that and the Domestic International returns column to its immediate right, highlights the 14 year geometric currency impact on Canadians investing internationally. You can see that these 14 years of currency volatility tend to flatten out the international domestic returns.

Canadian Investor International Returns 2005-2018

	Cdn   14 yr cpd	Dom Int’l 14 yr cpd	2018	2017	2016	2015	2014
TSX 60	5.67%	5.67%	-10.50%	9.78%	17.70%	-7.91%	12.30%
S&P 500	8.66%	6.73%	-6.20%	15.49%	6.52%	18.60%	22.77%
Euro 350	4.86%	4.38%	-13.00%	17.37%	-6.12%	12.64%	2.18%
Japan	3.98%	2.27%	-16.50%	17.26%	-2.69%	17.48%	5.53%

 Investors have an affinity towards high returns. It makes them feel better, and fortifies their feeling of financial comfort. Investment management isn’t just about generating returns.... it is about generating returns relative to risk. Risk-and-return operate asymmetrically...meaning that achieving higher returns probably means that one has taken on more risk, but conversely, taking on more risk does not guarantee higher returns. One of the sub-characteristics of a portfolio is its volatility: how much does it fluctuate in value– in the short run, but more importantly, in the long run. One of the markers for this is the statistical measure called standard deviation. In the following chart, we have calculated the 14 year standard deviations from the historical return data in the Annual Equity Index Returns chart. The numbers on the right represent the standard deviation for each of the geographic domestic markets. The numbers on the left represent the standard deviation for a Canadian investing in those markets, factoring in the currency aspect. 

Standard deviation	Canadian investor	Domestic Int’l
TSX 60	16.48%	16.48%
S&P 500	12.62%	16.23%
Euro 350	16.53%	18.88%
Japan 150	14.93%	23.68%

Here, we see that the 14 year currency fluctuations acted to reduce the volatility for a Canadian international investor. This analysis can be fine-tuned by creating a mock portfolio where a Canadian investor invests across all of these geographic markets (simulating what we actually do). This mock portfolio would have a 14 year compound return of 6.43% and a standard deviation of 12.8%.

Always beware of “lies, damned-lies and statistics”! These analyses are only based upon the 14  years that we have been tracking this data. Prudent investing always needs a long term perspective.

                  Twelve month sectoral results for 2018

The chart below shows our annual report on how the industrial sectors performed in Canada, the U.S. and globally for 2018 (Annual historical comparatives on sector data can be found on our website). These are price returns, which means they include the price appreciation (or decline) year-over-year, but exclude the dividend income. The Canadian results are reported in our domestic currency. The U.S. S&P returns are reflected in USD rather than our currency, so that the foreign exchange movement does not contaminate a comparison. Global returns of course reflect a myriad of the world’s currencies, which here are consolidated in USD; thus, there is some foreign exchange element to that data. The top line “WHOLE INDEX” return data in the chart below result from applying sector weightings to the sector returns. These weightings are different in the three regions. In the small capital market of Canada, the breadth (number) of players in a particular sector can be quite thin. Thus, the results of the few can significantly impact that sector’s return. This is particularly true in Canada for consumers, health and tech.   

It was a “correction” year, with negative returns across the board and across the globe. What was notable was that, in the Global 1200 and US S&P500 indices, all of the sectors experienced this “correction”, with the exception of Health Care. Some Canadian sectors significantly lagged the poor global results, like Health Care, Consumer Discretionary and Utilities. Alternately, some Canadian sectors outperformed global results, like Consumer Staples, Technology and Telecom. The dominant Energy sector, at –28.6%, weighed down the whole Canadian index. 

Throughout the year, we were monitoring these sectoral movements and chose to realize the appreciations in those leading sectors (notably Health, Tech and Financials) at various points in the year. 

For the year 2018 SECTOR	Annualized Price Returns for S&P Global 1200 Index Sectors (in US dollars)	Annualized Price Returns for US S&P 500 Index Sectors (in US dollars)	Annualized Price  Returns for Cdn. Composite Index Sectors (in Canadian dollars)
WHOLE INDEX	-10.5%	-6.2%	-11.6%
Energy	-17.2%	-20.5%	-28.6%
Materials	-17.5%	-16.4%	-10.6%
Industrials	-15.7%	-15.0%	-11.6%
Consumer Discretionary	-7.5%	-0.5%	-17.6%
Consumer Staples	-15.8%	-11.1%	0.7%
Health Care	1.6%	4.7%	-9.9%
Financials	-15.7%	-14.7%	-12.5%
Information Technology	-6.0%	-1.6%	11.7%
Telecommunications	-16.2%	-16.4%	-5.3%
Utilities	-1.3%	0.5%	-12.2%