Foresight - Spring 2025

Investing Update

Foresight had to take a forced “sabbatical” due to the national postal strike, and skip the Winter issue. Since the Summer issue, the equity markets have been buoyant. Rolling annual returns were negative from June 2022 through February 2023. They jumped into healthy returns from June 2023 and have been steadily double-digit from May 2024 to the end of the calendar 2024.

The components of portfolio construction- fixed income and equity markets- both experienced an unusual story-line recently. From July 2021 through February 2023, fixed income produced negative annual returns for all but two periods. Ninety year history was made when BOTH fixed income and equities produced negative returns at the same time for seven out of nine periods through to February 2023... “no where to run; no where to hide”, to use the old song lyric. Then, since November 2023, both have returned positively, with equity markets in double digits since December 2023.

The daily or monthly Market watcher may get mired in these short term perturbations, even as they cancel each other out. Compound return data are a good antidote! At Trivest, we have been calculating and reporting returns and compound returns for 30 years. Even a short three-year statistic is insightful. Nobody would dare to call three years “long term”, but nonetheless, a lot of history can happen in just three years. Annual, simple returns over any three year period can vary a lot, bending to the news of the day. But historical data analysis shows that equity down-drafts tend not to be very long-lived. So even that short three year compound stat can smooth out a climb up the Worry Wall.

For instance, the light line graph (using the left scale) shows the rolling one-year returns for sample files from January 2021 to November 2024. These annual returns range from 23% (post-Covid recovery) to –6.5%. The dark line graph shows the annual compound returns encompassing rolling three year periods. The band of these returns runs mostly between 4-8%, with two spikes significantly above that and two minorly below that. The one-year volatility of –6.5% to +23% shrinks to 4%-8%....the latter of which is consistent with historical long term returns.

The bar graph (on the right scale) shows the equity proportion of the portfolio. With the different equity proportions, the rolling three year returns are not directly comparable. For most of the data points, higher (equity proportion) bars led to higher lines, as equities have outperformed bonds, as discussed above.

 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:

 (“+“ 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 2024 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 and Japan. The left hand column shows the 2024 currency-adjusted returns for Canadian investors branching out across the globe.

Quarterly data that we track show that, over the past 18 years, the U.S./Canadian foreign exchange movements contributed approx. 8% of total return.   

 The following chart shows on the right the last five years of price-only returns for a Canadian investing around the world. It also shows, on the far left column, the 20 year annual compound returns (2005-24). The difference between that and the Domestic International returns column to its immediate right, highlights the 20 year geometric currency impact on Canadians investing internationally. You can see that these 20 years of currency volatility have contributed somewhat to the Canadian investor returns abroad.

Canadian Investor International Returns 2005-2024

 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 20 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. 

  Here, we see that the 20 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 produce a 20 year annual compound equity price return of 8.41% to a balanced global portfolio, with a standard deviation of 12.59%. The dividend yield adds approx. 2%. Always beware of “lies, damned-lies and statistics”! These analyses are only based upon the 20 years that we have been tracking this data. Prudent investing always needs a long term perspective.

                  Twelve month sectoral results for 2024

The chart below shows our annual report on how the industrial sectors performed in Canada, the U.S. and globally for 2024. These are price returns, which means they include the price appreciation (or decline) year-over-year, but exclude dividend income (approx. 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 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. The 2023 comparative WHOLE INDEX returns appear in (brackets) below.

All three markets posted strongly positive WHOLE INDEX returns for the second year in a row. However, all of the 2023 WHOLE INDEX data (in brackets) followed from 2022’s significant losses. As such, the large 2023 returns were what we term as Recovery returns, such that the annual, two-year compound return was approximately zero.

In the chart, only 5 of the 30 sector data points had negative returns, of which 3 were minor. Some Canadian sectors were radically counter to the global returns, positively for materials and energy and negatively for telecoms. In fact, the Canadian telecoms notably posted the worst return on the whole table.

In the global markets, four of the ten sector returns were significantly lower than the Whole Index. Investors need to understand that investing isn't just “buying the market”; rather, it includes selective sector picking. We monitor these sectoral movements and re-balance at various points in the year to realize the appreciation in leading sectors, and seek buying opportunities in the lagging ones.