By Tom Bradley
There’s been a lot of noise in the investment world this year about things that have little impact on long-term returns. Two in particular – Greece and the U.S. Federal Reserve’s next move on interest rates – have received a disproportionate amount of coverage. On the other hand, the current focus on China’s slowing economy is a substantive issue and stock markets are behaving accordingly.
After a strong start to the year, market indices are well off their highs, and in some cases are now down for the year, as the table below illustrates (S&P/TSX Composite Index and S&P 500 Index price returns are as of August 21; MSCI World Index price returns are as of August 20).
|Index||Return From High||YTD Return|
|Canada - S&P/TSX Composite Index||-14.0%||-7.9%|
|U.S. - S&P 500 Index ($U.S.)||-7.5%||-4.3%|
|World - MSCI World Index ($Cdn)||-4.0%||13.8%|
After six plus years of rising markets, however, a period of weakness, or even serious decline, should not come as a surprise. As a quick scan of our Volatility Meter reveals, stock markets are down 2 or 3 out of every 10 years on average (12 out of 54 years between 1961 and 2014).
At Steadyhand, we’ve talked persistently about lower returns going forward and the possibility of negative numbers for a period of time. Indeed, I’ve been accused of being a ‘Debbie Downer’ by more than a few people.
In light of the current market weakness, let me make a few points.
Despite the dire headlines and recent downward trend, we’re in the same situation we’re always in – we have no idea where markets are going in the short to medium term. Indeed, nobody knows, not ever.
We’re hoping our clients’ portfolios will weather the storm better than most (if the weakness continues) because we’ve been in ‘defense’ mode for a while.
In general, we’ve focused on higher quality bonds and stocks, particularly in the Equity Fund and Income Fund.
- Our exposure to commodities is relatively light (with the Small-Cap Equity Fund being the exception). In the Founders Fund, which is representative of most balanced portfolios, energy and basic materials account for about 10% of total assets.
- Asian stocks make up roughly 10% of the Founders Fund (with an emphasis on Japan).
- And the Founders Fund’s equity weighting is below its long-term target of 60% and cash accounts for 18% of total assets.
Only time will tell where markets go and how our clients’ portfolios fare. It’s important to remember, however, that any portfolio, balanced or 100% stocks, will be down on a day when the markets are down a lot, no matter how well positioned it is.
Going forward, our fund managers may take further defensive measures, although like me, they’re more inclined to look for opportunities to buy good companies on sale. As for the Founders Fund, I don’t anticipate any further moves to mitigate the decline. The fund is already there. Salman's and my focus will instead be on putting the cash back to work.1