With the continued strong equity performance and volatility and losses in the bond markets in recent months, we are finally starting to see a significant divergence in fund flows between the two asset classes:
This is the bullish scenario for equities we have highlighted previously. Based on bond valuations, equities remain undervalued and as people make the switch from one asset class to the other, the probability of stocks going from fairly valued to expensive is high. This isn’t to say the market will continue going up on a straight line, but continued fund flows should mean any pullback is shallow and measured.
The other thing to think about is where the money will flow. We continue to see more interest in non-Canadian funds due to their recent performance and acknowledgement that the Canadian benchmark is too concentrated in a few areas. In the U.S., we are seeing performance anxiety from fund managers: they are behind the benchmark and chasing beta to catch up. This is evident in a number of the higher beta, more risky areas outperforming (most short, biggest laggards, highest balance sheet leverage), as well as in short-covering in some of the most shorted areas (gold, oil, etc). While our continued focus on downside protection means we may have periods of underperformance when the "beta chase" is on, it will result in better total returns through the equity market cycle.
We haven’t seen the rotation beginning to the same extent in Canada, but we continue to feel we are well positioned when this occurs: Cambridge Canadian Asset Allocation Corporate Class remains 70% exposed to equities, cash positions are now 5-10% across our portfolios and we continue to use our flexibility to get exposure outside of Canada, with less than one-third of our total assets in Canadian stocks today.