Last month I looked at the performance of the big bank balanced mutual funds, which was unsurprisingly underwhelming. This month I dig deeper by looking at the big banks’ biggest Canadian equity and fixed income funds. Do their performance results show they have a competitive advantage investing in their home markets given their knowledge and experience with Canada’s economy, businesses, and markets?
Category: Portfolio Analysis
Can you bank on big bank balanced funds?
The big banks in Canada dominate the $1.8 trillion market of long-term mutual funds in Canada, with a 50% share of the funds outstanding. And within long-term mutual funds, balanced funds represent the largest portion at 50%[1]. Clearly Canadians have a lot of their money in the big bank balanced mutual funds. Given how important these funds are to the retirement plans of Canadians, let’s look at the performance of the Big 5’s big balanced mutual funds vs a passive portfolio of ETFs. Do the vast resources the big banks spend on research teams and portfolio management result in outperformance?
Riding The Bull
As we get into the final stages of the U.S. Federal Reserve raising the federal funds rate, it is natural to think more about a potential bull market rather than a bear market. While so far the low in the S&P 500 was last October, we still don’t have enough data to say that we have entered a new bull market – it will only be clear in hindsight. In the meantime we can compare the valuations of the S&P 500 at the start and end of previous bull markets to the October and current valuations. If October does turn out to have been the start of the next bull market, we can estimate whether the ride will be wild or tame.
Did You Hear The Bell?
In my May 2022 blog Barely A Bear I mentioned the old market adage that they don’t ring a bell at the bottom of a bear market. We never know where the bottom is until we can clearly see it in the rear-view mirror. So far it looks like mid October was the low for the U.S. market, so I thought it was timely to look at whether the bear market is over, and what that means for your asset allocation.
Relative Return Review
Back in March of 2021, in my blog Springing Forward, I wrote about the performance of Canadian, international, emerging market, U.S. value, and U.S. small cap stocks versus the U.S. large cap stocks. After many years of underperformance, U.S. value and small cap stocks had finally started to outperform U.S. large cap stocks. But Canadian, international, and emerging market stocks were only keeping pace. A lot has happened in the markets in the two years since that blog with central banks raising rates to tame inflation and stocks enduring a bear market. So let’s review how the relative returns have evolved.
CAPEd Crusader: Updated 10-Year Returns
Asset allocation is the biggest driver of your long-term returns. But the process requires estimates of returns and risks for the asset classes that you can invest in. For most Canadian portfolios, the largest asset class holdings are usually U.S. and Canadian equities. In my continual crusade to have the optimal asset allocation I have updated the estimated annualized 10-year returns for U.S. and Canadian stocks using the methodology from my November 2021 blog Stock Return CAPEr: The Next Decade’s Returns. Let’s see how the expected returns have changed with the sell-off in stocks over the last year.
Helpful Hedge Funds?
In last October’s blog Alternative Asset Allocation: Tricks and Treats I looked at how the expected return and risk of a portfolio could be improved by adding alternative assets such as private equity and private debt. This month I investigate whether including hedge funds in the asset mix helps a portfolio.
Balanced vs Bench Better?
Just over two years ago I wrote A Balanced Perspective on Balanced Funds on the performance of Canadian balanced funds compared to their benchmark. I focused on the longer-term results over 3, 5, and 10 year periods, looking both before fees and after fees. I thought the time frame was interesting back then because the end date was March 2020, the previous bear market. Given the massive rally that happened after that, and the bear market we are in now, I have revisited how Canadian balanced funds are doing in terms of keeping up with or exceeding their benchmark returns. Have they been able to add extra return through the big ups and downs in the markets?
It’s Different This Time, Again
So far in my career I have experienced 6 bear markets and 4 (probably going on 5) recessions. What has this taught me? That while every time is different, every time there are similarities too. In 2022 two different things are the Russian invasion of Ukraine and the cryptocurrency bust. The things we have seen before are high inflation, growth stocks breaking down, and central banks raising interest rates. Watching your portfolio go down during a bear market is stressful. But looking back over the last 100 years, as a group the businesses that constitute the stock markets have been able to adapt and move through the tough times and return to generating profits for their investors.
Is Value Still Value?
Two years ago in my blog Red Alert: Value is Value I looked at the extraordinarily long period of time that value stocks had underperformed growth stocks. I was looking to answer the question of whether it was time for the trend to change. The conclusion was that “we are getting close to when value should start outperforming growth for an extended period.” The trend lasted a few months longer and then became range bound, until the more speculative areas of the market peaked. Since then, value has outperformed growth and the question is, again based on historical data, does it have further to run?