"Time to invest in Canada?"

Greg Dean's picture

Bob, Brandon, Steve and I were in Miami last week for CI’s annual Leadership Forum giving us the opportunity to spend time with many of the advisors in attendance. For those who weren’t able to join us this year, I wanted to summarize some of the key points from the session we presented on investing in Canada. In reference to investing in Canada, we frequently got asked the question: “Is now the time?” I understand why people are asking it, but in my opinion it fails to recognize how hard it is to time the market. At Cambridge, we believe our funds should be held through cycles and not used as trading vehicles. (Of note: other than to pay taxes on gains, I have never sold a single unit of our funds since we started here over five years ago.)

Because Canada has such a resource-heavy stock market and economy, our currency and stock market swing more dramatically than most other developed markets. The colourful graphic below shows sector level return rankings for the TSX over the last 10 years. Good luck discerning a pattern from it! The swings in sentiment and indices have never been more prevalent than the last two years. In mid-2014 our dollar was worth $0.95 USD, oil was over $90 USD per barrel and things seemed to be going great for Canada. Fast forward to earlier this year and the CAD was down to $0.70 USD and oil prices fell below $30 USD per barrel. From the same colourful graphic, you can see after four terrible years for materials stocks, they are now at the top of the heap so far. A similar but opposite outcome is displayed for information technology and consumer discretionary below.

Source: Bloomberg *as at July 31, 2016

Due to the volatility of the market and concentration in a few sectors we believe investing in Canada should come with a Surgeon General’s warning! You can see from the next image that this isn’t the first time a big chunk of the Canadian market has been concentrated in one to two sub-sectors. Unfortunately each time this occurred the subsequent few years were very bad times to own those sectors.

When we are investing in our Canadian mandates (we specifically discussed Cambridge Pure Canadian Equity Fund and Cambridge Canadian Dividend Fund in this session) we are doing it assuming our client only owns that fund and thus, it must be diversified by sector. We also use cash opportunistically to take advantage of volatility and not be fully invested all the time. When you look at the returns of those two funds over the last five and a half years, in 2011 and 2015 we were able to protect capital when the Canadian market was weak. This allowed clients to fully benefit from better years like 2012, 2013 and so far in 2016. Preserving your capital makes it easier to grow it – because we don’t have to take on excess risk to deliver on our long-term goal of compounding your wealth over time.

*Performance starting on February 14, 2011 for Cambridge Pure Canadian Equity Fund Class F
**As at July 31, 2016
Source: Morningstar, CI Investments

By keeping a level head and not getting too emotional about stocks or the economy, we are in a prime position to take advantage of other people’s emotions. While we make our fair share of mistakes, our aim is always to minimize the damage when we’re wrong and make sure we get our fair share of the upside when we’re right. So next time we see each other, before you ask, “Is now the time?” remember we are constantly repositioning the portfolios to take advantage of fear in the markets. Bad headlines often result in the best opportunities.

 

  YR 1 YR 3 YR 5 YR 10 Since Inception
CI Cambridge Pure Canadian Equity Fund (Class F) 9.10% 13.70% 20.80% N/A 19.00%
Inception date: Feb. 2011          
CI Cambridge Canadian Dividend Fund (Class F) 11.50% 15.80% 11.00% 7.40% 8.30%
Inception date: Jun. 2006          

Performance as at August 31, 2016
Source: Morningstar, CI Investments

 

Disclaimer:
Commissions, trailing commissions, management fees and expenses may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This report may contain forward-looking statements about CI funds, future performance, strategies or prospects, and possible future fund action. These statements reflect the portfolio managers’ current beliefs and are based on information currently available to them. Forward-looking statements are not guarantees of future performance. We caution you not to place undue reliance on these statements as a number of factors could cause actual events or results to differ materially from those expressed in any forward-looking statement, including economic, political and market changes and other developments.

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