By Maurice Walch
Many investors are feeling as though there is no safe haven for their investments these days. Depending on what you read, U.S. stocks are overvalued and the recovery is over, leveled out or fading. Europe, recently the darling for investment capital, has been a disaster of late. The influx of refugees threatens to impede economic growth for the short to mid-term, and their social programs still represent an unfunded liability that will need to be dealt with. China is no longer driving the global economy to the degree it has and emerging markets are being dragged down as a result. Globally, 2015 was a good year for consumer goods and information technology but the energy industry meltdown was the offsetting factor in those gains.
When looking at where to place investment capital, it helps to look at the bigger historical picture. The following chart illustrates the top performing sectors over the past 16 years.
2015 US Growth
2014 US Large Cap
2013 US Small Cap
2012 Emerging Markets
2011 Canadian Bonds
2010 Cndn Small Cap
2009 Cndn Small Cap
2008 Canadian Bonds
2007 Emerging Markets
2006 Emerging Markets
2005 Emerging Markets
2004 Emerging Markets
2003 Cndn Small Cap
2002 Canadian Bonds
2001 US Small Cap
2000 US Value
As you can see, it is not very often that the same sector will outperform on a regular basis. Some advisors and private investors believe they can pick the sector that is going to outperform in advance. At best this is optimistic, at worst it can seriously impede the long term growth prospects of an investment portfolio.
Asset or sector allocation has been reported to influence up to 90 per cent of the performance of a portfolio, therefore it is important to get it right. If you are an investor who desires a portfolio that generates a predicable revenue stream and potential for growth, a good place to look for guidance is the activities of professional pension fund managers. Thirty years ago, most pension funds held some variation on the theme of 60 per cent bonds and 40 per cent equities.
In today’s low interest rate environment, that has changed to something in 30 per cent bonds, 40 per cent equities, and 30 per cent real assets. Subsets of these allocations would include corporate and government bonds, Canadian, U.S., and international equities. How you or your advisor makes your allocations, will to a large part determine how your portfolio performs, as the various sectors take their turn in the top (or bottom) performer spotlight.
No matter how well the asset allocation is structured, it is always at the mercy of the markets. In fact, some studies have shown that asset allocation is far surpassed by market movements as an influencer of portfolio performance. For example, in 2008 almost all funds were down and in the following year almost all funds were up. The key word here is almost. Due to active management, some funds were up in 2008, and although they didn’t have the same upside movement in 2009 as others, they didn’t need to. They hadn’t dug as deep a hole in 2008 so didn’t need any tremendous growth in 2009 in order to outperform the market on a long term basis.
Asset allocation and active management are the key differentiators between mutual funds and index funds. Index funds will participate in up to 100 per cent of the market movement. Mutual funds will be heavily influenced by market movement but also have the additional features of asset allocation and active management. These should help you to outperform the market over the long term. Something to think about as you review your portfolio.
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