Five years after the great global market plunge of 2008, Canadian mutual fund investors are in a happy place, thanks in part to the ascent of the Canadian dollar.
But fifteen-year results prepared for the Financial Post by Fundata, suggest that in other parts of the world, long-term investors are still suffering.
Sure, 2013 was a banner year for most equity funds but over 15 years all but Canadian equities and a few other small categories had pretty dismal results.
U.S. equity funds, for example, averaged a sizzling 36.7% return in 2013 but an anemic 1.8% annual compound return for the 15-year period through December 2013; international equities returned 27.6% and 1.5% respectively; European equities, 30.9% versus 1.0%.
Canadian equity funds, meanwhile, managed a modest but respectable 15-year average of 7.2% (19.4% in 2013).
Currency has played a role in those foreign fund returns, though, especially lately. Between early 2009 and mid-2011 the Canadian dollar soared from a low of US$.77 to a high of US$1.07, according to Bank of Canada data, and that rise effectively compressed the earnings of any funds using currencies in step with the greenback. Then the loonie started falling, to US$1.01 by yearend 2012 and to US$.94 by year end 2013, expanding foreign earnings albeit to a lesser extent.
As if to underline the currency impact, the top-performing fund category over 15 years through 2013, with a 12.3% average annual compound return, was alternative strategies, in which funds can make extensive use of currency hedging among other derivative-based investment tactics.
Luc de la Durantaye, managing director of asset allocation and currency management at CIBC Asset Management in Montreal, stresses the importance of considering exchange rates when making asset allocation decisions.
“I was at a recent global investment conference and was struck by the number of people who, when they're investing abroad, will spend a lot of time picking the right manager but not the right currency,” says Mr. de la Durantaye. “You need to be as mindful with currencies as with managers, because they can have just as big an impact.”
Nevertheless, currency shifts still only partially account for the long-term performance differential between domestic and non-domestic equity fund categories. Our dollar was at US$.66 in January 1999 and rose 42% to US$.94 at the end of 2013, but amortized on a compounding basis over those 15 years, and discounted from the return calculations, a flat exchange rate effectively would have added just 2.25 percentage points annually to those foreign 15-year averages — still pretty lacklustre, and a lingering reflection of the market crash.
Paul Musson, senior vice-president of investment management at Mackenzie Investments in Toronto, notes that to a certain extent, the performance differential also stems from timing. “Prior to the starting point [of the 15-year period], the U.S. market had been doing extremely well,” he says. “In the ten-year period from December 1988 to December 1998, for example, the S&P500 averaged 19.2% a year while the S&P/TSX averaged 6.7%, or only a third as much, so valuations here were much lower.”
Too, Mr. Musson points to global resource demand as a factor in the performance disparity, and adds that this demand has been waning recently. “If you look at those 15 years [from 1999 to the present], almost all of the [Canadian] gains came during the period from 2002 to 2010. It was driven by resource demand, in large part by China, which represented as much as 50% of the global demand for commodities such as copper and steel,” he says. “But since the end of the crisis, Canada has actually underperformed the S&P500.”
Similarly, Mr. de la Durantaye points to an erstwhile run-up on precious metals as having been beneficial to Canada, at least while it lasted. “When the crisis struck, the U.S. federal reserve started stimulating the economy and interest rates went down to zero, and that had an impact globally,” he says. “People started wondering if they were debasing the currency, and those fears of extreme monetization drove people into gold during 2008, 2009 and 2011.
“Then last year the Federal Reserve signaled a reverse course and people started saying, ‘We don't need gold any more,'” Mr. de la Durantaye says. “[The Fed's reversal] meant the U.S. and global economies were doing better, so they didn't feel the need to protect themselves and started moving back into growth stocks. That turned the tide for gold.”
As a result, while most fund categories had a roaring 2013, resources and precious metals were notable exceptions. While the natural resource category still averaged 10.1% compounded annually over the 15 years through 2013, that included losses in 2011 (-6.0%), 2012 (-1.3.3%) and 2013 (-1.4%). Erstwhile high-flying metals fared even worse, with a 15-year average annual compound return of 7.2% after losing -10.1% in 2011, -24.5% in 2012 and a whopping -46.9% in 2013.
Real estate equity funds (only three had 15-year track records) also managed to buck the 15-year blues with an 8.0% average annualized return for the period, thanks to a strong real estate sector in Canada, while health care equities delivered 6.6%. For the rest, though, investors would have done better sticking to fixed-income or balanced funds, though currency hedging would have helped.
Jonathan Popper, senior managing director and senior portfolio manager at Manulife Asset Management in Toronto, and portfolio manager for the Manulife Monthly High Income Fund (a Canadian balanced fund), points out that his fund was able to achieve a 15-year average annual compound return of 10%, partly through astute stock selection but also through partial hedging.
“Currency can be a big risk, and hedging worked to our advantage because the dollar went down,” Mr. Popper says. “If the Canadian dollar continues downward, we can take advantage of that, and if it goes up, we have protection with the unhedged component.”