Foresight - Spring 2022

Market volatility in both global stocks and bonds has been the theme so far in 2022. Global supply chain issues caused by the ongoing battle with the various variants of Covid has resulted in decades-high inflation being experienced in food, energy, labour and materials costs. It has been a race to see which economist can correctly forecast the number of Bank of Canada and U.S. Federal Reserve interest rate hikes over the next 18 months. A considerable amount of angst may arise from a 1-1.5% hike in interest rates, even coming off  historically low levels. Now layer on the conflict in the Ukraine which, aside from the devasting impact on the Ukrainian people, adds an extra dimension to global inflation risk. The Ukraine is a large producer and exporter of food (wheat, barley), energy (natural gas to Europe) and even rare materials for semiconductors. These increased inflationary pressures will undoubtably have a negative impact on the consumers’ pockets.

That said, how does all of this affect the outlook for your portfolio? An increase in interest rates will negatively impact bond prices, with the impact increasing as the number of years-to-maturity increases. In anticipation of this, in 2013 we began shortening bond portfolios from a 10 year ladder to a 5 year ladder. To hedge against the negative purchasing power impact of inflation, we have increased bond portfolio’s weighting in (inflation hedged) Real Rate of Return Bonds from approximately 10% five years ago to 20%.

To lower volatility in equity portfolios, in late 2020 we switched a large proportion of our Canadian equity holdings from index-based Canadian Equity ETFs to the BMO Low Volatility Canadian Equity ETF. This strategy is designed to participate in up markets (although likely not as much as the market in general) but then, more importantly, to outperform in down markets by falling less than the market. Fifteen months into this switch we are approximately 6% higher than we would have been if we hadn’t executed this strategy. Over the last 18 months we have further reduced volatility risk in equity portfolios with the addition of the Equiton Residential Income Fund and, most recently, the Neuberger Berman Specialty Finance Income Fund.

We continue to position portfolios to participate in long term equity appreciation through earnings and dividend growth, along with building bond portfolios to withstand economic shocks, provide money for cash calls when needed and dampen pricing volatility. Hopefully one day bonds will also produce a meaningful real rate of return (yield less inflation) as well. Although this would take borrowers back to higher interest rates!

 In December, Trivest donated $5,000 via the Red Cross to flood relief causes in the Fraser Valley. In late March, Don’s endowment to teaching excellence at the Sauder Business School will present its first $16,000 award at an event attended by 150 students and faculty, including historically-recognized profs from the Seventies when Don first created the award program. You can follow the link at:

https://www.sauder.ubc.ca/about-bc-sauder/school-news, then “January 10, 2022”.

 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. Therefore, for a  Canadian investor, an appreciation of the loonie is “bad”, ie lowers the international return. As you can see below, in any given year, the cross-currency exchange movements between two countries can be significant.

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

Historical Annual Change in Canadian Exchange Rates

From Canadian dollar to:

	2021	2020	2019	2018	2017
US $	+0.43%	+2.01%	+5.04%	-7.81%	+6.77%
Euro	+8.46%	-6.56%	+7.06%	-3.25%	-6.21%
Japanese Yen	+12.17%	-3.16%	+3.76%	-9.99%	+2.95%

(“+“ means a rise of the Canadian $)

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

The shaded returns across the diagonal in the chart below show the calendar 2021 domestic equity price returns (ie excluding dividends) in the major economies. All of the other entries include the currency impact on these returns to show the effective returns for investors who are branching out internationally from their own domestic market. Global markets performed exceedingly well across the board, with double digit returns in Canada, U.S, Europe and Japan. The left hand column shows the 2021 currency-adjusted returns for a Canadian investor branching out across the globe.

Quarterly data that we track show that, over the past 15 years, the U.S./Canadian foreign exchange movements contributed approx. 6% of the overall return.    

Annual Equity Index Price Returns that include Foreign Exchange Changes – Calendar 2021

Country/     Equity Index	Canadian Investor	American Investor	European Investor	Japanese Investor
Canada /TSX 60	28.05%	28.48%	36.51%	40.22%
U.S./S&P 500	28.29%	28.71%	36.77%	40.31%
Europe/Euro 350	18.27%	18.61%	26.07%	29.35%
Japan/Japan 150	3.86%	4.31%	11.54%	14.71%

The following chart shows on the right the last five years of simple price returns for a Canadian investing around the world. It also shows, on the far left column, the 17 year annual compound returns (2005-21). The difference between that and the Domestic International returns column to its immediate right, highlights the 17 year geometric currency impact on Canadians investing internationally. You can see that these 17 years of currency volatility have added to the Canadian investor returns abroad.

Canadian Investor International Returns 2005-2021

	Cdn   17 yr cpd	Dom Int’l 17 yr cpd	2021	2020	2019	2018	2017
TSX 60	7.57%	7.57%	28.05%	5.56%	18.11%	-10.50%	9.78%
S&P 500	11.04%	9.78%	28.29%	16.43%	24.08%	2.28%	15.49%
Euro 350	6.20%	6.10%	18.27%	4.23%	15.99%	-9.65%	17.37%
Japan	5.00%	4.20%	3.86%	13.52%	12.62%	-5.4%	17.26%

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 17 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	15.90%	15.90%
S&P 500	12.74%	16.26%
Euro 350	15.36%	18.25%
Japan 150	13.73%	21.66%

Here, we see that the 17 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 contribute a 17 year annual compound equity price return of 8.19% to a balanced global portfolio, with a standard deviation of 12.38%. The dividend yield adds approx. 2 1/2%. Always beware of “lies, damned-lies and statistics”! These analyses are only based upon the 17 years that we have been tracking this data. Prudent investing always needs a long term perspective.

Twelve month sectoral results for 2021

The chart below shows our annual report on how the industrial sectors performed in Canada, the U.S. and globally for 2021 (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 dividend income (approx. +2 1/2%). 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.   

Covid-2021 was another robust year globally, again led by the US. The 2020 comparative WHOLE INDEX returns appear in (brackets) below. Every sector across the globe did well. Almost all Canadian sectors also did well but lagged the robust global results. Two Canadian sectors notably underperformed the global results: Health and Materials. The Canadian Health sector is fairly thin to begin with, and includes the mercurial marijuana companies. Most US and global sectors have had strong positive back-to-back returns. In a few sectors, the strong 2021 returns were, at least partially, recovering from the poor prior year—energy, financials and utilities. In the prior year, Canada’s health and communications sectors contrarily did poorly, whilst its utilities did well.

We monitor these sectoral movements and re-balance at various points in the year to realize the appreciation in those leading sectors.

For the year 2023 (2022) 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	19.3% (13.1%)	26.9% (16.3%)	21.7% (2.2%)
Energy	34.9%	47.7%	41.8%
Materials	11.9%	25.0%	2.3%
Industrials	16.2%	19.4%	15.1%
Consumer Discretionary	13.1%	23.7%	16.3%
Consumer Staples	11.2%	15.6%	20.6%
Health Care	18.0%	24.2%	-20.1%
Financials	22.3%	32.6%	31.6%
Information Technology	28.7%	33.4%	18.3%
Telecommunications	12.8%	20.5%	19.1%
Utilities	7.4%	14.0%	7.5%